Chapter 2: Trade- offs , comparative advantage, and the market system.

Property rights are

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Property rights are the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. Property can be tangible, physical property, such as a store or factory. Property can also be intangible, such as the right to an idea.

What is the role of an entrepreneur?

A. to bring together the factors of production—labor, capital, and natural resources B. to operate a business that produces a good or service C. to take risks D.(correct) All of the above.

In the circular flow model of the economy, __________ are the suppliers of goods and services.

FIRMS

When nations specialize in their comparative advantage and engage in trade:

overall standards of living increase

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

In the diagram to the right, point G indicates an

unattainable result

Using information in the table, what is country A's opportunity cost of producing 1 unit of clothing?

2 units of food The information provided indicates that country A would have to sacrifice 3 units of clothing to produce 6 units of food. Therefore, each unit of clothing has an opportunity cost equal to 2 units of food, or a 6/3 ratio.

In the graphs shown, which country has a comparative advantage in the production of shirts?

Country B ( Comparative advantage: the ability of an individual, a firm, or country to product good or service at a LOWER OPPORTUNITY COST than competitors.)

If you and your neighbor both grow oranges and grapefruits and you are better than your neighbor at picking both oranges and grapefruits, there can be no advantage to you in specializing in growing only one type of fruit and trading with your neighbor for the other.

False

In the circular flow diagram, which arrow shows the flow of goods and services?

Firms to product markets to households

In the above graph, which of the following combinations of pies and cakes is unattainable given the existing resources?

Four cakes and seven pies(unattainable- above the slope line, don't have the resources to product)

What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy? Refer to the graph. What is the opportunity cost of moving from point B to point C?

The country is operating on its production possibilities frontier. 20 sedans

The basis for trade is comparative advantage, not absolute advantage.

True

The outward shift of the production possibilities frontier from point A to point B in the above graph would most likely be caused by:

a technological advance that affects both the production of automobiles and aircraft carriers

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.

Ms. Boulware is the best lawyer and the best secretary in town. She has:

an absolute advantage in both jobs

In the United States, property rights:

are guaranteed by two amendments to the U.S. Constitution Property rights are so critical to economic growth and prosperity that they are guaranteed by the fifth and the fourteenth Amendments to the U.S. Constitution. These amendments guarantee property rights at the federal level, so all states fall under the same standards. And, property rights are legally enforced through the court system. If someone's property rights have been violated, they can bring legal action against any person or business to ensure their rights are enforced.

A free market is a market with ________ government restrictions on how a good or service can be produced or sold and with ________ government restrictions on how a factor of production can be employed.

few; few

According to Adam Smith, which of the following is necessary for the proper functioning of the market system? According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?

for markets to work, people must be free to pursue their self-interest Prices

Adam Smith observed that people pursuing their own self-interest in a free market will actually result in the best interest of society as if these actions were guided by a(n):

invisible hand.

Absolute advantage is the ability of an individual, firm, or country to:

produce more of a good or service than competitors using the same amount of 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

The role of the entrepreneur always involves:

taking risks

In what type of economy does the government decide how most economic resources will be allocated?

Centrally planned economy

According to the theory of comparative advantage, specialization and free trade will benefit:

all trading partners who specialize in goods where they have comparative advantage According to the theory of comparative advantage, specialization and free trade will benefit all trading partners who specialize in goods where they have comparative advantage. In order for trading partners to all benefit from trade, they do not need to have an absolute advantage or even a monopoly. Nor do you have to specialize the most, merely specializing in the production of the good or service where you have the lowest opportunity cost (comparative advantage) and then engaging in trade will benefit all parties involved.

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 production possibilities frontiers depicted in the diagram to the right illustrate

both the labor force and capital stock increasing. Over time, though, the resources available to an economy may increase. For example, both the labor force and the capital stock-the amount of physical capital available in the country-may increase. The increase in the available labor force and the capital stock shifts the production possibilities frontier outward for the U.S. economy and makes it possible to produce both more automobiles and more tanks. Similarly, technological advance makes it possible to produce more goods with the same amount of workers and machinery, which also shifts the production possibilities frontier outward. Economic growth is the ability of the economy to produce increasing quantities of goods and services. Next Question

The basis for trade is _________advantage.

comparative The basis for trade is comparative advantage. The fastest manufacturing workers do not necessarily do much factory work. If the fastest manufacturing workers have a comparative advantage in some other activity—playing major league baseball, or being industrial engineers—they are better off specializing in that other activity. Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading. Next Question

If a country has a comparative advantage in the production of a good, then that country:

has a lower opportunity cost in the production of that good

Which of the following are the two key groups of participants in the circular flow of income? In a simple circular-flow model, there are flows of _________ and flows of _________.

households and firms A. factors of production; goods and services Your answer is not correct. B. funds received from the sale of factors of production; spending on final goods and services C.(correct) Both (a) and (b) are correct. This is the correct answer. D. None of the above; there are no flows in the circular flow of income.

What is the outcome of enforcing contracts and property rights in a market system? If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?

increased economic activity an independent court system

Absolute advantage is the ability of an individual, a firm, or a country to If a country has a comparative advantage in the production of a good, then that country

produce more of good or service than competitors using the same amount of resources. has a lower opportunity cost in the production of that good.

One of the great benefits of trade is

that it makes it possible for society to become better off by increasing its consumption. Markets are fundamentally about trade, which is the act of buying and selling. Sometimes we trade directly, but often we trade indirectly. One of the great benefits to trade is that it makes it possible for society to become better off by increasing its consumption.

Which of the following events would create economic growth, that is, shift the production possibilities frontier outward?

A. An increase in the available labor. B. An increase in the available natural resources. C. An increase in technology that affects the production of both goods. D.(correct) All of the above.

In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?

The division of labor Adam Smith explains how the making of a pin can be divided into many operations, and the he points to the very high output that can be produced in the factory that divides those tasks. Combining the production steps would have the opposite impact and decrease output while increasing the factory size will not directly impact the productivity of workers unless additional specialization is introduced.

What is the name given to the highest-valued alternative that must be given up to engage in any activity?

opportunity cost. We all face trade-offs given the fact that resources are scarce. So, by default when we choose to consume a particular product or engage in some activity, we are automatically giving up other goods or activities. For example, choosing to attend a class means you are giving up time that could be spent working, sleeping, or visiting with friends. The value of your next best choice is the opportunity cost of attending class. The production possibilities frontier is one way that we will use to illustrate the concept of opportunity costs that a business or even a country may face.

What are copyrights designed to accomplish?

Protect intellectual property rights

Which letter best represents the demand for factors of production in this circular flow model?

The letter C best represents the demand for factors of production in this circular flow model. Firms demand factors of production from the factor market and in return pay income. Letter A represents goods being sold by the firm in exchange for payment which is revenue for the firm. Letter D represents households supplying the factors of production.

Which of the following is critical to the success of the market system?

To allow individuals or firms to have exclusive use of their property

In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered?

Product markets

Refer to the graph. Which of the following best represents the situation in which BMW must face a trade-off between producing SUVs and producing hybrids?

Moving from point B to point C

Contracts, insurance, patents and accounting rules are:

inventions that make a market work better While markets appear to have emerged naturally, these other inventions were created to make free markets function even better by standardizing information, protecting private property and governing transactions. These innovations are enforced more in market economies than in centrally planned economies

On the diagram to the right, movement along the curve from points A to B to C illustrates

increasing marginal opportunity costs. As the economy moves down the production possibilities frontier, it experiences increasing marginal opportunity costs because increasing automobile production by a given quantity requires larger and larger decreases in tank production. Increasing marginal opportunity costs occur because some workers, machines, and other resources are better suited to one use than to another. The idea of increasing marginal opportunity costs illustrates an important economic concept: The more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity.

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. 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. Governments in all modern economies intervene more than is consistent with a fully free market. In that sense, we can think of the free market as being a benchmark against which we can judge actual economies.

A(n)______ is someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—to produce goods and services.

A(n) ENTREPRENEUR is someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—to produce goods and services. Entrepreneurs are central to the working of the market system. An entrepreneur is someone who operates a business. Entrepreneurs must first determine what goods and services they believe consumers want, and then they must decide how to produce those goods and services most profitably. Entrepreneurs bring together the factors of production—labor, capital, and natural resources—to produce goods and services. They put their own funds at risk when they start businesses.

Two key groups participate in markets. A ____ consists of all the individuals in a home. ______ are suppliers of goods and services. We can use a simple economic model called the _____ to see how participants in markets are linked.

Two key groups participate in markets. A HOUISEHOLD consists of all the individuals in a home. FIRMS are suppliers of goods and services. We can use a simple economic model called the CIRCULAR-FLOW DIAGRAM to see how participants in markets are linked. Two key groups participate in markets: A household consists of all the individuals in a home. Households are suppliers of factors of production-particularly labor-used by firms to make goods and services. Households use the income they receive from selling the factors of production to purchase the goods and services supplied by firms. Firms are suppliers of goods and services. Firms use the funds they receive from selling goods and services to buy the factors of production needed to make the goods and services. We can use a simple economic model called the circular-flow diagram to see how participants in markets are linked

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. A key to understanding an argument made by Adam Smith that prices would do a better job of coordinating the activities of buyers and sellers than the guilds could is the assumption that individuals usually act in a rational, self-interested way. In particular, individuals take those actions most likely to make themselves better off financially. Adam Smith understood—as economists today understand—that people's motives can be complex. But in analyzing people in the act of buying and selling, the motivation of financial reward usually provides the best explanation for the actions people take. In a famous phrase, Smith said that firms would be led by the "invisible hand" of the market to provide consumers with what they wanted. Firms would respond to changes in prices by making decisions that ended up satisfying the wants of consumers.

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 production—labor, capital, natural resources, and entrepreneurial ability. Product markets Markets for goods—such as computers—and services—such as medical treatment. Factor markets Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability. Factors of production are divided into four broad categories: ≻Labor includes all types of work, from the part-time labor of teenagers working at McDonald's to the work of top managers in large corporations. ≻Capital refers to physical capital, such as computers and machine tools, that is used to produce other goods. ≻Natural resources include land, water, oil, iron ore, and other raw materials (or "gifts of nature") that are used in producing goods. ≻An entrepreneur is someone who operates a business. Entrepreneurial ability is the ability to bring together the other factors of production to successfully produce and sell goods and services.

The production possibilities frontiers depicted in the diagram to the right illustrate

technological advances in the tank industry. Over time, though, the resources available to an economy may increase. For example, both the labor force and the capital stock-the amount of physical capital available in the country-may increase. The increase in the available labor force and the capital stock shifts the production possibilities frontier outward for the U.S. economy and makes it possible to produce both more automobiles and more tanks. Similarly, technological advance makes it possible to produce more goods with the same amount of workers and machinery, which also shifts the production possibilities frontier outward. Economic growth is the ability of the economy to produce increasing quantities of goods and services.