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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
produce are limited both by our available resources
and by technology. And if we want to increase our
production of one good, we must decrease our
production
of something else—we face ......................................
tradeoff
Full form of P.P.F.
Production Possibilities Frontier
What is P.P.F.?
The production possibilities frontier (PPF ) is the
boundary between those combinations of goods and
services that can be
produced and those that cannot.
What is the PPF used for?
⦿The PPF illustrates scarcity because we cannot
attain the points outside the frontier. These points
describe wants that can't be satisfied.
⦿We can produce at any point inside the PPF or on the PPF. These points are attainable.
⦿Points inside the frontier are inefficient
because resources are wasted or misallocated. At such
points, it
is possible to use the available resources to produce more of either or both goods.
Production Efficiency
We achieve production efficiency if we produce goods
and services at the lowest possible cost. This outcome
occurs at all the points on the PPF.
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.
AKA Production is inefficient inside the PPF because
resources are either unused or misallocated or both.
Resources are unused when they are idle but
could
be working.
For example, we might leave some of the
factories idle or some workers unemployed.
Resources are misallocated when they are assigned
to tasks for which they are not the best match.
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
in which ...........................................................................
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
alternative forgone.
One pizza costs 3 cans of Cola. What is the opportunity cost of Cola?
1/3rd of piza
True or False?
Opportunity Cost is a ratio.
✴True.✴
It is the decrease in the quantity produced
of one good (NUMERATOR) divided by the increase in the quantity produced of another good
(DENOMINATOR) as we move along the PPF.
IT IS ALWAYS DEFINED FOR THE DENOMINATOR QUANTITY.
The PPF is bowed outward because ......................................................................
resources are not all equally productive in all activities.
AKA the PPF is bowed outward due to the law of increasing opportunity costs.
We achieve production
efficiency at every point on the
PPF, but which point is the best?
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
lowest possible cost and in the quantities that provide
the greatest possible benefit, we have achieved what ?
allocative efficiency.
What is the Marginal Cost (MC)?
The Marginal Cost of a good is the opportunity cost of
producing one more unit of it.
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.
AKA the expansion of production possibilities
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
2. capital accumulation
Note: Technological change is the development of new goods and of better ways of producing goods and services. Capital accumulation is the growth of capital resources, including human capital
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.
For instance it will never be possible to satisfy all the wants of the several thousand people who all
would like to ski the best slopes on Vail with only their family and a few best friends present. So economic growth allows more wants to be satisfied but it does not eliminate scarcity.
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.
✔️Differences in opportunity costs arise from
differences in individual abilities and from differences in the characteristics of other resources
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.
✔️People must enjoy social recognition of and government protection of property rights to have confidence that their commitments to trade arrangements will be respected by
everyone in the market
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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