Definitions

Question 1

Define scarcity

Answer 1

When there is not enough of a good or service to satisfy everyone at zero price

Question 2

Define postive economics

Answer 2

When economists are just studying how things work

Question 3

Define normative economics

Answer 3

When called on to evaluate and recommend and suggest what ought to be

Question 4

Define Gross Domestic Product (GDP)

Answer 4

A measure of a country’s economic activity - it measures the market value (P x Q) of all final goods and services. It is comprehensive and only counts sals of final products, not of inputs, produced in a country.
In other words it is the market value of all final goods and services produced within a country within a given time

Question 5

What does GDP miss?

Answer 5

the market value of goods and services not traded in formal markets such as

• home production (home cooked meals and unpaid child care services)
• off the books transaction (weekend work for cash by a tradesperson)

Question 6

When considering the production possibilities for a country, what four things does the quantity of goods produced depend on?

Answer 6

• quantity of resources
• quantity of technology
• amount of time
• quantity of services

Question 7

What are the three types of resources and what do these mean?

Answer 7

• land (natural resources)
• labour (human time and effort)
• capital (physical manufactured inputs and human capital)

Question 8

What does the quantity of goods we can produce per day or year depend on?

Answer 8

the quantity of services produced holding resources and technology constant

Question 9

Why is the production possibilities not a straight line?

Answer 9

because the resources vary in their productive characteristsics

Question 10

On a production possibilities frontier, where are there unobtainable combinations of goods and services given resources and technology?

Answer 10

to the right of the PPF

Question 11

On a production possibilities frontier, where are there inefficient combinations of goods and services given resources and technology? Why is this area considered inefficient?

Answer 11

to the left of the PPF

this area is considered inefficient because more goods or services could be made with the given resources and technology

Question 12

Define resource heterogeneity

Answer 12

each type of resource varies in its characteristics that are relevant to production of the two types of product

Question 13

Define opportunity cost

Answer 13

the value of the next best activity foregone

Question 14

What two things does opportunity cost take into account?

Answer 14

the explicit costs and benefits (ie. the price in dollars) and the implicit costs and benefits (eg. effort and satisfaction)

Question 15

Why is the PPF considered a frontier?

Answer 15

Because an increase in the production of goods or services requires a decrease in the production of the other

Question 16

Explain why the marginal opportunity cost of services increases as production of services increases

Answer 16

When we first reallocate resources from the production of goods into the production of services, we first reallocate resources best suited to the production of services relative to the production of goods. This means that the cost of producing services in terms of the cost of making a good is very small and therefore the opportunity cost is small. As we produce more services, we reallocate resources increasingly better suited at producing goods relative to services and so the cost of producing serves in terms of the cost of making a good is higher so the opportunity cost is higher. This means that the marginal opportunity cost of producing services increases as the production of services increases

Question 17

Where can we find the opportunity cost on the PPF and how do you calculate it?

Answer 17

is it the slope of the PPF given by ΔQ(goods)/ΔQ(services).

Question 18

What is the difference between economic and technical efficiency?

Answer 18

All points on the PPF represent technically efficient production because all resources are fully employed and resources are being used in their most effective combinations.
If a technically efficient point on the PPF is the combination of outputs most valued by customers, it is economically efficient

Question 19

On the PPF, we assume Q(goods) = f(Q(services)), ceteris paribus. What other factors do we assume are held constant?

Answer 19

Q labour,
Q capital,
Q natural resources
Q technology