Economics Chapter 2

It is possible for the outcomes in a market system to be different from what firms and consumers intended them to be because

neither firms nor consumers are directly interested in increasing economic efficiency or the standard of living of the average person.

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

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

An entrepreneur is

someone who operates, bringing together the factors of production—​labor, ​capital, and natural resources—to produce goods and services.

The production possibilities frontier will shift outward

If resources are used to produce capital goods

With respect to​ consumption, individuals and countries

​can, through​ trade, consume beyond their production possibilities frontiers.

A psychic reward is best defined as

a nonmonetary form of remuneration that lifts​ one's spirit.

In what ways does a free market economy differ from a centrally planned​ economy? Unlike a free market​ economy,

centrally planned economies have extensive government controls.

What is the basis for​ trade?

comparative advantage

What role do private property rights 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.

what is the outcome of enforcing contracts and property rights in a market system?

increased economic activity

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

increasing marginal opportunity cost

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

is not physically possible.

Using the same amount of​ resources, suppose that Nicaragua can produce twice as much wheat as Colombia.​ Nevertheless, Colombia could still have the comparative advantage in producing wheat if

it is even less efficient than Nicaragua in the production of goods other than wheat

Refer to the graph. What is the opportunity cost of moving from point B to point​ C?

20 sedans

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

Households

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.

What is a free​ market?

A free market is one where the government does not control the production of goods and services.

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

An increase in technology that affects the production of both goods. & An increase in the available labor. & An increase in the available natural resources.

Who has comparative advantage in producing lumberjack boots ?

Canada

What do economists mean by​ scarcity?

Economists mean that unlimited wants exceed limited resources.

What is an​ entrepreneur?

Entrepreneurs operate businesses that produce goods and services.

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?

Even with an absolute​ advantage, the United States would have benefited from importing those products for which Britain had a comparative advantage.

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

Writing in the New York Times​, Michael Lewis argued that ​"...a market economy is premised on a system of incentives designed to encourage an ignoble human​ trait: self-interest." ​ What incentives does a market system provide to encourage​ self-interest?

Financial reward.

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.

What does increasing marginal opportunity costs​ mean?

Increasing the production of a good requires larger and larger decreases in the production of another good.

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

Point A because it is where the most resources are used to produce capital goods

Which​ point(s) are​ inefficient? Briefly explain why.

Point D because production there is not using all its available resources

Which​ point(s) are​ unattainable? Briefly explain why.

Point E because it is outside the production possibilities frontier

Which​ point(s) are​ efficient? Briefly explain why.

Points A​, B, and C because this is where maximum output is produced with available resources.

Who has comparative advantage in producing lumberjack shirts ?

The United States

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than another producer

What is absolute​ advantage?

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

What happens if a country produces a combination of goods that efficiently uses all of the resources available in the​ economy?

The country is operating on its production possibilities frontier.

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

The production possibilities frontier will be bowed outward.

Suppose we can divide all the goods produced by an economy into two​ types: consumption goods and capital goods. Capital​ goods, such as​ machinery, equipment, and​ computers, are goods used to produce other goods. Is it likely that the ppf would be a straight line or a bowed out line

The production possibilities frontier would likely be bowed out because not all resources are equally well suited to produce both consumption and capital goods.

Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart​ disease?

The reduction in funding for research to cure other diseases.

Why do entrepreneurs play a key role in a market​ system?

They bring together factors of production.

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.

During the 1928 presidential election​ campaign, Herbert​ Hoover, the Republican​ candidate, argued that the United States should only import those products that could not be produced here. Do you believe that this would be a good​ policy? Explain.

This is not a good policy because it does not necessarily result in countries producing those goods for which they have a comparative advantage.

Evaluate the following​ argument: "Adam​ Smith's analysis is based on a fundamental​ flaw: He assumes that people are motivated by​ self-interest. But this​ isn't true. ​ I'm not​ selfish, and most people I know​ aren't selfish."

This statement is based on the misconception that following your​ self-interest and being selfish are the same thing.

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

True

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.

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

an independent court system

intellectual property includes:

anything created by the mind of a person

In a simple​ circular-flow model, there are flows of​ _________ and flows of​ _________.

factors of​ production; goods and services & funds received from the sale of factors of​ production; spending on final goods and services

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

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

households and firms

According to Adam​ Smith, which of the following is the instrument the invisible hand uses to direct economic​ activity?

prices

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

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

In colonial​ America, the population was spread thinly over a large​ area, and transportation costs were very high because it was difficult to ship products by road for more than short distances. As a​ result, most of the free population lived on small farms where they not only grew their own food but also usually made their own clothes and very rarely bought or sold anything for money. Why were the incomes of these farmers likely to rise as transportation costs​ fell? As transportation costs​ fell

the farmers gained access to new markets and customers. Using comparative​ advantage, the farmers​ specialized, producing those goods for which they had lower opportunity cost. As they traded for other​ goods, their incomes and living standards increased.

This idea is an important intellectual contribution because

the interaction of firms and consumers in markets produces outcomes that are economically efficient and that promote the economic growth that results in rising living standards.

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.

Property rights are

the rights individuals or firms have to the exclusive use of their​ property, including the right to buy or sell it.

Why are independent courts important for a​ well-functioning economy? Independence is necessary for​ courts:

to make their decisions based on the law. & to make their decisions free of influence from other parts of the government. & to make their decisions free of intimidation by criminal gangs. & to make their decisions free of influence from people with powerful political connections.

What is the role of an​ entrepreneur?

to operate a business that produces a good or service, take risks, and bring together factors of production

In addition to making​ cars, Tesla planned to open a new factory in Nevada in 2016 to make​ batteries, including home storage battery packs. The opportunity cost of​ Tesla's investment in a new battery factory in Nevada is

what the company considered to be the best foregone option to the factory.

How should policymakers determine the amount of money that should be allocated for research curing heart​ disease? They should base their decision on

whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases.

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.