overview Flashcards
What are the 5 big picture ideas as the relate to ME
- Scarcity
- Production Possibilities frontier
- The PPF can shift outward
- Comparative advantage
- changes in Markets
Explain Scarcity
- economics focuses on scarcity and how it requires individuals, businesses and gov. to make CHOICES
Explain the Production Possibilities frontier
shows the different combinations of 2 goods that can be produced using all countries resources
The PPF can shift outward when what?
when there are more production from new Technology (or more resources)
Comparative advantage
countries that have a comparative advantage can specialize in the production of specific goods and trade wit other countries at a LOWER OPPORTUNITY COST than if they produced everything on their own
Changes in markets can be explained using what
a demand and supply graph
Scarcity definiton
we have unlimited wants but limited resources therefore we are forced to make choices
is money a resource?
no, you cannot produce anything with it
What are the 4 Factors of Production
- Land
- Labour
- Capital
- Entrepreneurship
Describe land (factors of production)
anything from nature like, water, minerals, crued oil, sunlight
Define Labour
the work that people do
What are the two types of capital
- Physical capital (tools, machines, factories used to produce items)
- Human capital (knowledge, experience and training that make workers more productive)
What is Entrepreneurship
the person that brings together all their resources, starts the business and takes the risk
What is Macroeconomics
- the collective decisions of everyone, the entire economy
- looks at things like growth, unemployment, inflation and different policies to speed up or slow down the economy
What is mIxed economy
where individuals and government both plays a role
What is Microeconomics
- study of small economic units
- looks at the decisions of individuals and firms
- things like cost of production kinds of markets
What is centrally planned economy
- gov. owns the factors of produciton
- gov. decides what to produce, how to produce it and who gets it
What is modern economy
combines free market and capitalism with some gov. interventions
What is opportunity cost
- due to scarcity, we are forced to make choices
What is the definition of opportunity cost
the cost of the next best alternative
What does the Production Possibility Frontier show
shows alternative ways we can use our scarce resources to produce only 2 Goods
What is the PPF table show
shows different combinations of 2 goods that can be produced using all of our resources
PPF - explain the points inside the curve
- inefficient
- because we are not using our resources to the fullest
PPF - explain the points outside the curve
impossible or unatainable
PPF - explain the points on the curve
full employment - efficient
What happens when the country goes form having a recession to having full employment
we go from an inefficient combination (inside the curve) where workers are not be fully utilized to an efficient one where workers are being fully utilized
- this does not shift the curve ( we have the # of workers available)
What if we had more workers or better workers, or more physcial capital, what happnes to the demand curve? Does this make sense?
it would shift outward
because there would be new combinations possible
Define Comparative Advantage
a country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than other countries
How does comparative advantage relate to specialization and trade
comparative advantage encourages countries to specialize in producing goods where they have a comparative advantage (lower opportunity cost to produce) and trade for goods where they don’t
What is a benefit for all involved with comparative advantage
allows all participants to achieve greater overall output and efficiency
ouput: produce more
Efficency:
What is the difference between Comparative Advantage and Absolute Advantage
even if one country has an absolute advantage in producing all goods, comparative advantage shows that both countries can still benefit from trade.
Absolute advantage
refers to the ability to produce more of a good using fewer resources than others.
How do you calculate Comparative Advantage (Steps)
- identify which country has an absolute advantage for each good
- calculate opportunity cost for each country
- identify which coutnry has a comparative advantage
- identify the terms of trade that is mutually beneficial for both countries
Ex. of comparative advantage: country a can make 10 wheat per our and 5 cars per hour
country b: can make 6 wheat per hour and 3 cars per hour
- Which country is more efficient at producing wheat and which is more efficient at producing cars?
Country A is more efficient at producing both wheat and cars
Ex. of comparative advantage: country a can make 10 wheat per our and 5 cars per hour
What is the Opportunity cost in country A to produce 1 car
Producing 1 car costs 2 wheat (10/5 = 2)
x. of comparative advantage: coutnry a can make 10 wheat per our and 5 cars per hour
What is the Opportunity cost in country A to produce 1 wheat
Producing 1 wheat costs 0.5 cars (5/10 = 0.5)
Ex. of comparative advantage: country a can make 10 wheat per our and 5 cars per hour
country b: can make 6 wheat per hour and 3 cars per hour
In country B: what is the opportunity cost to produce 1 car
Producing 1 car costs 2 wheat (6/3=2)
Ex. of comparative advantage: country a can make 10 wheat per our and 5 cars per hour
country b: can make 6 wheat per hour and 3 cars per hour
In country B: what is the opportunity cost to produce 1 wheat
Producing 1 wheat costs 0.5 cars (3/6 =0.5)
Which country has comparative advantage and - ADD MORE for determining terms of trade and absolute advantage
What are terms of trade
both countries will be willing to trade if and only if they can get the other product at a lower opportunity cost than if they produce it themselves
(if they trade then it needs to be mutually beneficial)
Ex. USA makes 10 cars or 5 planes per day
Canada makes 8 cars and 2 planes per day
Identify which country has an absolute advantage for each good
Country Cars Planes
USA 10 5
Can 8 2
USA has absolute advantage for each
Country Cars Planes
USA 10 5
Can 8 2
What is the opportunity cost for USA when they produce 1 plane
What is the opportunity cost for USA when they produce 1 Car
Opp cost of 1 plane for USA is:
5/10 = 2 cars
Opp. Cost of 1 car for USA is:
10/5 = 0.5 planes
Country Cars Planes
USA 10 5
Can 8 2
What is the opportunity cost for CAN when they produce 1 plane
What is the opportunity cost for CAN when they produce 1 Car
Opp cost of 1 plane for CAN is:
8/2 = 4 Cars
Opp. Cost of 1 car for CAN is:
2/8 = 1/4 plane
Country Cars Planes
USA 10 5
Can 8 2
What is the opportunity cost for CAN when they produce 1 plane
What is the opportunity cost for CAN when they produce 1 Car
who should specialize in producing cars and who should specialize in producing planes
Canada should specialize in producing cars
2/8 =1/4 plane (less opportunity cost than usa)
USA should specialize in producing planes
5/10 = 2 cars
If canada specializes in cars (add terms of trade)
if us specialized in planes (add terms of trade)
add definitions from text book
What are the 5 Comparative advantage Hacks
- spot output and input questions
- 000 and IOU calculating the per opp. cost
- 50/50 comparative advantage
- terms of trade
- Quick and Dirty method
Explain spot output and input questions
Output - # of cars that can be produced
(want higher numbers)
Input - # of hrs it takes to produce one unit
(want lower #s)
explain000 and IOU
Output Q’s = 0.0.0
- output = other goes over
If calculating cost of cars - put # of planes over cars
Input Qs= IOU
Input = other goes under
opp cost of one plane = plane / car
explain 50/50 comparative advantage
its either one or the other, not both
choose the one with lower opp cost
input or output Q
Terms of trade
add
Quick and Dirty method
Output Q’s
US should specialize in cars or planes (can only be one)
- multiply #s will show you the possible outcomes
Country Cars Planes
USA 5 1
China 3 2
USA = 5 x 2 = 10
China: 3 x 1 = 3
Pick the higher # 10
- this tells you the right outcome and who should specialize in what
Input question - the answer would be the lower number
