Chapter 3

Question 1

Comparative advantage

Answer 1

• Ability of some entity to produce a good at a lower opportunity cost than another entity.

Question 2

Absolute advantage

Answer 2

• Ability of one entity to produce a product at a lower resource cost than another entity.

Question 3

What are the 3 reasons Adam Smith listed for why specialization would increase productivity?

Answer 3

• Repetition. Worker becomes proficient in that one task.
• Continuity. Specialized worker doesn’t spend the time switching between tasks -> efficiency and a consistent result.
• Innovation. Specialized worker gets insights -> better production methods

Question 4

What’s an import? An export?

Answer 4

• Import: good/service produced in a foreign country and bought by people at home.
• Export: good/service produced at home and bought by people in a foreign country.

Question 5

What is outsourcing/offshoring?

Answer 5

When a domestic firm shifts part of its production to a different country.

Question 6

What are the 3 general outcomes of outsourcing?

Answer 6

• Loss of domestic jobs, although that’s healthy for an economy.
• Insourcing; jobs are shifted from other countries to home, partially or totally offsets job loss from outsourcing.
• Lower prices for consumers and more output for firms. Jobs gained from these two effects either completely or partially offset jobs lost to outsourcing.

Question 7

Market economy

Answer 7

An economy in which people specialize and exchange goods and services in markets.

Question 8

What are the 4 government/social inventions that make markets more efficient?

Answer 8

• Contracts: specifying the terms of exchange, facilitating exchange between strangers.
• Insurance: reduces risk to entrepreneurs.
• Patents: increase profitability of inventions, encouraging firms to develop new products and production processes.
• Accounting rules: provide investors with reliable information about the financial performance of a firm.

Question 9

Centrally planned economy

Answer 9

Econ in which gov’t bureaucracy decides how much of each good to produce, how to produce the good, and who gets the good.

Question 10

What are the 4 kinds of market failure?

Answer 10

• Pollution: gov’t just needs to ensure that polluters bear the full cost of their production and consumption decisions.
• Public good: levees, national defense, parks, space exploration, etc.
• Imperfect information: gov’t has to disseminate information in order to combat imperfect information and promote informed choices.
• Imperfect competition: gov’t should foster competition, which leads to lower prices and more choices.

Question 11

Aside from protecting against market failure, what are the other 2 roles of gov’t in markets?

Answer 11

• Establishing rules for market exchange and using police to enforce such rules.
• Reducing economic uncertainty / providing for people who’ve experienced unforeseen difficulties / accidents.