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Production Possibilities Frontier (Microeconomics Textbook Parkin 10e) Terms in this set (48)The quantities of goods and services that we can tradeoff Full form of P.P.F. Production Possibilities Frontier What is P.P.F.? The production possibilities frontier (PPF ) is the What is the PPF used for? ⦿The PPF illustrates scarcity because we cannot Production Efficiency We achieve production efficiency if we produce goods At points inside the PPF, production is inefficient because ........................................................................................................................... we are giving up more than necessary of one good to produce a given quantity of the other good. possible cost of production. Resources are unused when they are idle but
could For example, we might leave some of the Resources are misallocated when they are assigned For example, we might assign skilled pizza chefs to work in a cola factory and skilled cola producers to work in a pizza shop. We could get more pizzas and more cola from these same workers if we reassigned them to the tasks that more closely match their skills. Tradeoffs arise in every imaginable real-world situation a choice must be made. On our real-world PPF, we can produce more of any one good or service only if we produce .................................................................................... less of some other goods or services All tradeoffs involve cost. What is the name of the 'cost'? opportunity cost What is opportunity cost? The opportunity cost of an action is the
highest-valued One pizza costs 3 cans of Cola. What is the opportunity cost of Cola? 1/3rd of piza True or False? ✴True.✴ The PPF is bowed outward because ...................................................................... resources are not all equally productive in all activities. We achieve production
efficiency at every point on the The answer is the point on the PPF at which goods and services are produced in the quantities that provide the greatest possible benefit. When goods and services are produced at the allocative efficiency. What is the Marginal Cost (MC)? The Marginal Cost of a good is the opportunity cost of How do you calculate Marginal Cost? We calculate marginal cost from the slope of the PPF. As quantity increases, MC or opportunity cost also increases. What happens to slope of PPF? The slope becomes steeper. What is the marginal benefit? The marginal benefit from a good or service is the benefit received from consuming one more unit of it. This benefit is subjective. It depends on people's preferences—people's likes and dislikes and the intensity of those feelings The device that we use to illustrate the .................................... is the marginal benefit curve. preferences It is a curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good. What are we talking about? Marginal benefit Curve Is the marginal benefit curve is related to the PPF ? No. In fact, marginal benefit curve is unrelated to the PPF and cannot be derived from it The most you are willing to pay for something is its ..................................... marginal benefit What is the principle of decreasing marginal benefit? It is a general principle that the more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it. This tendency is so widespread and strong that we call it a principle—the principle of decreasing marginal benefit. The basic reason why marginal benefit decreases is that ______________________________________________________________________________. we like variety. The more we consume of any one good or service, the more we tire of it and would prefer to switch to something else What is the economic growth? an increase in the amount of goods and services produced per head of the population over a period of time. Economic growth increases our standard of living. What happens to overcoming scarcity and avoiding opportunity cost ? Economic growth doesn't overcome scarcity and avoid opportunity cost. To make our economy grow, we face a tradeoff—the faster we make production grow, the _____________________________ is the opportunity cost of economic growth. greater What have vastly expanded our economic growth or production possibilities? 1. technological changes and If a nation devotes all its factors of production to producing consumption goods and services and none to advancing technology and accumulating capital, what happens to its production possibilities? Its production possibilities in the future will be the same as they are today As production possibilities expand, consumption in the future can increase. The decrease in today's consumption is the opportunity cost of tomorrow's increase in consumption. To expand production possibilities in the future, a nation must devote fewer resources to producing current consumption goods and services and some resources to accumulating capital and developing new technologies. How does economic growth influence the production possibilities frontier? Economic growth shifts the PPF outward. Persistent outward shifts in the production possibility frontier—economic growth—are caused by the accumulation of resources, such as more capital equipment or by the development of new technology. What is the opportunity cost of economic growth? When a society devotes more of its scarce resources to research and development of new technologies, or devotes additional resources to produce more capital equipment, both decisions lead to increased consumption opportunities in future periods at the cost of less consumption today. The loss of consumption today is the opportunity cost borne by society for creating economic growth. Does economic growth overcome scarcity? Scarcity reflects the inability to satisfy all our wants. Regardless of the amount of economic growth, scarcity will remain present because it will never be possible to satisfy all our wants. What is comparative advantage? ✔️A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. A person who is more productive than others has an ....................................... absolute advantage Difference between absolute advantage and comparative advantage Absolute advantage involves comparing productivities—production per hour—whereas comparative advantage involves comparing opportunity costs. What is a firm? A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. Firms coordinate a huge amount of economic activity Importance of a firm Firms are necessary to allow people to specialize. Without firms, specialization would be limited because a person would need to specialize in the entire production of a good or service. With firms people are able to specialize in producing particular bits of a good or service. For a society to enjoy the fruits of specialization and trade, the individuals who comprise that society must voluntarily desire to specialize in the first place. What is a market? A market is any arrangement that enables buyers and sellers to get information and to do business with each other. Importance of market Markets coordinate the economic choices of people and firms. What is property right? The social arrangements that govern the ownership, use, and disposal of anything that people value are called property rights. Importance of property rights ✔️Where property rights are enforced, people have the incentive to specialize and produce the goods in which they have a comparative advantage. Relation between market and property rights Markets can work efficiently only when property rights exist. What is money? Money is any commodity or token that is generally acceptable as a means of payment. Importance of money Money makes trading in markets more efficient. 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