ECON 2010 Chapter 2

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The production possibilities frontier will shift outward

if resources are used to produced capital goods

A production possibilities frontier:

shows the maximum attainable combinations of two goods that may be produced with available resources

Lawrence Summers served as secretary of the treasury in the Clinton administration and as director of National Economic Council in the Obama administration. He has been quoted as giving the following moral defense of the economic approach. ​"There is nothing morally unattractive about​ saying: We need to analyze which way of spending money on health care will produce more benefit and which​ less, and using our money as efficiently as we can. I​ don't think there is anything immoral about seeking to achieve environmental benefits at the lowest possible​ costs." ​ Source: David​ Wessel, "Precepts from Professor​ Summers," Wall Street Journal​, October​ 17, 2002. It would be more moral to reduce​ pollution,

taking the cost into account because money spent on pollution reduction is not available for other worthy activities

What are private property rights? Private property rights are:

the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property

How can a country gain from specialization and trade?

A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services

Why are independent courts important for a well-functioning economy? Independence is necessary for courts:

All of the below: -to make their decisions based on the law. -to make their decisions free of intimidation by criminal gangs. -to make their decisions free of influence from other parts of the government. -to make their decisions free of influence from people with powerful political connections.

What role do they play in the working of a market system? Private property rights:

Both encourage a significant number of people to be willing to risk funds by investing them in business AND encourage firms to spend money on research and development

What do economists mean by scarcity?

Economists mean that unlimited wants exceed limited resources.

In the​ 1950s, the economist Bela Balassa compared 28 manufacturing industries in the United States and Britain. In every one of the 28​ industries, Balassa found that the United States had an absolute advantage. In these​ circumstances, would there have been any gain to the United States from importing any of these products from​ Britain? Explain.

Even with an absolute advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage

What does increasing marginal opportunity costs mean?

Increasing the production of a good requires larger and larger decreases in the production of another good

Which of the following is not scarce according to the economic definition?

None of the below -Capital -Coal -Cars -Time

At which point is the country's future growth rate likely to be the highest?

Point A because it is where the most resources are used to produce capital goods

Which point(s) are inefficient?

Point D because production there is not using all available resources

Which point(s) are unattainable?

Point E because it is outside the production possibilities frontier

Which point(s) are efficient?

Points A, B, and C because this is where the maximum output is produced with available resources

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost

What is absolute advantage?

The ability to produce more of a good or service than competitors using the same amount of resources

What is the circular-flow diagram and what does it illustrate?

The circular-flow diagram shows how households and firms are linked through product and factor markets

What are the implications of this idea for the shape of the production possibilities frontier?

The production possibilities frontier will be bowed outward

We can show economic inefficiency:

With points inside the production possibilities frontier

According to an article in the Economist​ magazine: ​"In all rich​ countries, property rights are secure...Legally recognising land ownership has boosted​ farmers' income and productivity in Latin America and Asia...More than​ two-thirds of​ Africa's land is still under customary​ tenure, with rights to land rooted in communities and typically neither written down nor legally​ recognized." ​Source: "Title to​ Come: Property Rights Are Still Wretchedly Insecure in​ Africa," Economist​, July​ 16, 2016. a. Which of the following statements regarding secure property rights? b. Which of the following statements is true? c. What problems might African farmers have because they lack secure property rights?

a. Property rights provide incentives for people to maintain and increase the value of the property they own b. By protecting private property rights, governments make it more likely that investments will be made in businesses that provide jobs and income for workers. c. All of the below: - Without secure property​ rights, farmers in Africa may be reluctant to make the investments in their farms that would raise the​ farms' productivity. - Without secure property​ rights, farmers are not able to obtain funds by selling some of their land. - Without secure property​ rights, it is harder for farmers to borrow because they cannot use their land as collateral.

A Gallup public opinion poll indicates that among people aged 18 to​ 29, more have a favorable view of socialism than of capitalism. A columnist in the Wall Street Journal​ comments: ​"Would these people actually know socialism if they saw​ it? Taxing the​ rich, Medicare-for-all, and a Green New Deal that replaces fossil fuels with renewables are certainly​ liberal, probably​ radical, possibly unwise. But​ socialist? Hardly." ​ Sources: Frank​ Newport, "Democrats More Positive about Socialism Than​ Capitalism," news.gallup.com, August​ 13, 2018; and Greg​ Ip, "Venezuela's Collapse Exposes the Fake Socialism Debated in​ U.S." Wall Street Journal​, February​ 6, 2019. What definition of socialism is the columnist using if he​ doesn't consider the programs he lists to be​ socialist? Is the​ columnist's definition of socialism one that U.S. socialists like Senator Bernie Sanders and Congresswoman Alexandria​ Ocasio-Cortez would be likely to​ accept?

centrally planned economy in which the government directly controls most production. Bernie Sanders would be unlikely to accept this definition of socialism because he is more concerned with the provision of services such as health care and not government ownership of businesses

What is the basis for trade?

comparative advantage

After Russia seized what had formerly been the Ukrainian territory of Crimea in February​ 2014, the United States and many other countries imposed economic sanctions that reduced the ability of Russia to engage in international trade. A columnist writing in the New York Times noted​ that, ​"If sanctions push Russia onto a path of greater​ self-reliance, its manufacturing and service industries will surely grow​ faster...." ​Source: Anatole​ Kaletsky, "Reasons to Welcome a Ukraine​ Deal," New York Times​, September​ 18, 2014. If the columnist is correct about the effect of the​ sanctions, then, in the long​ run, the sanctions will

decrease the economic well-being of the average Russian because Russia will have to produce some goods and services at a higher cost than its trading partners

The Scottish philosopher Adam Smith argued in 1776 that

prices would do a better job of coordinating the activities of buyers and sellers than guilds could

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

we can show economic efficiency:

with point on the production possibilities frontier


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