Test #1 Flashcards
chapt. 2, 5, 6
What is Ceteris Paribus?
The assumption in economics - “holding other things equal”
We only want to allow one variable to change at a time
What is the PPF?
The PPF illustrates the trade-offs facing an economy that produces only two goods
It shows the maximum amount of one good that can be produced for any given quantity produced of the other
*always uses quantities
- the x and y intercepts are the max amount that can possibly be produced of that product
Any point on or below the line is feasible (on the line is efficient), and any point above the line is not feasible
What does it mean by there are not missed opportunities in production
When moving between efficient points of production, there is no way to produce more of one good without producing less of the other good
Explain the idea of increasing opportunity cost
In reality, the PPF is not straight, it’s curved which shows an increasing opp. cost.
It becomes more and more expensive as you move along with production (producing a small amount of a diff good is ok at first but as you produce more and more of that good you have to give up more and more of the other goods)
What is economic growth and what are the two possible causes of it
Economic growth = an increase in production capacity (PPF shifts upwards)
2 possibilities:
increase in FACTORS of production:
- increase resourced used to produce goods and services
better TECHNOLOGY:
- advances in the technical means for producing goods and services
What are examples of factors of production?
Land (natural resources)
Labour - hours of work or number of workers (mental and physical abilities of the workforce)
Physical capital - usually refers to machinery / goods or services used that aren’t human
Human capital - proxy of education - educational achievements and skills of the labour force
When does a country have a comparative advantage?
What has to be the case for a country to trade?
A country has a comparative advantage if the opp. Cost of producing a good or service is lower than other countries
Countries will trade only if the price of goods is less than its domestic opp. cost
How can both countries gain from trade?
Through specialization and trade, both countries produce more and consume more than if they were self-sufficient
What does it mean to barter?
Exchanging goods or services for other goods or services without using money
What does the circular-flow diagram represent? What are the four different aspects that are interconnected in the diagram?
It represents the transactions in an economy by flows around a circle
Household (person or group of people that share their income)
- households give money to markets for goods and services (and they receive goods and services)
Markets for goods and services give money to firms ( and receive goods and services)
Firms (organizations that produce goods and services for sale)
- firms give money to factor markets (and receive factors)
Factor markets (people selling their resources to firms)
- factor markets give money to households (and receive factors)
Describe an economy’s income distribution
What determines an economy’s income distribution?
The way in which total income is divided among the owners of the various factors of production (how it’s allocated between differently skilled workers as well as owners of capital and land
Factor markets determine the economy’s income distribution
What is positive economics and normative economics?
Positive - economic analysis that describes the way the economy actually works (it’s a statement that is either true or false)
Normative - make predictions about the way the economy SHOULD work (shows political leniency)
What is an efficient economy and efficient allocation?
efficient economy - no missed opportunities - can’t produce more of one good without producing less of the other. (requires both efficiency in production and efficiency in allocation
efficient allocation - allocating resources so that consumers are as well off as possible
What are some real world complications that the circular flow diagram ignores?
Family run businesses, firms selling to other firms, government involvement
What are the two key sources of differences in economists’ opinions?
- Differences in VALUES
- Differences arising from economic modelling - disagreements about which simplifications are appropriate in a model make different conclusions
What is globalization?
What is hyperglobalization?
The growth of all the different forms of economic linkages among countries
The phenomenon of extremely high levels of international trade
What is reshoring? What are some arguments for it?
Bringing production closer to markets
Companies sometimes decide that the money they saved by buying goods from suppliers thousands of miles away is more than offset by the disadvantages of long shipping times and other inconveniences
Some firms considering relocating some production facilities as means to minimize future production disruptions
What economic model does trade follow? What is an autarky?
The Ricardian model of international trade
- countries specialize in what they have a comp.advan
- there is a constant opportunity cost (straight PPF)
Autarky = a situation in which a country doesn’t trade with other countries
- autarky price = price before opening to trade
What is the real explanation for low wages in poor countries?
The low wages are due to low overall productivity
- productivity –> for a given unit of effort, what kind of value is generated?
- so countries that produce lower value products will be paid less
- many low-wage nations would be much poorer than they are if they weren’t able to export goods like clothing based on their low wage rates
What does factor intensity refer to?
refers to the ranking of goods according to which factor is used in relatively greater quantities in production compared to other factors
ex. clothing production is labour-intensive because it tends to use a high ratio of labour to capital
When is production of a good characterized by increasing returns to scale?
if the productivity of labour and other resources used in production rise with the quantity of output (the products have to be produced in a massive amount in order to make money from it)
If an industry gets more efficient as it grows, then there will be a few large producers and production will only take place in a few countries
ex. Large passenger airplanes require enormous factories and huge one-time investments in research and development so a small number of companies with large-scale factories dominate production → and have lots of trade in the industry
What are the sources of comparative advantage?
- Differences in climate
- Differences in factor endowments:
factor abundance = supply of a factor of production relative to other factors (ex. canada is abundant in forests)
factor intensity = how intensively a factor is used in the production of a given good relatively to other factors - Differences in technology
