ECON1101 Chapter Notes - Chapter 3: Autarky, Comparative Advantage, Opportunity Cost

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31 May 2018

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Production Possibility Curve (PPC): The PPC represents all possible combinations

of bananas and rabbits that can be produced with Alberto's labour if he works the

whole day. Captures the maximum output possibilities for two or more goods,

given a set of inputs if they are used efficiently.

Efficient Production Point: An efficient production point represents a combination

of goods for which currently available resources do not allow an increase in the

production of one good without a reduction in the production of the other. All the

points on the PPC are efficient.

Inefficient Production Point: Represents a combination of goods that can be

produced with the currently available resources. All the points on the PPC or

below and to the left of the PPC are attainable.

Attainable Production Point: Represents any combination of goods that can be

produced with the current available resources. All the points on the PPC or below

and to the left of PPC are attainable.

Unattainable Production Point: Any combination of goods that cannot be

produced with the currently available resources. All the points that lie outside of

the PPC are unattainable.

Opportunity cost formula: loss/gain

Absolute Advantage: An agent or economy has an Absolute Advantage in a

productive activity when he/she can carry on this activity with less resources than

another agent.

Opportunity Cost: The value of the next best alternative to that particular action.

Comparative Advantage: An agent or economy has a Comparative Advantage in a

productive activity when he/she has a lower opportunity cost of carrying on that

activity than another agent.

Principle of Comparative Advantage: States that everyone is better off if each

agent (or each country) specialises in the activities for which they have a

comparative advantage.

PPC gets shifted out if there is:

An increase in infrastructure such as factories, equipment, etc.,

An increase in population and so in labour force or

Advancements in knowledge and technology, via education, R&D, IT and

communications technologies.

The Low-Hanging Fruit Principle (for Increasing Opportunity Cost): States that in

the process of increasing the production of any good, one first employs those

resources with the lowest opportunity cost and only once these are exhausted

turn to resources with higher cost.

Consumption Possibility Curve (CPC): Represents all possible combinations of

agents that the economy can feasibly consume when its open to international

trade.

If a country is a closed economy (doesn't trade internationally), the PPC and

the CPC are the same because the agents must consume whatever they

produce.

If a country is an open economy (trades on international market), the CPC is

usually greater than the PPC because part of what the agents produces can

be traded for other goods and services, which relieves the restrictions on

consumption.

With millions of agents the PPC will be a smooth curve that bows from its origin

too.

Comparative Advantage and the Basis for Trade

Tuesday, 3 April 2018

1:40 pm

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Document Summary

Production possibility curve (ppc): the ppc represents all possible combinations of bananas and rabbits that can be produced with alberto"s labour if he works the whole day. Captures the maximum output possibilities for two or more goods, given a set of inputs if they are used efficiently. Efficient production point: an efficient production point represents a combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other. All the points on the ppc are efficient. Inefficient production point: represents a combination of goods that can be produced with the currently available resources. All the points on the ppc or below and to the left of the ppc are attainable. Attainable production point: represents any combination of goods that can be produced with the current available resources. All the points on the ppc or below and to the left of ppc are attainable.

Related Questions

The production possibilities frontier illustrates

A) all goods that can be produced by an economy.

B) all goods and services that are desired but cannot be produced due to scarce resources.

C) the combination of goods and services that can be produced efficiently.

D) all possible production of capital goods.

indigoelephant292

Any point on a country's production possibilities frontier represents a combination of two goods that an economy :

a. will never be able to produce.
b. can produce using all available resources and technology.
c. may be able to produce in the future with more resources and/or superior technology.
d. can produce using some portion, but not all, of its resources and technology.

olivegnu327

A bowed out PPF reflects which of the following ideas?

i.increasing opportunity cost

ii. resources are not equally productive in all activities

iii. prices of goods increase over time

		I only
		I and iii
		ii and iii
		I and ii

1 point

QUESTION 2

With no international trade, a country ________ consume at a point outside of its PPF; with international trade, a country ________ consume at a point outside of its PPF.

		can; cannot
		cannot; can
		cannot; cannot
		can; can

1 point

QUESTION 3

If the production possibilities frontier between two goods is a straight line, then the

		the line does not qualify as a production possibilities frontier because the unattainable production points are too close to the inefficient production points.
		opportunity cost is not a ratio.
		increasing opportunity costs.
		resources are equally productive in both goods.

1 point

QUESTION 4

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It decreases.
		It increases.
		It remains constant.

1 point

QUESTION 5

"Comparative advantage" is defined as a situation in which one person can produce

		more of a good than another person.
		a good for a lower dollar cost than another person.
		a good for a lower opportunity cost than another person.
		more of all goods than another person.

1 point

QUESTION 6

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		increases.
		decreases.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		remains constant.

1 point

QUESTION 7

A bowed out production possibility frontier shows that the

		opportunity cost relationship is linear.
		the opportunity cost of a good is constant as more of the good is produced.
		the opportunity cost of a good increase as more of the good is produced.
		the opportunity cost of a good decrease as more of the good is produced.

1 point

QUESTION 8

Which of the following statements is correct?

		The production possibilities frontier shows that there are no limits to production.
		Any point on or within the PPF is production efficient.
		If capital is idle, the economy is producing at its full potential.
		A tradeoff is a limit that forces an exchange or a substitution of one thing for something else.

1 point

QUESTION 9

A major earthquake occurs in the central part of the United States. What impact would this have on the nation's production possibilities frontier and why?

		A tradeoff would occur to replace the resources and goods destroyed.
		It would shift inward because some of the nation's resources, such as capital and labor, would be destroyed.
		It would shift outward because unemployment would be reduced.
		Nothing would happen because the nation would still have the same capabilities.

1 point

QUESTION 10

When a nation is producing on its production possibilities frontier, if more resources are used to produce one good, then the production of other goods

		must increase.
		must decrease.
		must remain the same.
		must change but they might increase or decrease.

1 point

QUESTION 11

Moving along a country's PPF, a reasonable opportunity costs increase is that

		unemployment increases as a country produce more and more of one good.
		unemployment decreases as a country produces more and more of one good.
		some resources are better suited for producing one good rather than the other.
		technology declines as a country produce more and more of one good.

1 point

QUESTION 12

A reason the production possibilities frontier exists is

		scarcity of resources and unlimited technology.
		unemployment.
		scarcity of resources.
		unlimited resources and technology.

1 point

QUESTION 13

Moving from one point to another on a production possibilities frontier implies

		increasing the production of one good and decreasing the production of another.
		increasing the production of both goods.
		decreasing the production of both goods.
		holding the production levels of both goods constant.

1 point

QUESTION 14

Specialization and trade make a country better off because with trade the country can consume at a point

		outside its production possibilities frontier.
		on its trading partner's production possibilities frontier.
		inside its production possibilities frontier.
		on its production possibilities frontier.

1 point

QUESTION 15

The production possibilities frontier is the

		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced when technology is changing.
		the minimum output that can be produced when resources are used inefficiently.
		the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology.
		maximum output that can be produced at an opportunity cost of zero.

1 point

QUESTION 16

The opportunity cost of economic growth is ________ and the benefit of economic growth is ________.

		decreased current consumption; decreased future consumption
		decreased current consumption; increased future consumption
		increased current consumption; increased future consumption
		increased current consumption; decreased future consumption

1 point

QUESTION 17

In terms of a nation's production possibilities frontier, what impact does international trade have?

		International trade shifts the nation's production possibilities frontier outward.
		International trade shifts the production possibilities frontier outward for the goods that are exported and inward for the goods that are imported.
		International trade shifts the nation's production possibilities frontier inward.
		International trade allows the nation to consume at a point outside its production possibilities frontier.

1 point

QUESTION 18

The production possibilities frontier illustrates the

		goods and services that people want.
		limits to people's wants.
		resources the economy possesses, but not it is the level of technology.
		maximum combinations of goods and services that can be produced.

1 point

QUESTION 19

As we move along the production possibilities frontier,

		the possibilities of tradeoffs diminish.
		the production of one good increases as the production of the other good decreases.
		more of both goods can be produced.
		a tradeoff is not possible because nations need all goods.

1 point

QUESTION 20

What is the opportunity cost of economic growth?

		Eliminate scarcity
		Land.
		Capital goods.
		Consumption of goods.

1 point

QUESTION 21

Which of the following statements is correct?

i.As the economy grows, the opportunity costs of economic growth decrease.

ii. Economic growth has no opportunity cost.

iii. The opportunity cost of economic growth is current consumption forgone.

		ii only
		iii only
		I only
		I and iii

1 point

QUESTION 22

Does economic growth depend upon which of the following?

i. Increasing the quantity of labor.

ii. Lowering the prices of goods and services.

iii. Advancing technology.

		ii only.
		I only.
		I and iii.
		iii only.

1 point

QUESTION 23

When drawing a production possibilities frontier, which of the following is held constant?

		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced
		the available factors of production and the state of technology

1 point

QUESTION 24

To increase its economic growth, a nation should

		encourage spending on goods and services.
		increase in current consumption.
		encourage education because that increases the quality of labor.
		limit the number of people in college because they produce nothing.

1 point

QUESTION 25

The opportunity cost of one more slice of pizza in terms of sodas is the

		some pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.
		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.

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ECON1101 Chapter Notes - Chapter 3: Autarky, Comparative Advantage, Opportunity Cost

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