Fundamentals Part 2

Economists use the phrase _____ to refer to the positive gains enjoyed by both buyers and sellers when they trade.

"trade creates wealth"

Use the production possibilities schedules to answer the following question. What would be acceptable terms of trade for limes between Person A and Person B?

1 avocado < Price < 4 avocados

Refer to the table to answer the following question. If Julia only wants to consume 10 pounds of coffee, and she agrees to trade Oscar 3 pounds of bananas in exchange for 1 pound of coffee, how many bananas does Julia gain compared to the initial situation without specialization and trade?

10 pounds of bananas

Using the production possibilities graphs, what would be acceptable terms of trade for coffee between Oscar and Julia?

2 bananas < Price < 4 bananas

Refer to the table to answer the following question. If Oscar only wants to consume 34 pounds bananas, and he agrees to trade Julia 3 pounds of bananas in exchange for 1 pound of coffee, how much coffee does Oscar gain compared to the initial situation without specialization and trade?

2 pounds of coffee

When production is characterized by opportunity costs, the resulting production possibilities frontier will be a straight line.

Blank 1: constant, equal, unchanging, fixed, consistent, or linear

When resources are fixed, increasing the production of one good causes a(n) (increase/decrease) in the production of the other.

Blank 1: decrease, decline, reduction, fall, dip, or drop

The quality of a(n) model can be measured by how well it reflects reality and whether it gives us insights that can be used in the real world.

Blank 1: economic or economics

A useful way to visually represent the data in a production possibilities schedule is by means of a graph called a(n) frontier.

Blank 1: production Blank 2: possibilities or possibility

The opportunity cost of producing a good for one producer may be different from that of another because of differences in available and

Blank 1: resources, resource, or inputs Blank 2: technology or tech

Combinations lying the production possibilities frontier are possible but inefficient with the current resources and technology.

Blank 1: within, inside, below, in, underneath, under, beneath, left, or interior

Using these production graphs, in which product should Julia specialize?

Coffee

As long as there are differences in opportunity costs, there are advantages and there will be potential for trade to make both parties better off.

Comparative

According to the circular flow diagram, which two groups interact in the resources market?

Households and firms

On a production possibilities frontier (PPF), if you are able to increase the production of both goods at the same time then, initially, resources were allocated

Inefficiently

If the price is too , producers will not be eager to sell, but buyers will be willing and able to buy.

Low

cost is most plainly visible when spending more money on one thing as it means that less money can be spent on another thing.

Opportunity

cost is most plainly visible when spending more money on one thing means that less money can be spent on another thing.

Opportunity

If Alex engages in a mutually beneficial trade with another producer, where would his consumption point lie?

Outside the PPF

Based on the production possibilities schedules, who should specialize in the production of avocados?

Person A

In the circular flow model, households can obtain the income they need to buy the products they want to consume only by selling their - also known as factors of production.

Resources

The practice of producing a single good or service rather than producing multiple goods or services is called _____ (one word).

Specialization

is the result of low-cost producers focusing all their efforts on producing a single good or service.

Specialization

Whether or not a good or service is traded depends largely on the terms of

Trade

Beneficial terms of trade are the terms—or prices—that are between the two parties' opportunity costs.

True

Which of the following help measure the quality of a good economic model?

Whether it gives us insights that can be used in the real world How well it reflects reality

A production possibilities frontier that illustrates a 1-for-1 trade off between goods is drawn as:

a straight, downward-sloping line.

Comparative advantage refers to:

being the lowest relative opportunity cost producer of a good.

For an entire economy, the production possibilities frontier is going to be:

bowed out because we have different resources with different opportunity costs.

If you are ""relatively"" better at something, you have a(n) advantage.

comparative

If you are relatively better at something, then you are said to have a(n) _____ advantage in that activity.

comparative

The simple model of production assumes that the opportunity cost of production is:

constant

Specialization causes individuals and nations to rely on one another and increases the:

degree of interdependence between them.

On a production possibilities frontier (PPF) with Good X on the horizontal axis and Good Y on the vertical axis, we can say that the slope of the PPF (in absolute value) equals the opportunity cost of producing Good X with respect to the production of Good Y. This is true because the slope:

describes the trade-off resulting from the production of Good X in terms of Good Y

The opportunity cost of producing a good for one producer may be different from that of another because of:

differences in available resources and technology.

The wealth - or additional well-being - created by trade -

does not have to be monetary.

Combinations of output along the production possibilities frontier correspond to:

efficient use of resources

In the two sector circular flow model, ________ must buy resources from _________ in order to produce the output they will sell to households.

firms; households

The benefit - or wealth - that accrues to a buyer or a seller as a result of trading one good - service - or resource for another is the:

gains from trade.

When the producer of a good or service has a lower opportunity cost than other producers, that producer has an advantage in the market because:

he or she will be able to sell at a lower price than other producers.

If the price is too , producers will be eager to sell, but buyers will not be willing or able to buy.

high

The circular flow model shows how:

households and firms interact in two key markets.

The harm in specializing is that:

if the demand for the good or service you produce decreases, its price and your income will decrease too.

In the real world, the opportunity cost of production as production increases.

increases

Specialization causes individuals and nations to rely on one another and:

increases the degree of interdependence among them.

When resources are allocated in such a way that it is possible to increase the production of one good without decreasing the production of another, then the allocation of resources is:

inefficient

Resources are also called:

inputs because they are transformed into output in the production process.

Suppose a farmer has three kinds of land for growing peaches; good - better - and best. As the farmer increases production - she will use the best land first - and costs will be low. At some point - she will run out of the best land and will have to start using the better land - and costs will be a little higher. This describes the:

law of increasing opportunity cost.

Anytime the terms of trade change and move closer to someone's opportunity cost, that person is going to benefit from trade than he or she did before.

less

When the opportunity cost associated with increasing the production of one good or service in terms of another is constant at every level of production, then the production possibility frontier is:

linear.

The law of increasing opportunity costs exists because

not all resources are well-suited for all production.

As long as there are differences in costs, there are comparative advantages and there will be potential for trade to make both parties better off.

opportunity

The cost of producing a good or a service can be found by solving for the cost of one good in terms of another.

opportunity

The terms of trade that are beneficial to both parties are prices that lie between both the parties' costs.

opportunity

The value of the next-best forgone alternative is the cost.

opportunity

Consider a production possibilities frontier (PPF) with Good X on the horizontal axis and Good Y on the vertical axis. The slope of the PPF tells us the _____ of producing one additional unit of Good X.

opportunity cost

Individuals and countries specialize because of differences in:

opportunity costs.

Combinations inside the production possibilities frontier are:

possible but inefficient.

When people trade - producers can achieve something they can't without trade. Thus - only with trade is it

possible to operate outside the production possibilities frontier.

Comparative advantage refers to the ability to:

produce a good or service at a lower opportunity cost than others.

In the circular flow model, the two markets are the factor market and the:

product market.

Each row of the tabular __________ illustrates the maximum amount of a good or a service that can be produced given the production of the other.

production possibilities schedule

The production possibilities frontier, or curve, is a graphical representation of the

production possibilities schedule.

The function of firms in the circular flow model is to _____ resources and _____ products.

purchase; sell

According to the circular flow diagram, households and firms interact in the ______ and the ______.

resource market; product market

Although points on the production possibilities frontier represent the different combinations of output, ultimately what they show is how we allocate our scarce to the production of two different goods or services.

resources

In the circular flow model, households can obtain the income they need to purchase the products for consumption only by selling:

resources

_________ is/are also called factors of production since they are transformed into output during the production process.

resources

The opportunity cost of producing a good or a service can be found by:

solving for the cost of one good in terms of another.

For an entire economy, the production possibilities frontier is going to be bowed out because:

some resources are better suited for producing some goods or services than others.

In the real world, the opportunity cost increases as production increases, because:

some resources are better suited for producing some goods or services than others.

Because of differences in opportunity costs, individuals and businesses

specialize in the production of the good for which they wield a comparative advantage.

A potential risk of specialization is:

susceptibility to market fluctuations.

Terms of trade are:

the price of one good in terms of another.

Terms of trade refers to

the price of one good or service in terms of another.

Opportunity cost is:

the value of the opportunity that you give up when you choose one activity instead of another

Individuals and countries specialize because the opportunity cost of producing goods and services:

varies.

What is the opportunity cost of Product B?

½ Product A

According to the circular flow, which two groups interact with each other in the product market?

✓ Households and firms