Chapter 2 - The Economic Problem

Question 1

PPF: What are the points on the line (frontier) considered?

Answer 1

Production efficiency

Question 2

PPF: Where are points unattainable? Why?

Answer 2

Outside the PPF.

Because it illustrates scarcity b/c we cannot attain the points outside the frontier

Question 3

How would the opportunity cost be represented?

Answer 3

What you give up ÷ What you gain

Question 4

What is comparative advantage?

Answer 4

If someone can perform the activity at a LOWER OPPORTUNITY COST than anyone else

Question 5

What is an absolute advantage?

Answer 5

If the person is MORE PRODUCTIVE

Question 6

What causes movement along a PPF?

Answer 6

Reallocation of existing resources between goods

Question 7

What causes the PPF to shift outward?

Answer 7

Increase in resources, technology, human capital, trade

Question 8

What causes the PPF to shift inward?

Answer 8

Loss of resources, disasters, war, decline in tech

Question 9

What is free trade?

Answer 9

trade policy that allows traders to trade across national boundaries without interference from governments

Question 10

Gains From Trade: How to identify comparitive advantage?

Answer 10

From looking at opportunity cost, which individual can give up less of Good B to produce Good A.

Question 11

How do you determine how much to trade after specializing?

Answer 11

Look at opportunity cost.

For example,
- if Person 1’s opportunity cost of making 1 smoothie is 1 salad, that means that they WONT trade a smoothie unless they get MORE THAN 1 salad.
- if Person 2’s opportunity cost of making 1 smoothie is 5 salads, they WONT trade a smoothie if it costs MORE THAN 5 salads

Question 12

Gains From Trade: How do you determine if there were any gains?

Answer 12

Compare to original production capabilities before trade

Question 13

What is dynamic corporate advantage?

Answer 13

occurs when a person (or nation) gains a comparative advantage from learning-by-doing.

Question 14

When does trade occur? Is absolute advatange a basis for trade?

Answer 14

Trade occurs when two people have different comparative advantages.

Absolute advantage is NOT a basis for trade