Week 1 - Choices and Trade-Offs in the Market Flashcards
What are the Production Possibilities Assumptions?
- Fixed resources.
- Full employment of resources.
- Fixed technology.
- Two products only.
What is the production possibilities frontier (PPF)
The boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology. The PPF is used to illustrate the effects of scarcity and its consequences.
What are the three features of production possibilites?
- Attainable and unattainable combinations.
- Efficient and inefficient production.
- Trade-offs and free lunches.
What is production efficiency?
A situation in which we cannot produce more of one good or service without producing less of something else.
When is production efficient?
When production is on the PPF.
When is production inefficient?
When production is inside the PPF. More could be produced of both goods without forgoing goods.
What is a free lunch?
A free lunch is a gift – getting something without giving up something else. When production is inside the PPF, there would be a free lunch.
What is the difference between a trade-off and a free lunch?
- A trade-off is an exchange – giving up one thing to get something else.
- A free lunch is a gift – getting something without giving up something else.
- When production is on the PPF, we face a trade-off.
- When production is inside the PPF, there would be a free lunch.
What economic concept does marginal opportunity costs demonstrate?
- Increasing marginal opportunity costs demonstrates an important economic concept: The more resources already devoted to an activity, the smaller the payoff (return) to devoting additional resources to that activity.
- If the factory produces 10 cars and 0 trucks, switching resources to make 1 truck might reduce car production to 8 cars. The marginal opportunity cost of 1 truck is 2 cars.
How are marginal opportunity costs shown?
The bowed-out shape of the PPF illustrates the concept of increasing marginal opportunity costs.
What is economic growth?
The ability of the economy to produce increasing quantities of goods and services. - Production possibilities expand and its PPF shifts outward.
How can an economy grow?
o Develops better technology,
o Improves the quality of labour, or
o Increases the quantity of capital
o Resource increase
What is absolute advantage?
The ability of an individual, firm or country to produce more of a good or service than other producers using the same amount of resources.
What is comparative advantage?
The ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers.
