Chapter 3- Value Creation Through Production

Question 1

The production process does what?

Answer 1

It turns inputs into consumable outputs

Question 2

Consumable outputs are:

Answer 2

goods and services

Question 3

Resource/input #1- Natural resources/land

Answer 3

tangible but not produced by anyone, cost: rent

Question 4

Resource/input #2- Labor

Answer 4

physical and mental talents of individuals applied to production, cost: wage

Question 5

Resource/input #3- Capital

Answer 5

produced means of production, cost: interest

Question 6

Resource/input #4- Entrepreneurship

Answer 6

risk taking/risk bearing and innovation, cost: profit

Question 7

technology

Answer 7

the way that inputs are combined to produce outputs

Question 8

make work fallacy

Answer 8

the idea that jobs are valuable whether or not the production from the labor adds value (ex: using shovels to dig a canal in India instead of bulldozers to create more jobs)

Question 9

Production Possibilities Frontier (PPF)

Answer 9

simplified way of understanding the production trade-offs that are made in an economy

Question 10

The PPF assumes what three things?

Answer 10

1. Only 2 goods are produced over some period of time
2. A fixed amount of resources are used
3. A given technology is used

Question 11

Law of increasing opportunity cost (LIOC)

Answer 11

as one or more goods is produced, the opportunity cost of producing a unit of that good rises in terms of which good must be sacrificed- happens when applying the Principle of Optimal Arrangement to production of 2 goods where resources are not all the same

Question 12

Economic growth comes from:

Answer 12

When:
1. more or better resources
2. better technologies
result in an expansion of an economy’s productive capabilities

Question 13

Wealth depends on:

Answer 13

1. Quantity of resources
2. Quality of resources
3. Freedom to use those resources

Question 14

The invisible hand of self-interest

Answer 14

leads people to do more good (unintentionally) than people who are purposefully trying to serve others

Question 15

What does Bastiat say about middlemen?

Answer 15

all middlemen add value or else they would not exist (even if that value is convenience)

Question 16

What did Adam Smith say about the wealth of a country?

Answer 16

wealth of a country lies in lands, houses, and consumable goods (how much stuff country has)

Question 17

In what ways is value created?

Answer 17

through trade and production

Question 18

What does Bastiat say will control grain profits? What will control costs?

Answer 18

competition will bid profits down and will also give incentive to keep cost low

Question 19

Grain would go to regions of famine first because…

Answer 19

they value it more than other regions, so individuals selling grain will make the most money off their grain there

Question 20

Can you lower cost by using force?

Answer 20

by lowering the cost of one thing, you simply shift that cost to the amount that must be paid to actually use force, so no not really