Econ Ch 2

Question 1

Voluntary vs Coerced Exchange

Answer 1

Value creating vs zero sum game

voluntary exchange - willing get together and make an exchange because you expect it to make both side better off - exchange that creates value

coerced - zero sum game - one person wins at the expense of someone else, transferring value, not exchanging

Question 2

zero sum game

Answer 2

one person wins at the expense of someone else

Question 3

coercion

Answer 3

someone will devote resources to make you worse off if you do not comply

Question 4

How does trade create value

Answer 4

value of a good or service is subjective, voluntary trade creates value

1. when individuals engage in voluntary exchange, both parties are made better off - get something you want more than what you are trading
2. by channeling goods and resources to those who value them the most, trade increases the wealth created by a society’s resources, increases the resource’s value

Question 5

how trade leads to economic growth

Answer 5

1. games from specialization and division of labor
   - focus on things we do best and then trade for the things we do not do so well
2. gains from mass production methods
   - things become cheaper on average when they are produced in bulk
3. gains from innovation
   - when we trade products, we also trade ideas

Question 6

creation of wealth

Answer 6

• the process by which people become rich will make everybody richer, as long as its done through voluntary exchange

Question 7

Transaction costs

Answer 7

the time, efforts, and other resources needed to search out and complete and exchange
- reduce voluntary exchanges

Question 8

midddleman

Answer 8

a person who buys and sells good or services or arranges trades and reduces transaction costs

Question 9

Importance of Property Rights

Answer 9

1. the right to exclusive use of the property
2. legal protection against invasion from other individuals
3. the right to sell, transfer, exchange, or mortgage the property

Question 10

4 incentives of property rights and what they do

Answer 10

keep a resources value for economic growth

1. Incentive to use resources in ways that are considered beneficial to others
2. private owners have an incentive to care for and manage what they own
3. Private owners have an incentive to conserve for the future
4. private owners have an incentive to make sure their property does not damage your property

Question 11

what does lacking property rights lead to

Answer 11

lack of economic progress

Question 12

Production and Possibilities Curve

Answer 12

PPC
outlines all possible combinations of total output that could be produced assuming a
1. fixed amount of productive resources
2. given amount of technical knowledge
3. full and efficient use of resources

• is bowed outward because of the concept of increasing opportunity costs

Question 13

constant opportunity cost PPC

Answer 13

• gaining one thing but giving up one
• slop indicates the amount of one good that must be given up to produce more of the other good

Question 14

increasing opportunity cost PPC

Answer 14

giving something up to make more of something, not constant
- bowed outward because of the concept of increasing opportunity costs

Question 15

know efficient, inefficient, unattainable points, how much is produced at a certain point, what is given up when moving from one point to another

Answer 15

:)

Question 16

Shifting the PPC

Answer 16

a change that influences the production of Y, but not X
- up or down

a change that influences the production of X, but not Y
- right or left

a change that influences the production of both X and Y
- up and down and right and left

Question 17

4 factors that shift the PPC

Answer 17

1. change in the economy’s resource base
2. changes in technology
3. a change in the rules under which the economy functions
4. change in work habits

Question 18

investment

Answer 18

the purchase, construction, or development of resources

Question 19

technology

Answer 19

the knowledge available in an economy at any given time

Question 20

law of comparative advantage

Answer 20

who can produce it the cheapest
- examples on notes
The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost