2: The Economic Problem

Question 1

What is a production possibilities frontier (PPF)? When is production efficiency achieved?

Answer 1

Boundary of combinations of goods/services that can be produced and those that cannot
Any points on the PPF is efficient. Inside is inefficient, outside is unattainable.

Question 2

What kind of ratio does the two goods/services on a PPF graph share?

Answer 2

The opportunity cost of a good is the INVERSE of the opportunity of the other good. (If a pizza costs 5 coke, than a coke costs 1/5 pizza)

Question 3

What does the outward bow of the PPF mean?

Answer 3

As the quantity of a good increases, the opportunity cost of that good also increases.

Question 4

What is the principle of decreasing marginal benefit?

Answer 4

More we have of a good, the less its marginal benefit, thus we are less willing to pay for an additional unit of it.

Question 5

Production efficiency vs Allocative efficiency

Answer 5

Production efficiency: We cannot produce more of one good without giving up the other (producing at a point on PPF)
We cannot produce more of one good without giving up some other good that we value higher (producing at a point we prefer the most; MB=MC)

Question 6

Describe economic growth

Answer 6

Expansion of production possibilities, increasing standard of living (Can we get off the current PPF and do better?)

Question 7

What is the cost of economic growth?

Answer 7

Consuming/Producing less currently to use those resources in research and development

Question 8

Comparative advantage vs Absolute advantage

Answer 8

Comparative: Person can perform at a lower opportunity cost than others
Absolute: Person is more productive than others