econ ch 2 Flashcards
How does the production possibilities frontier show that every choice involves a tradeoff?
Movements along the PPF frontier illustrate that producing more of one good requires producing less
of other good. This observation reflects the result that a tradeoff must be made when producing output
efficiently
How does the production possibilities frontier illustrate scarcity?
The unattainable combinations of production that lie beyond the PPF illustrate the concept of scarcity.
There simply are not enough resources to produce any of these combinations of outputs. Additionally,
while moving along the PPF to increase the production of one good requires that the production of
another good be reduced, which also illustrates scarcity.
How does the production possibilities frontier illustrate production efficiency?
The combinations of outputs that lie on the PPF illustrate the concept of production efficiency. These
points are the maximum production points possible and are attained only by producing the goods and
services at the lowest possible cost. Any point inside the frontier reflects production where one or both
outputs may be increased without decreasing the other output level. Clearly, such points cannot be
production efficient.
How does the production possibilities frontier illustrate opportunity cost?
The slope of the PPF is a ratio that expresses the quantity of lost production of the good on the y-axis
to the increase in the production of the good on the x-axis moving downward along the PPF. The
steeper the slope, the greater ratio, and the greater is the opportunity cost of increasing the output of the
good measured on the horizontal axis.
What is marginal cost? How is it measured?
Marginal cost is the opportunity cost of producing one more unit of a good or service. Along a PPF
marginal cost is reflected in the absolute value of the slope of the PPF. In particular, the magnitude of
the slope of the PPF is the marginal cost of a unit of the good measured along the x-axis. As the
magnitude of the slope changes moving along the PPF, the marginal cost changes.
What is marginal benefit? How is it measured?
The marginal benefit from a good or service is the benefit received from consuming one more unit of
it. It is measured by what an individual is willing to give up (or pay) for an additional that last unit.
How does the marginal benefit from a good change as the quantity produced of that good
increases?
As the more of a good is consumed, the marginal benefit received from each unit is smaller than the
marginal benefit received from the unit consumed immediately before it, and is larger than the marginal
benefit from the unit consumed immediately after it. This set of results is known as the principle of
decreasing marginal benefit and is often assumed by economists to be a common characteristic of an
individual’s preferences over most goods and services in the economy.
What is allocative efficiency and how does it relate to the production possibilities frontier?
Production efficiency occurs when production takes place at a point on the PPF. This indicates that all
available resources are being used for production and society cannot produce additional units of one
good or service without reducing the output of another good or service. Allocative efficiency, however,
requires that the goods and services produced are those that provide the greatest possible benefit. This
definition means that the allocative efficient level of output is the point on the PPF (and hence is a
production efficient point) for which the marginal benefit equals the marginal cost.
What conditions must be satisfied if resources are used efficiently?
Resources are used efficiently when more of one good or service cannot be produced without
producing less of some of another good or service that is valued more highly. This is known as
allocative efficiency and it occurs when: 1) production efficiency is achieved, and 2) the marginal
benefit received from the last unit produced is equal to the marginal cost of producing the last unit.
What gives a person a comparative advantage?
A person has a comparative advantage in an activity if that person can perform the activity at a lower
opportunity cost than anyone else, If the person gives up the least amount of other goods and services
to produce a particular good or service, the person has the lowest opportunity cost of producing that
good or service.
Distinguish between comparative advantage and absolute advantage
A person has a comparative advantage in producing a good when he or she has the lowest opportunity
cost of producing it. Comparative advantage is based on the output forgone. A person has an absolute
advantage in production when he or she uses the least amount of time or resources to produce one unit
of that particular good or service. Absolute advantage is a measure of productivity in using inputs.
Why do people specialize and trade?
People can compare consumption possibilities from producing all goods and services through selfsufficiency against specializing in producing only those goods and services that reflect their
comparative advantage and trading their output with others who do the same. People can then see that
the consumption possibilities from specialization and trade are greater than under self-sufficiency.
Therefore it is in people’s own self-interest to specialize. It was Adam Smith who first pointed out in
the Wealth of Nations how individuals voluntarily engage in this socially beneficial and cooperative
activity through the pursuit of their own self-interest, rather than for society’s best interests
What are the gains from specialization and trade?
From society’s standpoint, the total output of goods and services available for consumption is greater
with specialization and trade. From an individual’s perspective, each person who specializes enjoys
being able to consume a larger bundle of goods and services after trading with others who have also
specialized, than would otherwise be possible under self-sufficiency. These increases are the gains from
specialization and trade for society and for individuals.
What is the source of the gains from trade?
As long as people have different opportunity costs of producing goods or services, total output is
higher with specialization and trade than if each individual produced goods and services under selfsufficiency. This increase in output is the gains from trade.
What are the main functions of markets?
The main function of a market is to enable buyers and sellers to get information and to do business with
each other. Markets have evolved because they facilitate trade, that is, they facilitate the ability of
buyers and sellers to trade with each other.
How Prices Allocate Resources
Market economies harness the forces of supply and demand to serve that end.
Supply and demand together determine the prices of the economy’s many
different goods and services; prices in turn are the signals that guide the
allocation of resources.
