Final Study guide Flashcards
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What does the Production Possibility Frontier (PPF) show?
The maximum possible combinations of two (or more) goods that may be produced by an economy.
What do combinations along and inside the PPF represent?
Possible output combinations.
What do combinations outside the PPF represent?
Unattainable combinations with current technology and resources.
How is economic growth represented in relation to the PPF?
By an outward shift in the frontier.
What does an outward pivot of the PPF along one axis indicate?
Improved production technology impacting one good.
Where does production efficiency occur on the PPF?
At all points along the frontier.
What does the PPF illustrate about tradeoffs?
As production of one good increases along the frontier, production of the other good decreases.
What is opportunity cost in the context of the PPF?
Opportunity cost = change in output of one good / change in output of the other.
What is marginal cost?
The cost of producing one more unit of a good measured in units of the other good.
What does the outward bowed shape of the PPF illustrate?
Increasing opportunity cost.
Why do opportunity costs increase as production of a good increases?
Because not all resources are equally well suited to producing both goods.
What is allocative efficiency?
It is not possible to change the output combination to make a consumer better off without making another consumer worse off.
At what point does allocative efficiency occur on the PPF?
Where the opportunity cost of producing one more unit of a good matches the rate at which consumers are willing to trade one good for another.
What are preferences in economics?
A description of a person’s likes and dislikes.
What is marginal benefit?
Change in total benefits resulting from consuming one more unit of a good.
How is marginal benefit measured?
By the amount a person is willing to pay for one more unit of the good.
What is the Principle of Diminishing Marginal Benefit?
As consumption of a good increases, marginal benefit decreases.
What shape does the curve of marginal benefits and units consumed take?
It is downward sloping.
What does absolute advantage mean?
The ability of an individual, a company, or a country to produce more of a product than other producers.
What does comparative advantage mean?
The ability to produce a product at a lower opportunity cost than other producers.
Can a producer have a comparative advantage in all goods?
No, it is not possible to have a comparative advantage in production of all goods and services.
What is the result of trade?
Differences in comparative advantages across partners.
What is the opportunity cost of Joe producing one salad?
1/5th of a smoothie.
What is the opportunity cost of Liz producing one salad?
One smoothie.
What happens to the maximum and minimum prices of salads after trade?
Salads will sell between 1/5th and one smoothie each.
What is the opportunity cost of economic growth?
Current consumption.
What are sources of economic growth?
Capital accumulation and technological change.
What does the circular flow model highlight?
The flow of resources to firms and the financial flows.
What role do prices play in market-based economies?
Prices provide the coordinating mechanism.
What happens when relative prices of a good increase?
Producers of the now higher priced good can outcompete others for resources.
