Micro

on production possibilities curve

EFFICIENT

OUTSIDE production possibilities curve

UNATTAINABLE

Production Possibilities Frontier (PPF):

a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

Which of the following transactions takes place in the markets for the factors of production in the circular-flow diagram? a)Dylan receives a salary for his work as a financial analyst for an investment firm. b)Kristin buys two business suits to wear to her job as a Chief Information Officer. c)Jim receives clean water in his home in exchange for paying his water bill. d)Caroline owns a nail salon and receives payments from her clients for her services.

a)Dylan receives a salary for his work as a financial analyst for an investment firm.

If Shawn can produce donuts at a lower opportunity cost than Sue, then a)Shawn has a comparative advantage in the production of donuts. b)Sue has a comparative advantage in the production of donuts. c)Shawn should not produce donuts. d)Shawn is capable of producing more donuts than Sue in a given amount of time.

a)Shawn has a comparative advantage in the production of donuts.

Positive statements

attempt to describe the world as it is.

Normative statements

attempt to prescribe how the world should be.

Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that? a)the nation is producing beyond its capacity, so inflation will occur. b)the nation is not using all available resources or is using inferior technology or both. c)the nation is producing an efficient combination of goods. d)there will be a large opportunity cost if the nation tries to increase production of any good.

b)the nation is not using all available resources or is using inferior technology or both.

In the circular-flow diagram, which of the following items flows from households to firms through the markets for goods and services? a)goods and services b)dollars paid to land, labor, and capital c)dollars spent on goods and services d)wages, rent, and profit

c)dollars spent on goods and services

The blacksmith that requires a smaller quantity of iron to produce a certain amount of horseshoes, relative to the quantities of iron required by other blacksmiths to make the same amount of horseshoes a)has a low opportunity cost of producing horseshoes, relative to the opportunity costs of other blacksmiths. b)has a comparative advantage in the production of horseshoes. c)has an absolute advantage in the production of horseshoes. d)should be the only producer of horseshoes.

c)has an absolute advantage in the production of horseshoes.

If demand is INELASTIC

e<1 % Change in Q (>) SMALLER % change in P LESS sensitive to price changes (necessities, food, oil, ) (FOOD less sensitive than breakfast cereal)

If demand is ELASTIC

e>1 % change in Q (>) LARGER % change in P more sensitive to price changes (WINE more sensitive that beverages) (luxurious items)

Gains from trade occur when

entities trade along their comparative advantage.

opportunity cost

of an item is what must be given up to obtain that item.

Comparative advantage:

the ability to produce a good at a lower opportunity cost than another producer

Absolute advantage:

the ability to produce a good using fewer inputs than another producer

inside the production possibilities curve

the nation is not using all available resources or is using inferior technology or both. *INEFFICIENT*