ECON 2010 Chapter 2
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
