Economics I Chapter 2

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comparative advantage

The advantage a country has when it can produce a good at lower opportunity cost than someone else or than another country can.

law of increasing opportunity costs

As more of a good is produced, the opportunity costs of producing that good increase.

production possibilities frontier (PPF)

Represents the possible combinations of two goods that can be produced in a certain period of time under the conditions of a given state of technology and fully employed resources.

productive efficient

The condition where the maximum output is produced with the given resources and technology.

productive inefficient

The condition where less than the maximum output is produced with the given resources and technology. Productive inefficiency implies that more of one good can be produced without any less of another being produced.


The body of skills and knowledge involved in the use of resources in production. An advance in technology commonly refers to the ability to produce more output with a fixed amount of resources or the ability to produce the same output with fewer resources.

Describe how each of the following would affect the U.S. production possibilities frontier: (a) an increase in the number of illegal immigrants entering the country, (b) a war that takes place on U.S. soil, (c) the discovery of a new oil field, (d) a decrease in the unemployment rate, and (e) a law that requires individuals to enter lines of work for which they are not suited.

a) An increase in the number of illegal immigrants entering the country would cause an outward shift in the PPF because would be more cheap labor available so production would increase.
b) A war on U. S. soil would cause the PPF to shift inward becuase plant and equipment would either be used for war efforts or destroyed and people would be drafted or killed. Both would decrease production.
c) The discovery of a new oil field would cause the PPF to shift outward due to the increase in resources.
d) A decrease in the unemployment rate will not change the PPF itself because actual production in the country was below the PPF when the unemployment rate was high. The decrease in unemployment will expand actual production back to a level on the PPF efficiently using all resources.
e) A law requiring people to go into fields they are not suited for would cause the production level to underutilize resources or be located at a level beneat the PPF because people's skills are being misapplied and underutilized.

Explain how the following can be represented in a PPF framework: (a) the finiteness of resources implicit in the scarcity condition, (b) choice, (c) opportunity cost, (d) productive efficiency, and (e) unemployed resources.

"The PPF can illustrate various economic concepts: (1) a) Scarcity is illustrated by the frontier itself. Implicit in the concept of scarcity is the idea that we can have some things but not all things. The PPF separates an attainable region from an unattainable region.
b) Choice is represented by our having to decide among the many attainable combinations of the two goods. For example, will we choose the combination of goods represented by point A or by point B?
c) Opportunity cost is most easily seen as movement from one point to another, such as movement from point A to point B. More cars are available at point B than at point A, but fewer television sets are available. In short, the opportunity cost of more cars is fewer television sets.
d) Productive efficiency is represented by the points on the PPF (while productive inefficiency is represented by any point below the PPF
e) Unemployed resources are shown at any points below the PPF where resources are not fully employed

What condition must hold for the production possibilities frontier to be bowed outward (concave downward)? To be a straight line?

To be bowed outward the opportunity costs must be increasing, and to be a straight line the opportunity costs must be constant.

Give an example to illustrate each of the following: (a) constant opportunity costs and (b) increasing opportunity costs.

Constant opportunity costs are present when there are only two possible goods to be produced. Increasing opportunity costs are the more realistic of the two scenarios. Under this scenario specialization and trade occur because some economies are more efficient at producing certain goods than others.

Why are most production possibilities frontiers for goods bowed outward (concave downward)?

Because in most cases, a productive efficiency advantage exists in an economy for certain goods than they can then trade for goods that they are not as efficient at producing.

Within a PPF framework, explain each of the following: (a) a disagreement between a person who favors more domestic welfare spending and one who favors more national defense spending, (b) an increase in the population, and (c) a technological change that makes resources less specialized.

a. A disagreement between people who favor domestic welfare spending and those who favor more national defense spending illustrate the concept of choice within the PPF framework. As a choice is made on whether to spend more on domestic welfare of defense, the point on the PPF will change.
b. An increase in population would also bring about an increase in the resource of labor and would shift the PPF upward or increasing overall production.
c. A technological change that makes resources less specialized will shift the PPF upward and increase production.

Explain how to derive a production possibilities frontier. For instance, how is the extreme point on the vertical axis identified? How is the extreme point on the horizontal axis identified?

A PPF is derived by calculating the opportunity cost associated with producing more of one good on the production of another. The extreme point on the vertical axis would show the point at which all resources were going to the production of the other good and no resources toward the good on the Y axis. Conversely, the extreme point on the horizontal axis shows the point at which all resources were going to the production of the other good and no resources toward the good on the x axis.

If the slope of the production possibilities frontier is the same between any two points, what does this imply about costs? Explain your answer.

That implies that the opportunity costs are constant. A constant slope means that the PPF is a straight line with constant opportunity costs.

Suppose a nation's PPF shifts inward as its population grows. What happens, on average, to the material standard of living of the people? Explain your answer.

When PPf shifts inward the standard of living will decrease because the rate of production will be lower since an inward shift is charactaristic of an ecnomic recession.

Can a technological advancement in sector X of the economy affect the number of people who work in sector Y of the economy? Explain your answer.

Yes it can. For example, advances in agriculture can make it possible for fewer farmers to produce more food, so that some farmers can leave farming to produce other things. Also, technological advances could result in a smaller percentage of people working in rural areas on farms and a larger percentage of people working in manufacturing and services in the cities and suburbs.

What exactly allows individuals to consume more if they specialize and trade than if they don't?

If they do not specialize and trade, then they must use resources less efficiently than possible to produce those goods so specializing and trading allows them to make more of the goods they can produce efficiently and trade them for those goods that they produce less efficiently. This means they can trade for more goods than they could produce.

A straight-line PPF shows _________ opportunity costs.


A bowed-outward (or Concave-Downward) PPF shows ______________ 0pportunity costs.


Which type of PPF is present when specialization is possible or encouraged?

bowed-outward PPF

What are the two major factors that affect economic growth?

An increase in the quantity of resources and an advance in technology.

What are the 7 economic concepts illustrated by the PPF

Opportunity Cost
Productive Efficiency
Productive Inefficiency
Economic Growth

Transaction Costs

The costs associated with the time
and effort needed to search out,
negotiate, and consummate an

What happens to the PPF if a technological advance only benefits the production of the good shown on the y axis and not the good shown on the y axis?

The point on the y axis will shift upward while the point on the x axis will remain the same.

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