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53 Cards in this Set
- Front
- Back
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all combinations of goods and/or services that can be produced with given amounts of resources
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production possibilities
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Suppose you have one week (seven days) to study for the next exam. Assume that you sleep 8 hours per day, take 15 hours of classes per week (including time to go from class to class), and need 37 hours per week for life needs (like eating, bathing, commuting, resting, etc.). The remaining time is what you have available to study for the exam or for leisure. To simplify, assume that the exam is based on books that you can read at a rate of 10 pages per hour. How many pages can you read and how many hours of leisure can you get with the time available in the next seven days?
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600 pages and 60 hours
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In the diagram above, indicate the combinations of pages read and hours of fun that are attainable given the resource availability. Explain.
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Any number on the PPF
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In the diagram above, indicate the production combinations that imply unemployment of resources. Explain.
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Anything below or underneath the PPF
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A situation where, given the amount of resources available, more (production or happiness) cannot be achieved without a trade off.
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economic efficiency
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In the diagram in the previous problem,
a) Which production combinations are efficient? |
Anything on the PPF
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In the diagram in the previous problem,
b) Which combinations are inefficient? Explain. |
Anything underneath the PPF
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According to the definition of efficiency given above, does an efficient production combination mean that it's a "good" or "fair" choice?
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No.
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What is opportunity cost?
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How much you are losing because you decide to do something else.
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In Problem 2.1, how is the opportunity cost of an additional hour of leisure related to the PPF?
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10 Pages
It is the slope of the PPF |
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Note that as hours of leisure increases, the magnitude of the slope of PPF _________ (increases/decreases/stays constant).
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increases
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Thus, the opportunity cost of additional hours of leisure is __________ (increasing/decreasing/constant) because the magnitude of the slope of the PPF gives the opportunity cost of the product represented in the __________ axis
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increasing; horizontal
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Increasing the amount produced of one good requires giving up increasing amounts of other goods. In other words, as more of one good is produced, the opportunity cost of producing that good increases
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law of increasing costs
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The answers for the previous question demonstrate the law of increasing costs:
What explain the law of increasing costs in practice? |
Decreasing productivity of resource
Decreasing availability of a fixed resource |
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How is the law of increasing costs related to the shape of the PPF? Explain.
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It must be bowed out (outward shaped)
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(Change in resource availability)
In the study-leisure example, what happens with your PPF if you sleep 10 h less per week? Draw the new PPF. Explain. |
It shifts out, the PP expands
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(Change in technology or productivity)
In the study-leisure example, what happens with your PPF if you become better in studying (e.g., you get a computer with better resources, you get a helpful friend to study together, you find a better method of studying, etc.)? Draw the new PPF. Explain. |
Leisure time is same, grade is higher
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(Specific negative resource shock)
In the study-leisure example, what happens with your PPF if you become ill and can't study (but you still have fun watching TV or listening to music)? Draw the new PPF. Explain. |
Grade is lower, leisure time is same
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any resource that can be used in current, but also in future production
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capital
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(Accumulation of capital)
In the study-leisure example, what happens with the future PPF if your grade in the next exam depends on how much you studied for this exam? Suppose that to keep your future PPF the same in the future, you must have learned enough to get a 70 in this exam. Draw the future PPF. Explain. Case 1: you are getting a high grade in this exam |
Grade will be same or higher
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(Accumulation of capital)
In the study-leisure example, what happens with the future PPF if your grade in the next exam depends on how much you studied for this exam? Suppose that to keep your future PPF the same in the future, you must have learned enough to get a 70 in this exam. Draw the future PPF. Explain. Case 2: you are getting a low grade in this exam |
Grade will be lower
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When can trade be beneficial to all parties involved?
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Trade requires different productivities and low trading costs
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the ability to produce with lower resource costs
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absolute advantage
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the ability to produce with lower opportunity costs
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comparative advantage
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Note: Specialization does not mean to produce only one good, but it means to produce a surplus of a good so that?
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it can be traded for other goods
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Trade is beneficial to all parties only if the seller can sell at a price ______ than her opportunity cost (thus making a profit) and the buyer can buy at a price _____ than her opportunity cost (thus saving resources).
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higher; lower
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all the combinations of goods that can be consumed with the resources available
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consumption possibilities frontier (CPF)
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What can we conclude about how specialization is related to comparative advantages?
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The person who has the comparative advantage, they should be the one selling and producing that good
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Product Market makes _____________ to Firms
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Money Payment
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Firms _____________ to Product Market
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Sell Products
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Households make _____________ to Product Market
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Money Payment
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Product Market ____________ for Households
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Buys Products
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Households ______________ to Resource Market
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Sell Resources
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Resource Market makes ____________ to Households
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Money Payment
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Resource Market _____________ for Firms
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Buy Resources
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Firms make _____________ to Resources Market
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Money Payment
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Who is in the middle of the Circular Flow Model?
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Government (Regulation)
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What is the role of households in the economy?
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They buy products and sell resources
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Markets for goods - such as computers - and services - such as medical treatment
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production market
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What happens in production market?
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Products are sold
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Where resources are traded
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Resource Market
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What happens in Resource Market?
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Resources are traded
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What is the role of money in the economy?
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It makes it a lot easier for people to make trades
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What are missing in the simple version of the model?
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The government (regulation)
Financial Market |
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If the circular flow model is not completely realistic, why do we use it?
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Because so many things happen, but it is still managable
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If the production possibilities frontier is ______, then opportunity costs are constant as more of one good is produced
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linear
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The slope of a production possibilities frontier
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measures the opportunity cost of producing one more unit of a good
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According to the production possibility model, if more resources are allocated to the production of physical and human capital, then which of the following is likely to happen?
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fewer goods will be produced for consumption today
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Suppose your expenses for this term are as follows: tuition: $12,000, room and board: $6,500, books and other educational supplies: $1,500. Further, during the term, you can only work part-time and earn $3,500 instead of your full-time salary of $14,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college?
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$24,000
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The natural resources used in production are made available in the
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factor market
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"An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776 was written by?
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Adam Smith
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Adam Smith's invisible hand refers to
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the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole
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The term 'property rights' refers to
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the ability to exercise control over one's own resources within the confines of the law
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