unit 2

Question 1

what is net benefit

Answer 1

direct benefit – direct cost

Question 2

what is opportunity cost

Answer 2

the net benefit of the next best action not
taken

Question 3

what is a reservation option

Answer 3

the next best alternative

Question 4

what is economic cost

Answer 4

direct costs + opportunity cost

Question 5

what is economic rent

Answer 5

net benefit from option taken – opportunity
cost

Question 6

what does the index of real wages mean

Answer 6

The term index means the value of some quantitative amount relative to its value at some other time which is usually normalised to 100
The term real means that the money wage has been adjusted to take into account changes of prices of time (inflation). The result represents the real buying power of the money workers earned

Question 7

what are relative prices

Answer 7

Relative price is the price of one option relative to another often expressed as a ratio of two.

Question 8

what are innovation rents

Answer 8

Innovation rents = profits from using the new technology - profits if you continue with the same technology as competitors

Question 9

what is specialisation

Answer 9

Specialization means each person does just one or a few of
the large number of tasks necessary for some project or goal.

Question 10

what 3 things does specialisation facilitate

Answer 10

• Learning by doing as we acquire skills by producing things
• Differences in ability: due to skill or natural surrounding some people are better at producing certain things than others
• Economies of scale: producing a large number of units is more cost effective

Question 11

what is absolute advantage

Answer 11

Being more productive
in producing a good
means having an
absolute advantage.

Question 12

what is comparative advantage

Answer 12

Having a lower relative
cost of producing a
good means having a
comparative
advantage.

All producers can benefit even when this means that one producer specialises in a good that another could produce at lower costs.
Countries are better off specialising and then trading goods with each other to save cost and become more efficient.

Question 13

what is division of labour

Answer 13

specialisation in producing things either
within a firm or across society

Question 14

what is production technology

Answer 14

the process that a firm uses to
convert a set of inputs into an output that it can sell.

Question 15

what are factors of production

Answer 15

– the inputs into the production
process (e.g. raw materials, labour, capital goods, energy)

Question 16

what is a production function

Answer 16

a relationship that tell us how much
output will be produced given the amounts of inputs used

Question 17

how does a technology dominate another

Answer 17

it costs less at any set of input prices

Question 18

what does a firms costs depend on

Answer 18

technology and input prices

Question 19

what is cost of production

Answer 19

Cost of production = (wage x workers) + (price of a ton of coal x number of tons)
= (w x N) + (p x R)

Question 20

how can isocost lines be used to tell us what technology to use

Answer 20

Isocost lines are used to compare the technologies that are not dominated
A change in the relative price of labour and energy will change the slope of the firm’s isocost lines
To draw an isocost line first calculate the cost and then find another point with the same cost such as the endpoints e.g. if no coal was used 4 workers could be hired with £40

Question 21

how do you represent costs

Answer 21

• isocost lines join all the combinations of workers and coal that cost the same amount
• slope of isocost lines = -w/p
• the slope depends on relative price

Question 22

facts about isocost lines

Answer 22

• Every point in the space is on one isocost line
• All points on the line have the same cost
• This is our definition of an isocost line
• Isocost lines are parallel
• Isocost lines closer to the origin represent cheaper combinations
• Any point above an isocost line costs more than points on the isocost
  line

Question 23

why was the price of labour relative to energy very high in Britain

Answer 23

• English wages were
  higher than wages
  elsewhere
• Coal was cheaper in coalrich Britain than in the
  other countries

Question 24

what technology allow to happen

Answer 24

• Further technological
  progress
• Wage growth
• Falling energy costs

Question 25

what 2 things can influence wage

Answer 25

How much is produced: the size of the pie that is to be divided between workers and the owners of other impetus

The share going to workers: this depends on how wages are determined and if workers have well paying employment opportunities other than their current job. E.g. if workers are competing for the same job and the next best alternative is a low paying job then wages are likely to be low

Question 26

what are the key ideas in a model

Answer 26

Equilibrium – a situation that is self-perpetuating, meaning
that there is no tendency for the situation to change unless
an external force for change is introduced
* Endogenous variables – variables whose values are
determined by relationships built into the mode
* Exogenous variables – variables whose values are
determined outside the model
* Ceteris paribus – holding other things equal

Question 27

if greta produces 1500 apples and 60 tons of wheat what is her opportunity or producing one apple. what is her opportunity cost of producing 1 one of wheat

Answer 27

apple production = 60/1500 = 0.04

wheat production = 1500/60 = 25