Chapter 2 Econ
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 LOADING.... 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 are the two main categories of participants in markets?
Firms and households.
According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest.
Which participants are of greatest importance in determining what goods and services are produced?
Households.
in a famous essay on the market system, the economist Leonard Read discussed how a pencil sold by the U.S. firm Eberhard Faber Pencil Company (now owned by Paper Mate) was made. He noted that logging companies in California and Oregon grew the cedar wood used in the pencil. The wood was milled into pencil-width slats at a factory in San Leandro, California. The graphite for the pencil was mined in Sri Lanka and mixed with clay purchased from a firm in Mississippi and wax from a firm in Mexico. The rubber was purchased from a firm in Indonesia.
It was not necessary for the managers of any of firms that participated in the making of the pencils to know how the components they produced were used to make pencils.
As part of their budget tightening process, many states are cutting aid to colleges and universities, with students being asked to pick up a bigger part of the escalating tab of higher education. Which of the following would do the most to enable you to cope with those higher expenses without impairing your progress toward a degree?
Reducing your consumption of goods and services not essential to your education.
What is comparative advantage?
The ability to produce a good or service at a lower opportunity cost than other producers.
What is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
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.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
With respect to consumption, individuals and countries
can, through trade, consume beyond their production possibilities frontiers.
We can use a simple economic model called the _______to see how participants in markets are linked.
circular-flow diagram
the basis for trade is ____ advantage
comparative
a _______ is someone who operates a business, bringing together the factors of productionlong dash—labor, capital, and natural resourceslong dash—to produce goods and services.
entrepreneur
If country ABC can produce a unit of good 1 with fewer resources than can country XYZ, it is correct to say that country ABC
has anabsolute advantage in producing good 1.
Suppose an increasing number of school districts across the country find themselves with too few teachers at a time of rising enrollments and calls for improved outcomes in terms of student performance. A market-based remedy for this emerging mismatch between the availability of teachers and school districts' needs would likely emphasize
higher compensation to elicit both a larger quantity of teacher services and a greater reliance by districts on non-traditional instruction methods.
Two key groups participate in markets. A ______ consist of all the individuals in a home. ________ are suppliers of goods and services.
household, firms
Whether carried out by an individual or a country, production beyond the production possibilities frontier
is not physically possible.
According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
prices
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.
The primary difference between product markets and factor markets is that
product markets are markets for goods, while factor markets are markets for factors of productionlong dash—labor, capital, natural resources, and entrepreneurial ability.
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
One of the great benefits of trade is
that it makes it possible for society to become better off by increasing its consumption.
Prepping for a next-day exam over the course of an evening (and possibly into the wee hours of test day) poses increasing costs since
the longer you choose to study will result in an increase in the number and value of foregone activities.
Property rights are
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
What is the role of an entrepreneur?
to bring together the factors of productionlong dash—labor, capital, and natural resources/to take risks/ to operate a business that produces a good or service
A free market exists
when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.
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.