Exam 2 Flashcards
What is opportunity cost?
What must be given up in order to consume or produce more of a good
What is marginal cost?
The (opportunity) cost of producing an additional (incremental) unit of a good
What is absolute advantage
When one producer can produce more of a good than another producer in a certain period of time
What is comparative advantage?
When one producer can produce a good at a lower opportunity cost than another producer
What is specialization?
Concentrating one’s efforts in a specific activity or field
What is Production Possibility Frontier (PPF)?
Represents the possible combinations of goods that an economy or individual can produce in a certain period of time
How is it possible to combine for more goods than was possible when acting alone?
Specialization and engaging in trade
What is the key to specialization?
Each side producing according to their comparative advantage
What are the 3 Limitations on Specialization?
- Requires sufficient ability to produce enough to meet demand
- Transportation costs must be low enough to make specialization worthwhile
- Specialization limited by extent of the market
Where is specialization the greatest?
Big Cities > Rural Areas
The larger variety of goods and services become available
What does the Production Possibility Frontier represent graphically?
All possible combinations of two goods that can be produced when a given amount of resources and technology
Shows the maximum quantity of one good that can be produced for any given amount of production of the other good
What does movement along the Production Possibility Frontier (PPF)?
It shows the trade-offs that exist in production
Diverting resources from production of one good to another
What are the three key concepts illustrated by PPF?
- Efficiency
- Opportunity Cost
- Economic Growth
What is efficiency in production?
No way to produce more of one good without producing less of another good
What is the efficiency of all points on PPF?
Efficient in production
What is the efficiency of points inside PPF?
Feasible but not efficient
What is the efficiency of points outside PPF?
Not feasible
How is opportunity cost represented graphically?
Slope of the PPF is the opportunity cost of producing the good on the horizontal axis measured in terms of the good on the vertical axis
How is constant opportunity cost represented graphically?
PPF is a straight line
Opportunity cost of production does not change as production increases
How is increasing opportunity cost represented graphically?
PPF bowed outward
Opportunity cost rises as production increases
As more is produced, less suitable resources are being used in production
Resources are not easily transferable between production of goods
What is economic growth?
Growing ability of economy to produce goods and services
How does economic growth affect PPF?
Causes an outward shift in PPF
What causes an outward shift in PPF?
Increases in factors of production
Changes in technology
What are imports?
Goods and services purchased from other countries