Microeconomics Module 1

Use the production possibilites schedules above 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

What is the opportunity cost of Product B?

1/2 Product A

Refer to the table to answer the folowing 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 intal 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 foilowing 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 Reason: Oscar can trade away 30 pounds of bananas and keep 34 pounds of bananas He gets 10 pounds of coffee from Julia. Without specialization, Oscar consumes 8 pounds of coffee. Trade increases his amount of coffee by 2 pounds

Constant Opportunity Costs

A characteristic of production whereby the opportunity cost associated with increasing or decreasing the production of one good or service, in terms of another, is constant at every level of production.

Constant Opportunity Costs

A characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

Increasing Marginal Cost

A condition in which the additional cost associated with each successive unit of an activity increases.

Scarcity

A condition that results from the inability of limited resources to satisfy unlimited wants. Ex: Because your time is subject to scarcity, you have to decide whether you're better off studying for your economics exam or going to a movie with friends. Similarly, due to the scarcity of natural resources, we can't have all the housing and all the forests we may want because cutting down a tree to build a house means less forest.

Production Possibilities Frontier (PPF)

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology. The PPF shows the production combinations that are both attainable and efficient.

Circular Flow Model

A model that concisely describes how goods, services, resources. and money flow back and forth in an economy.

Law of Increasing Opportunity Cost

A principle in economics that holds that because some resources are better suited to producing one good or service than another, as the production of a good or service increases, the opportunity cost of each additional unit rises. Ex: Suppose a farmer has three kinds of land for growing apples: good, better, and best. As the farmer increases production, she'll 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. Once that land is used, she will have to use the good land, where costs are even higher. The law of increasing opportunity cost suggests that the more apples she produces, the higher the opportunity cost of producing apples will be because lower-quality/higher-cost land will need to be used as production expands.

Production Possibilities Schedule

A table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology

v Land

All natural resources used in production; sometimes referred to as "gifts of nature."

Labor

All physical and mental activity devoted to producing goods and services.

The process of assigning a good, a service, or a resource to one use instead of another describes

Allocating

Efficient Allocation of Resources

Allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another.

Inefficient Allocation of Resources

Allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another.

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services.

In the circular flow model, _____ and _____ interact in the resource market and the product market.

Blank 1: households, houses, individuals, homes, or people Blank 2: firms, businesses, companies, corporations, business, firm, company, or corporation

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

Coffee

When resources are allocoted in such a way that it is possible to increase the production of one good only by decreasing the production of another, then the allocation of resources is said to be

Efficient

Someone who is self-interested only performs actions for his or her own benefit and not for the benefit of others.

False

Martin has given himself an entertainment budget of $5 per week. He has decided that each week he will spend that $5 by either attending a matinee movie at his local theater or downloading five songs by one of his favorite artists. What is the non-monetary opportunity cost of seeing a movie this week?

Five songs By choosing to see a movie this week, Martin gives up the 5 songs he could have bought instead

In the circular flow model, ______ can obtain the income they need to buy the products they want to consume only by selling their resources.

Households

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

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

______ capital refers to the knowledge and skills that people acquire to increase productivity.

Human

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.

_____ 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

The comparison of the scarcity of one good, service, or resource to that of another is called "_______ scarcity" (Entee just one word in the blank

Relative

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

Resources

means that resources are limited.

Scarcity

_____-interest is the idea that people choose to do the things that interest them.

Self

_____ in trade causes individuals and nations to become interdependent.

Specialization

Comparative Advantage

The ability to produce a good or service at a lower relative opportunity cost than that of another producer. Ex: If in the time it takes you to iron one shirt, you could wash 10 dishes, but in the time it takes your roommate to iron one shirt, she could wash 20 dishes, you have the comparative advantage in ironing shirts: You give up only 10 dishes, while she gives up 20.

Marginal Benefit (MB)

The additional benefit associated with one more unit of an activity.

Marginal Cost (MC)

The additional cost associated with one more unit of an activity.

Gains from Trade

The benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another. The wealth, or additional well-being, created by trade does not have to be monetary.

Relative Scarcity

The comparison of the scarcity of one good, service, or resource to that of another. Ex: A major problem faced by developing countries is the relative scarcity of drinkable water as compared to water in general.

Self-interest

The idea that people choose to do the things that interest them.

Optimization

The idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost; people will engage in an activity as long as the marginal benefit of an activity is greater than or equal to its marginal cost. If MB 2 MC, do it. If MB < MC, don't do it.

Optimal Level of Output

The level of output at which the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit. MB = MC

Decreasing Marginal Benefit

The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit.

Specialization

The practice of using available resources to produce a single good or service rather than producing multiple goods or services. Ex: You and your roommate agree to a specialization of chores-you will specialize in ironing shirts while your roommate specializes in vacuuming the floor. With this plan, it is likely that you each will spend less time doing household chores.

Terms of Trade

The price of one good, service, or resource in terms of another. Ex: Roommates Alex and Victor decide that Alex will wash five of Victor's shirts in exchange for Victor vacuuming the apartment once. The five pressed shirts for one vacuumed apartment are the terms of trade.

Allocation

The process of assigning a good, service, or resource to one use instead of another. Ex: At a local town council, people debated a proposal that would change the allocation of public space for recreational use by demolishing a skating park and building an arboretum.

Marginal Decision Making

The process or making cnoices im increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action. Ex: When you decide to turn off the bedroom light on your way to the kitchen so that you can save a little money on your electric bill, you're engaging in marginal decision making. Similarly, when you decide after studying for 3 hours that another hour of sleep is more beneficial to you than a fourth hour studying, that's marginal decision making.

Entrepreneurial Ability

The talent or ability to combine land, labor, and capital to produce goods and services. Entrepreneurial ability different from human capital in that it primarily involves assuming risk and organizing resources into a productive process.

Capital

The tools, machinery, infrastructure, and knowledge used to produce goods and services. Capital sometimes divided into "physical" and "human" capital.

Opportunity Cost

The value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another. Opportunity costs exist because of scarcity You just received $100 for your birthday. Your most preferred way of spending the money is either to buy a new jacket or to buy a ticket to a concert. If you purchase the jacket, the opportunity cost of the jacket is the entertainment value of the concert that you didn't attend. Even though you were given the $100, the jacket isn't free because you had to give up the concert in order to acquire it.

Every person's and - ultimately - every economy's standard of living depends on the effective use of resources.

True

Clara can spend her afternoon doing one of three things: She can study economics, plant a sapling in her garden, or wash her car. Suppose she values spending time in the garden most; next her time washing the car; and her bime studying economics the least What is the opportunity cost of planting a garden?

Washing her car

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

a straight, downward-sloping line.

Because the world is choracterized by scarcity, people must choose between dfferent uses for the resources at their disposal. In economics, we refer to this as

allocating resources

Individuals and businesses must choose between the different uses for their available resources This is called _______ resources and is due to the concept of _______

allocating; scarcity

Comparative advantage refers to:

being the lowest relative opportunity cost producer of a good.

Combinations lying _______ the production possibilities frontier are impossible to produce with the current resources and technology.

beyond, outside, above, past, or over

For an entire economy, the peoduction 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

Specialization in a particular good is based on _______ advantage on the good.

comparative

The producerwith the lowest relative opportunity cost has an) _____ advantage and should specialize in the production of that good.

comparative

Gains from trade can be measured by:

comparing the levels of consumption available before and after the trade.

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

constant

When you see a production possibilities frontier (PPF) drawn as a straight line, the opportunity cost of one good or service in terms of units of the other good or service that must be given up) is assumed to be

constant

If the marginal benefit of an activity exceeds the marginal cost of the activity (MB > MC), we should

continue to increase output until MB = MC.

As the amount of an activity increases, its marginal benefit:

decreases.

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

degree of interdependence between them.

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.

Combinations of output along the production possibilities frontier correspond to:

efficient use of resources.

In the circular flow model,- _____ must buy resources in order to produce the output they will sell to households

firms, businesses, suppliers, companies, manufacturers, factories, producers, producer, corporations, or producers

In the two sector circular fiow model ____ must buy resources from _____ in order to produce the output they will sell to households

firms: households

In the circular flow model, the market economy creates:

flows of goods and services resources and money.

Graphing the information in the production possibilities schedule produces the production possibilities:

frontier

The benefit- or wealth- that accrues to a buver or a seller as a resut 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 sel, but buyers will not be willing or able to buy.

high

Economics is about:

how people make choices in a world of scarcity

Suppose a firm spends S10.000 to train its employees on a new, company-wide software program that it has already purchased and intends to adopt in the following month. in this case, the knowledge gained through the training is considered

human capital

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, rises, increase, or rise

As the amount of an activity increases, its marginal cost:

increases.

When resources are alocated 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 opportunty cost.

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

low, little, cheap, or less

The additional benefit associated with one more unit of an activity is the ________ benefit.

marginal

The additional cost associated with one more unit of an activity is the _____ cost.

marginal

An economy should continue producing a good or a service so long as:

marginal benefit exceeds marginal cost.

When you decide - after studying for three hours - that another hour of sleep is more beneficial to you than a fourth hour of studying. you are engaging in:

marginal decision making.

When you decide to turn off the bedroom light on your way to the kitchen so that vou can save a little money on your electric bill, you are engaging in:

marginal decision making.

Focusing production entirely on one good or service leaves you susceptible to changes in the

market or economy

Each row of the production possibilities schedule illustrates the _______ amount of a good or a service that may be produced, given the production of the other.

maximum, most, highest, largest, greatest, or max

The law of increasing opportunity costs exists because

not all resoutces 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

opportunity

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

opportunity

If the terms of trade are the same as your ______ cost, you will receive no gains from the trade.

opportunity

Spending mare money on one thing means that you have less money to spend on something else. This is called _____ cost.

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

Consider a production posbilnes frontier (PPF) Wth 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

The value of the next-best forgone alternative is the

opportunity cost

With trade, the person who benefits more is the person who trades at or near the other person's

opportunity cost

Money spent by a firm on machinery that is designed to improve future productivity is called:

physical capital

Tools - machinery - and infrastructure are classified under the resource category of (Use one word for each blank.)

physical capital

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 possibilties frontieet

Comparative advantage refers to the ability to:

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

According to the circular flow diagram, when a firm receives money for a good or service it sold to a household, the interaction occurs in the ____ market.

product

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

production possibilities schedule.

Self interest, marginal decisions, and optimization all form the basis of _______ decision making.

rational

Self-interest, marginal decision making, and optimization form the basis for:

rational decision making.

Physical capital

refers to tangible items that are created to increase productivity;

human capital

refers to the knowledge and skills that people acquire in order to increase productivity.

According to the circular flow diagram, households and firms interact in the ____ and the_____

resource market: product market

The circular flow model shows how households and firms interact in two key markets: the ____ market and the ____ market

resource; product

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

Every person's and every economy's standard of living relies on the etfective use of

resources

If you decide to produce ata level where marginal cost exceeds marginal benefit (MC> MB), there is a waste of ________ that could be better used somewhere else

resources,

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, resource, inputs, or input

Economics is the study of how individuals and societies allocate resources among many competing uses. (Use one word for the blank)

scarce

Economics studies how individuais ond businesses make decisions in a world of _____ resources

scarce

When resources are _______ increasing the production of one good causes a decrease in the production of the other.

scarce

Economics is the study of how individuals and societies allocate:

scarce resources among many competing users.

A common economic situation where an economy's resources are insufficient to meet the existing wants and must be used judiciously is referred to as

scarcity

A major problem faced by developing countries is the relative ______ of drinkable water as compared to water in general

scarcity

A strong economic model allows us to analyze the economic events of the world by:

simplifying a very complex economic world.

The ________ of the production possibilities frontier equals the trade-off of the production of one good or service in terms of the other

slope, trade-off, opportunity cost, curvature, or curve

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.

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.

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

straight

Marginal cost is:

the additional cost associated with one more unit of an activity

There is no incentive to eithér increase or decrease the level of the activity performed when:

the marginal benefit equals the marginal cost,

The optimal level of economic activity occurs when:

the marginal benefit equals the marginal cost.

Economics

the study of how individuals and institutions make decisions in a world of scarce resources.

Whether a good or a service will be traded internationally depends largely on:

the terms associated with the trade

Opportunity cost is:

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

Because resources are scarce

they must be allocated between competing uses.

The marginal benefit of an activity can be found by calculating the change in:

total benefits as the level of the activity increases by one unit.

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

trade

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

varies

If you continue producing when marginal benefit is less than marginal cost, you are:

wasting resources that would be better spent elsewhere.