Slide 2 Flashcards
what is the budget line/budget constraint?
it represents all the combinations of two products that a customer can purchase given current prices and their income
what is the production possibilities frontier (PPF)
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)
explain the relationship between the PPF and opportunity costs
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.
points along the PPF are efficient.
what does this mean
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.
how do you determine what quantity to produce when given a PPF
we compare costs and benefits. the best choice occurs where marginal benefit = marginal costs. The PPF helps determine opportunity cost
is marginal cost the same as opportunity cost?
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.
how do we measure marginal benefit?
by the amount that a person is willing to pay for an additional unit
what is the principle of decreasing marginal benefit?
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
of all possible combinations of good1 and good2, at what point will maximize satisfaction
when marginal benefits = marginal costs
true or false: marginal benefit is subjective
true. because the buyer decides on their own marginal benefit
what is allocative efficiency?
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
when have you reached production efficiency?
when all resources are put to use and we cannot produce more of one good without producing less of another
define economic growth
an expansion of the production possibilities, PPF
what two key factors influence economic growth
- technological change: better/faster ways of producing
- capital accumulation: growth of capital resources (more resources we can use to produce with)
(ex. instead of producing pizzas produce pizza ovens)
true or false: economic growth is not free
true
what is the opportunity cost of economic growth
less current consumption, because we need to use the resources to research/develop and produce new capitol
define comparative advantage and absolute advantage
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
how do you determine if a trade is fair?
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)
what is the effect of trade on the PPF graph and the effect of trade on the economy
it will increase the area of the PPF graph.
we exploit comparative advantage to contribute to economic growth by expanding the PPF
when analyzing whether or not trade is beneficial what tables do you need to compare
2 and 4
we are calculating opp.cost. how do you know which number is to go on the denominator and which is to go on top?
it should be
you give me x (top) / I give you Y (bottom)
