1.1 Basic Concepts
Scarce resources are _________.
Limited
Marginal cost measures what?
The cost of the next unit produced
A point inside the PPC curve would be ____________.
Inefficient
What is specialization?
When an individual or country focuses on making one good or what part. They produce all of that one good and no other goods.
Trade is based on _________ advantage.
Comparative advantage
What's the main difference between a command and market economy?
Command economies are set by the government who decides what is produced and how much. Market economies have little government intervention and producers and consumers decide prices and quantities.
Marginal revenue measure what?
The revenue generated by the next unit produced
Any point outside of the PPC curve would be ____________.
Impossible
What is absolute advantage?
A country or individual who, when devoting all their resources to it, is able to produce more of one good than the other nation/person
Using one hour of labor, the United States can produce 20 bottles of wine or 10 pieces of cloth. France, with one hour of labor, can produce 25 bottles of wine or 30 pieces of cloth. Which goods should either country NOT specialize in?
Wine - United States, Cloth - France
What is opportunity cost?
The value you would have received for doing the NEXT best alternative. What you gave up to do your action.
What condition (formula) tells us the optimal amount of a good that should be bought/consumed?
marginal benefit = marginal cost
What is the formula for calculating the opportunity cost of a good using the PPC?
OC of good A = (change in good B) divided by (change in good A)
What is comparative advantage?
When it is cheaper for one country/person to produce a good. They have the lower opportunity cost for producing the good.
The nation of Andros can produce either 100 metric tons of wheat or 25 metric tons of steel in a single year. The neighboring nation of Brisa can produce either 80 metric tons of wheat or 40 metric tons of steel in the same amount of time. Which country should specialize in what?
Wheat - Andros, Brisa - Steel
Suppose you run a Taco Bell franchise location and you have $200 to spend. You choose to spend it on an advertisement instead of more ingredients. What is the opportunity cost of spending on advertisements?
The additional ingredients you would have bought
Firms will continue to produce additional units as long as MR ________ MC.
Exceeds
Suddenly, there's a mass migration of workers so now there are more workers in a market. How does that affect the PPC/PPF of our tables and chairs?
This is an increase in resources, so it shifts outward
How might a technological innovation in the production of one good (e.g., a new technology that makes it faster to produce cars) change a country's opportunity cost and potentially its comparative advantage?
It will lower the opportunity cost and potentially generate a comparative advantage.
How do we decide the price that people will pay for a good through trade?
Price has to be between the producer's OC and the consumer's OC -------> producer OC < price < consumer OC
How do property rights in market economies encourage market efficiency?
Property rights incentivizes people to maximize the value of their possessions because they directly own that value, so if they sell a good, they can get a profit
A small company, "The Cookie Jar," sells gourmet cookies. The market price for one box of cookies is $10. This means their marginal revenue (MR) for each box is constant at $10. The total costs for producing different numbers of cookie boxes are as follows: 1 box: $12, 2 boxes: $1, 3 boxes: $20, 4 boxes: $28, 5 boxes: $38, 6 boxes: $52. How many should the company produce?
5 boxes
A natural disaster wipes out the resources that are used for making chairs but not for tables. How does this affect the PPC of tables and chairs?
The curve shifts inward. HOWEVER, the point where you are producing only tables and no chairs stays the same. It pivots inward around this point.
Two survivors, Jack and Kate, are stranded on a remote island. In order to survive, they must either gather coconuts or catch fish. Each day, they have a limited amount of time to perform these tasks. Jack can gather 10 coconuts per day or catch 2 fish per day. Kate can gather 1 coconut per day or catch 1 fish per day. Who has a comparative advantage for either good?
Coconuts - Jack, Kate - Fish
The US's OC to produce TVs is: 3 computers, US's OC to produce computers is 1/3 TVs. China's OC to produce TVs is 2 computers, China's OC to produce computers is 1/2 TVs. What range must the price of TVs and computers lie between?
Price of TV must be between 2 and 3 a computer. Price of Computers must be between 1/3 and 1/2 TVs.