A production possibilities frontier (PPF) is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
At which point is the country’s future growth rate likely to be the highest? Briefly explain why. Point W (top) because it is where the most resources are used to produce capital goods.
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy? The country is operating on it production possibilities frontier.
What does increasing marginal opportunity costs mean? Increasing the production of a good requires larger and larger decreases in the production of another good.
What are the implications of this idea for the shape of the production possibilities frontier? The production possibilities frontier will be bowed outward.
What is absolute advantage? The ability to produce more of a good or service than competitors using the same amount of resources
What is comparative advantage? The ability to produce a good or service at a lower opportunity cost than other producers
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good … will have a comparative advantage if it has a lower opportunity cost of producing that good
For Fred and Barney, which of the following is true?
Barney has a comparative advantage in making unicycles and Fred in making pogo sticks.
For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of the following is true about the comparative advantage between the two countries? Italy has the comparative advantage in wine.
Whether carried out by an individual or a country, production beyond the production possibilities frontier … is not physically possible
With respect to consumption, individuals and countries … can, through trade, consume beyond their production possibilities frontier.
Scarcity implies that every society and every individual face trade-offs because scarcity means that … human wants are greater than what available resources can produce.
By definition, economics is the study of … the choices people make to attain their goals given their scarce resources
The three economic questions that every society must answer are … what goods will be produces, how will they be produces, and who will receive the goods?
Centrally planned economies allocate resources based on decisions by government, while market economies answer these question through decisions made by households and firms.
Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when marginal benefit equals marginal cost.
Positive analysis in concerned with what is and normative analysis is concerned with what ought to be. Economics is about positive analysis, which measure the costs and benefits of different courses of action.
Indicate which of the following statements represent positive analysis and which represent normative analysis. A 500-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents positive analysis. The federal government should spend more on AIDS research. This represents normative analysis. Rising paper prices will increase textbook prices. This represents positive analysis The price of coffee at Starbucks is too high. This represents normative analysis.
Two-dimensional graphs have a horizontal and a vertical axis and are used in economics to illustrate relationships between two economic variables.
Richard Posner is a federal court judge who also writes on economics topics. A newspaper reported summarized Posner’s views on the effect of online bookstores...
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