ch.2 Production, Economic Growth, and Trade

Factors of Production

Land, Capital, Labor, and Entrepreneurial Ability

Production

the process of converting factors (land, labor, capital, entrepreneurship)of production into outputs(goods and services)

Production Efficiency

goods and services are produced at their lowest resource (opportunity) cost

Allocative Efficiency

The mix of goods and services produced is just what society desires

PPF (production possibilities frontier)

a model that shows the combinations of two goods a society can produce at full employment

PPF points efficient vs. inefficient

points to the left of the PPF are attainable but inefficient

points to the right of the PPF are unattainable

Opportunity Cost EX:

BACKPACKS TABLETS
12,000 0
10,000 1,000
8,000 2,000
6,000 3,000
4,000 4,000
2,000 5,000
0 6,000

To produce 1000 more tablets, 2000 backpacks must be forgone, or 2 backpacks for every tablet

Calculating Opportunity Cost

POINT BACKPACKS TABLETS OPPORTUNITY
COST OF ONE TABLET
a 12,000 0 —
b 10,000 3,200 2,000 ÷ 3,200= 0.625
c 6,000 5,200 4,000 ÷ 2,000= 2.00
d 0 6,000 6,000 ÷ 800= 7.50

PPF shifts to the right as an economy grows due to

1. Expanding resources

2. Improving technologies

OUTWARD SHIFT OF THE PPF MEANS

economic growth

How will a recession affect a country’s PPF?

1. the country’s PPF will shift inward

2. the country’s PPF will shift outward

3. the country will produce at a point below an unchanged PPF

4. the country will produce at a point above an unchanged PPF

5. a recession doe snot change a country’s position on the PPF

3. the country will produce at a point below an unchanged PPF

Absolute Advantage

a country can produce more of a good than another country using the same amount of resources

Comparative Advantage

a country has a lower opportunity cost of producing a good than another country

FRANCE CAN PRODUCE 100 VIOLINS OR 250 ELECTRIC SHAVERS. GERMANY CAN PRODUCE 200 VIOLINS OR 300 ELECTRIC SHAVERS. WHICH COUNTRY HAS AN ABSOLUTE ADVANTAGE IN ELECTRIC SHAVER PRODUCTION?
A. FRANCE
B. GERMANY
C. BOTH COUNTRIES
D. NEITHER COUNTRY
E. CANNOT BE DETERMINED

B. GERMANY

FRANCE CAN PRODUCE 100 VIOLINS OR 250 ELECTRIC SHAVERS. GERMANY CAN PRODUCE 200 VIOLINS OR 300 ELECTRIC SHAVERS. WHICH COUNTRY HAS A COMPARATIVE ADVANTAGE IN ELECTRIC
SHAVER PRODUCTION?
A. FRANCE
B. GERMANY
C. BOTH COUNTRIES
D. NEITHER COUNTRY
E. CANNOT BE DETERMINED

A. FRANCE