Economics Chapter 2

in the real world are most opportunity costs constant?

False - most PPFs are bowed outward. In other words, for most goods, the opportunity costs increase as more of the good is produced.

In an economy, only one combination of goods is productive efficient. True or false? Explain your answer.

False. There are numerous productive efficient points, all of which lie on the PPF.

Productive Inefficient

The condition in which less than the maximum output is produced with the given resources and technology. Productive inefficiency implies that more of one good can be produced without any less of another being produced

Productive Efficient

The condition in which the maximum output is produced with the given resources and technology.

What happens if economic growth leads to production of good on only one axis

The curve goes out on the axis with increase and stays level on the other axis

Which two major factors that produce economic growth

(1) an increase in the quantity of resources and (2) an advance in technology.

Ex Post

Phrase that means "after," as in after a trade

Ex Ante

Phrase that means before," as in before a trade.

Specialization

Producing goods in which you have a comparative advantage

unemployed resources

The less than full utilization of a resource's productive capabilities

compartive advantage

the ability to produce a good or service at a lower opportunity cost than other producers

What economic concepts does ppf illustrate

(1) Scarcity is illustrated by the frontier itself. Implicit in the concept of scarcity is the idea that we can have some things but not all things. The PPF separates an attainable region from an unattainable region. (2) Choice is represented by our having to decide among the many attainable combinations of the two goods. For example, will we choose the combination of goods represented by point A or by point B? (3) Opportunity cost is most easily seen as movement from one point to another, such as movement from point A to point B. More cars are available at point B than at point A, but fewer television sets are available. In short, the opportunity cost of more cars is fewer television sets. (4) Productive efficiency is represented by the points on the PPF (such as A-E), while productive inefficiency is represented by any point below the PPF (such as F ). (5) Productive Inefficiency - productive inefficiency is represented by any point below the PPF (such as F ). (6) Unemployment (in terms of resources being unemployed) exists at any productive-inefficient point (such as F), whereas resources are fully employed at any productive-efficient point (such as any point in the range A-E). (7) Economic Growth - An increase in resources or an advance in technology can increase the production capabilities of an economy, leading to economic growth and shift outward in the production possibilities frontier.

The PPF separates the production possibilities of an economy into two regions:

(1) an attainable region, which consists of the points on the PPF itself and all points below it (this region includes points A-F), and (2) an unattainable region, which consists of the points above and beyond the PPF (such as point G). Recall that scarcity implies that some things are attainable and others are unattainable. Point A on the PPF is attainable, as is point F; point G is not.

Constant Opportunity Cost

An opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line.

How does production affect opportunity cost?

As more of a good is produced, the opportunity costs of producing that good increase

What does the law of increasing costs have to do with a bowed-outward PPF?

A bowed-outward PPF is representative of increasing costs. In short, the PPF would not be bowed outward if increasing costs did not exist.

What does a straight-line production possibilities frontier (PPF) represent? What does a bowed-outward PPF represent?

A straight-line PPF represents constant opportunity costs between two goods. For example, for every unit of X produced, one unit of Y is forfeited. A bowed-outward PPF represents increasing opportunity costs. For example, we may have to forfeit one unit of X to produce the eleventh unit of Y, but we have to forfeit two units of X to produce the one hundredth unit of Y.

Law of Increasing Opportunity Costs

As more of a good is produced, the opportunity costs of producing that good increase. The law of increasing opportunity costs holds for most goods because people have varying abilities. For example, some individuals are better suited to building houses than others are. When a construction company first starts building houses, it employs the people most skilled at doing so. The most skilled persons can build houses at lower opportunity costs than others can. But as the construction company builds more houses, it finds that it has already employed the most skilled builders; so, it must employ those who are less skilled at building houses. The less skilled people build houses at higher opportunity costs

Adam Smith Invisible Hand Theory

Beneficial social and economic outcomes for entire society may arise from the accumulated self-interested actions of individuals, none of whom intends to bring about such outcomes.

When do you have a straight-line PPF?

Straight-line PPF 5 = Constant opportunity costs The opportunity cost of 1 shirt is always 1 book. And because opportunity costs are constant, the PPF in Exhibit 1(b) is a straight line. When opportunity costs are not constant, the PPF will not be a straight line (See page in text book)

What happens if increase in resources or new technology leads to an increase in both x and y axis goods

The PPF Curve shifts up and out on both axis

Technology

The body of skills and knowledge involved in the use of resources in production. An advance in technology commonly increases the ability to produce more output with a fixed amount of resources or the ability to produce the same output with fewer resources.

A politician says, "If you elect me, we can get more of everything we want." Under what condition(s) is the politician telling the truth?

The first condition is that the economy is currently operating below its PPF. It is possible to move from a point below the PPF to a point on the PPF and get more of all goods. The second condition is that the economy's PPF shifts outward.

Production Possibilities Frontier (PPF)

The possible combinations of two goods that can be produced during a certain span of time under the conditions of a given state of technology and fully employed resources. ●Represents the possible combinations ●of two goods that can be produced in ●a certain period of time under the ●conditions of a given state of ●technology and fully employed ●resources.

economic growth

the increased productive capabilities of an economy. Economic growth is illustrated by an outward shift in the PPF.

Production Possibilities Frontier (Increasing Opportunity Costs)

the production possibilities frontier is bowed outward (concave downward) because the opportunity cost of coffee makers increases as more coffee makers are produced: Bowed-outward PPF 5 Increasing opportunity costs Now how many cell phones does the economy have to forfeit to get 1 additional coffee maker? The answer this time is 2 cell phones. We conclude that, in moving from point A to point B, the opportunity cost of 1 coffee maker was 1 cell phone, but that, in moving from point B to point C, the opportunity cost of 1 (additional) coffee makers is 2 cell phones. If we were to continue producing additional coffee makers, we would see that we would have to give up increasingly more cell phones. You can see this easily if you consider the economy moving from point C to point D (where the opportunity cost of producing an additional coffee makers is 3 cell phones) or moving from point to D to point E (where the opportunity cost of producing an additional coffee makers is 4 cell phones).

Unemployed vs. Employed Resources

●When the economy exhibits productive inefficiency, it is not producing the maximum output with the available resources and technology. One reason may be that the economy is not using all of its resources; that is some resources are unemployed. ●When the economy exhibits productive efficiency it is producing the maximum output with the available resources and technology. That is its resources are fully employed.