Chapter 2 Homework

The production possibilities frontier will shift outward

if technological advances occur

Whether carried out by an individual or a country, production beyond the production possibilities frontier

is not physically possible

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

shows how households and firms are linked through product and factor markets

A production possibilities frontier...

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

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

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.

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

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

why are independent courts important for a well-functioning economy?

-to make their decisions based on the law -to make their decisions free of influence form other parts of the government -to make their decisions free of influence form other parts of the government -to make their decisions free of intimidation by criminal gangs.

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.

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

Any point highest on the production possibilities frontier line/curve because it is where the most resources are used to produce capital goods.

Which points are efficient?

Any point(s) ON the production possibilities frontier line/curve

What points are UNATTAINABLE?

Any point(s) OUTSIDE of the production possibilities frontier line/curve

Which points are inefficient?

Any point(s) falling INSIDE the production possibilities frontier line/curve

What are the two main categories of participants in markets?

Firms and households

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 is comparative advantage?

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

What is absolute advantage?

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

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

The production possibilities frontier will be bowed outward.

With respect to consumption, individuals and countries

can, through trade, consume beyond their production possibilities frontier

Which participants are of the greatest importance in determining what goods and services are produced?

households

What is the basis for trade?

comparative advantage

Firms are likely to produce more of a good or service when its price _____ and less of a good or service when its price ______

rises; falls

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 inefficiency:

with points INSIDE the production possibilities frontier

We can show economic efficiency:

with points on the production possibilities frontier.