Slide 2

Question 1

what is the budget line/budget constraint?

Answer 1

it represents all the combinations of two products that a customer can purchase given current prices and their income

Question 2

what is the production possibilities frontier (PPF)

Answer 2

it is a graph that shows all the different combinations of two goods that can be produced using available resources and technology

it also depicts the combination of goods that can be produced and those that cannot. (ie. i don’t have enough resources to make any combination of goods above the line)

Question 3

explain the relationship between the PPF and opportunity costs

Answer 3

every choice along the PPF involves a trade-off. Where producing one more unit of one good takes away from the number of units you can produce of the other good. Therefore the opportunity cost of making X amount of good1 is the amount of good2 you need to give up.

Question 4

points along the PPF are efficient.

what does this mean

Answer 4

an efficient point lies on the PPF curve. (because production is possible and maxed) At any point, more of one good can be produced only by producing less of the other.

Question 5

how do you determine what quantity to produce when given a PPF

Answer 5

we compare costs and benefits. the best choice occurs where marginal benefit = marginal costs. The PPF helps determine opportunity cost

Question 6

is marginal cost the same as opportunity cost?

Answer 6

almost. marginal cost of a good is the opportunity cost of producing one more unit of it. Ie. how much of the other good do i need to give up to make one more unit of the other.

Question 7

how do we measure marginal benefit?

Answer 7

by the amount that a person is willing to pay for an additional unit

Question 8

what is the principle of decreasing marginal benefit?

Answer 8

the more we have of any good, the less its marginal benefit and the less we are willing to pay for an additional unit of it

Question 9

of all possible combinations of good1 and good2, at what point will maximize satisfaction

Answer 9

when marginal benefits = marginal costs

Question 10

true or false: marginal benefit is subjective

Answer 10

true. because the buyer decides on their own marginal benefit

Question 11

what is allocative efficiency?

Answer 11

When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved allocative efficiency

we can give up the other good, but we value it too much to give it up at a specific point

it is the point where MC = MB

Question 12

when have you reached production efficiency?

Answer 12

when all resources are put to use and we cannot produce more of one good without producing less of another

Question 13

define economic growth

Answer 13

an expansion of the production possibilities, PPF

Question 14

what two key factors influence economic growth

Answer 14

1. technological change: better/faster ways of producing
2. capital accumulation: growth of capital resources (more resources we can use to produce with)
   (ex. instead of producing pizzas produce pizza ovens)

Question 15

true or false: economic growth is not free

Answer 15

true

Question 16

what is the opportunity cost of economic growth

Answer 16

less current consumption, because we need to use the resources to research/develop and produce new capitol

Question 17

define comparative advantage and absolute advantage

Answer 17

comparative advantage: you have this advantage when you are able to produce at a lower opportunity cost than anyone else. compare opportunity cost

absolute advantage: you have this advantage when you are more productive than others. compare productivity

Question 18

how do you determine if a trade is fair?

Answer 18

typically money, but you can also determine if it’s fair by comparing opportunity cost. A trade will be fair if they both save. (ie. i will trade so long as I can’t produce it for cheaper)

Question 19

what is the effect of trade on the PPF graph and the effect of trade on the economy

Answer 19

it will increase the area of the PPF graph.

we exploit comparative advantage to contribute to economic growth by expanding the PPF

Question 20

when analyzing whether or not trade is beneficial what tables do you need to compare

Answer 20

2 and 4

Question 21

we are calculating opp.cost. how do you know which number is to go on the denominator and which is to go on top?

Answer 21

it should be
you give me x (top) / I give you Y (bottom)