Chapter 2 Flashcards: The Economic Problem, Growth, and Gains From Trade

A comprehensive set of questions and answers covering the Production Possibilities Frontier, scarcity, opportunity cost, efficiency, economic growth, gains from trade, and market coordination based on the notes from Chapter 2 and related sections.

What does the production possibilities frontier (PPF) mark the boundary between?

Attainable combinations of goods and services and unattainable combinations, given resources and technology.

The PPF is the boundary between those combinations of goods and services that can be produced and those that cannot.

Attainable versus unattainable production points given current resources and technology.

Why is the PPF downward sloping?

It reflects tradeoffs in choices due to scarce resources—producing more of one good requires giving up some of the other.

A point outside the PPF is…

Unattainable with current resources and technology.

A point on the PPF represents which kind of efficiency?

Production efficiency, meaning resources are fully and efficiently utilized.

A point inside the PPF indicates…

Underutilization or inefficiency, such as unemployment or misallocation of resources.

What does a bowed-out (bowed outward) PPF indicate?

Increasing opportunity costs as more of one good is produced.

Economy-wide growth shifts the PPF in which direction?

Outward—economic growth expands production possibilities.

What are two primary drivers that shift the PPF outward (economic growth)?

Technological progress and capital accumulation.

Opportunity cost is defined as…

The value of the next-best alternative forgone.

Marginal cost is…

The opportunity cost of producing one more unit of a good or service.

Marginal benefit is…

The maximum amount a person is willing to pay for one more unit of a good.

Allocative efficiency occurs when…

Marginal benefit equals marginal cost (MB = MC).

Production efficiency means…

Producing on the PPF, using all available resources efficiently.

What does a point inside the PPF reveal about resources?

Resources are not fully utilized or are misallocated.

How is the slope of the PPF related to opportunity cost?

The slope represents the opportunity cost of one good in terms of the other.

Why is the PPF often bowed outward in most models?

Because resources are not equally productive in all activities, causing increasing OC.

What causes the PPF to shift outward due to growth?

Technological progress and capital accumulation.

What does Katrina illustrate about the PPF?

An inward shift (temporary reduction in productive capacity) due to a disaster.

What is the opportunity cost of economic growth?

Present consumption forgone to accumulate capital.

What are property rights?

The social arrangements that govern the ownership, use, and disposal of property.

Intellectual property is protected by…

Copyrights and patents.

In a world without property rights, gains from trade would be…

Harder to realize and specialization would be limited.

What is the market?

Any arrangement that enables buyers and sellers to get information and trade with one another.

In markets, decisions are coordinated by…

Adjustments in prices.

Two essential social institutions for trade are…

Property rights and markets.

Comparative advantage means a producer has a lower…

Opportunity cost of producing a good than others.

Absolute advantage means a producer can…

Produce more of a good with the same resources.

Gains from trade arise when each producer specializes according to…

Comparative advantage (lower opportunity cost) and then trades.

Dynamic comparative advantage is primarily driven by…

Learning-by-doing.

Gains from trade can allow individuals to consume…

A combination of goods beyond their own production possibilities frontier.

What is the effect of technology on the PPF?

Shifts the frontier outward (economic growth).

What is the effect of capital accumulation on the PPF?

Shifts the frontier outward (economic growth).

What is the role of opportunity cost in a PPF table or curve?

It is represented by the slope; it measures what must be given up to produce more of one good.

What does a pure straight-line PPF imply about OC?

Constant opportunity costs (OC does not change as you move along the frontier).

When MB > MC, the efficient quantity should be…

Increase production of the good until MB = MC.

What happens to the PPF if there is unemployment?

Production occurs at a point inside the frontier (not on it).

What does 2.5 Economic Coordination emphasize about markets?

Markets coordinate decisions through price signals, facilitating trade.

What is the difference between productive efficiency and allocative efficiency?

Productive: on the PPF; Allocative: MB = MC across all goods.

The opportunity cost of increasing Y when moving along the PPF is measured by…

How much X must be given up (the slope of the PPF).

What does ‘specialization according to comparative advantage’ achieve?

Increases total world production and allows gains from trade.

What is an outward shift of the PPF called?

Economic growth.

Which of the following is true about a country with a comparative advantage in good X?

It can gain from trade by specializing in the good in which it has lower OC.

If a country has an absolute advantage in all goods, can it still gain from trade?

Yes, via comparative advantages in different goods.

A point that is attainable but inefficient is:

Inside the PPF (not on the frontier).

A point that is unattainable in the current setup is:

Outside the PPF.

What does ‘opportunity cost is a ratio’ mean in production possibilities?

OC is the slope of the PPF, ratio of the forgone good per unit gained.

What is marginal benefit in consumer terms?

The willingness to pay for one additional unit.

What is marginal cost in producer terms?

The cost of producing one additional unit.

What is the study guide term for the tradeoff represented by the negative slope of the PPF?

Tradeoff (OC) along the PPF.

The effect of a discovery that makes resources more productive is to…

Shift the PPF outward (economic growth).

Which point in a PPF implies misallocation or unused resources?

A point inside the frontier.

What is the Mercantile term for the idea that ‘outside points are attainable only with trade’?

Consumption possibilities can lie outside the PPF with trade.

What does increasing opportunity cost imply about the shape of the PPF?

The PPF bows outward.

What is the key condition for a country to consume beyond its own PPF?

Gains from trade through specialization and exchange.

What is the role of human capital in economic growth?

Investment in human capital contributes to outward PPF shifts.

Which is true about the PPF for two goods when technology is constant and resources change?

Shifts indicate changes in the availability of resources or technology.

The marginal benefit curve generally slopes…

Downward.

The marginal cost curve generally slopes…

Upward.

What is the key idea behind the ‘gains from trade’?

Trade allows each country to specialize in what it produces relatively best and consume beyond its own production possibilities.

What does ‘trend of OC’ tell you about the PPF shape and growth?

OC rising as you move along a bowed-out PPF indicates increasing OC and growth potential.

What is the difference between a ‘point of efficiency’ and a ‘point of allocative efficiency’?

Efficient point means productive efficiency (on PPF); allocative efficiency means MB=MC across outputs.

What shifts the PPF outward in the long run?

Technological progress and capital accumulation.

What is the opportunity cost of increasing production of X on a straight-line PPF?

A constant amount of Y forgone per additional unit of X.

In the context of 2.5, what two institutions are essential for trade?

Property rights and markets.

What does ‘absolute advantage’ imply in a two-country model?

One country can produce more of a good with the same resources.

What does ‘comparative advantage’ imply in a two-country model?

Each country should specialize in the good for which it has the lower OC and trade.

What is the difference between a point being attainable vs. attainable with trade?

Attainable with trade means consumption can lie beyond own PPF due to exchange.

What is the key takeaway about a bowed-out PPF and opportunity costs?

A bowed-out PPF indicates increasing OC, not constant OC.