Intro - Chptr 2 Flashcards
Production possibility table
A table that lists a choice’s opportunity costs by summarizing what alternative outputs can be achieved with the same inputs.
What is a production possibility curve (PPC)?
A steep PPC means (high/low?) opportunity cost.
A flat curve means (high/low?) opportunity cost.
A curve measuring the maximum combination of outputs that can be achieved with a given number of inputs.
- A steep curve means high OC
- A flat curve means low OC
What two points does the PPC demonstrate?
(1) There is a limit to what you can achieve, given the existing institutions, resources, and technology.
(2) Every choice you make has an OC. You can get more of something only by giving up something else.
What is the principle of increasing marginal opportunity cost?
Opportunity costs increase the more you concentrate on the activity; in order to get more of something, one must give up ever-increasing quantities of something else. This is why the PPC, in general, is bowed outward.
Why does the principle of increasing marginal OC occur?
Some resources are better suited for the production of one good than for another good. In the production of a certain good we use the better suited resources first. Once these resources are used we use the lesser suited resources which have a higher OC because we need more of them to achieve similar outputs.
What is productive efficiency?
Achieving as much output as possible from a given amount of input.
What is efficiency?
Achieving a goal with as few inputs as possible.
Define “comparative advantage”?
The ability to better suited (lower OC) to the production of one good than to the production of another good. Comparative advantage is the reason why PPC are generally bowed outward.
What is the “lowest cost rules” principle?
re: Comparative advantage & combined production possibility curve.
The slope of the combined PPC is determined by the country with the lowest OC. It is by producing where costs are lowest that countries can achieve gains from trade.
Exchange Rate
The price of one country’s currency in terms of another country’s currency.
What is ineffiency?
Getting less output from inputs that, if devoted to some other activity, would produce more output.
What is the slope of line?
Change in y that results from an increase in x (change y / change x). Change in x is always positive.
What lets countries consume beyond their production possibility curve?
Specialization and TRADE.
What is the “law of one price”?
The law of one price states that wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country. If wages differ sufficiently, companies will relocate jobs to the low-wage country until parity is reastablished.
Who is Adam Smith?
A British moral philosopher who wrote “Wealth of Nations” (1776) in which he argued that it was humankind’s proclivity to trade that leads to individuals using their comparative advantage. …the market will guide people like an “invisible hand” to gravitate towards those activities for which they have a comparative advantage.
Roles of government in a market economy?
- Providing a stable set of institutions and rules.
- Promoting effective and workable competition.
- Correcting for externalities.
- Ensuring economic stability & growth.
- Providing public goods.
- Adjusting for undesirable market results.
Externality
The effect of a decision on a third party not taken into account by the decision maker.
Macroeconomic externality
The effect of an individual decision that affects the levels of unemployment, inflation, or growth in an economy as a whole but is not taken into account by the individual decision maker. e.g. people spending too little can lead lead to unemployment. e.g. people raise their price & don’t consider the effect on inflation.
Public good
A good that if supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another individual.
Private good
A good that, when consumed by one individual, cannot be consumed by another individual.
Free rider
A person who participates in something for free because others have paid for it.
Market failure
Situations in which the market does not lead to a desired result.
Government failure
Situations in which the government intervenes and makes things worse.
Progressive tax
A tax whose rates increase as a person’s income increases.
Regressive Tax
A tax whose rates decrease as income rises.
Proportional tax
A tax whose rates are constant at all income levels, no matter what a taxpayer’s total annual income is.
Merit /demerit goods
Merit goods: Goods & activities that government believes are good for you even though you may not choose to engage in the activities or consume the goods. Government may provide support for these goods through subsidies or tax benefits.
Demerit goods: Goods… government believes are bad for people even though they choose to use the goods… e.g. illegal drugs.
Interpolation assumption
The assumption that the relationship between variables is the same between points as it is at the points.
Movement along a curve
Shows how a change in one variable affects the other variable; it does not change the relationship of the variables.
Where are the maximum & minimum points on a nonlinear curve? What is the slope?
Slope = 0.
Slope at any given point on a nonlinear curve is determined by the slope of a linear line that’s tangent to that curve.
What is the equation for a linear curve?
y = mx + b,
where m = slope; b = y-axis intercept
PPC shifts are caused by?
An increase or decrease in inputs or in a the productivity of inputs will cause the PPC to shift in or out.
The slope of a PPC indicates what?
The slope tells you the OC of good X (horizontal axis) in terms of good Y (vertical axis).
If Pakistan can produce 4,000 yds textiles or 1 ton chocolate
What is the OC of textiles? -of chocolate?
Pakistan: 4,000 textiles costs 1 chocolate.
4,000/4,000 = 1/4,000
OC of 1 textile is 1/4,000 chocolate
Pakistan: 1 chocolate costs 4,000 textiles.
1/1 = 4,000 /1
OC of 1 chocolate is 4,000 textiles.
