Production Possibilities Frontier and Economic Principles (Lecture Notes)

A set of 51 Q&A flashcards covering Production Possibilities Frontier concepts, opportunity costs, micro vs macro, positive vs normative analysis, policy institutions, and growth.

What does the Production Possibilities Frontier (PPF) illustrate?

The trade-off between outputs of two goods at a given time.

What does moving along the PPF demonstrate?

Opportunity costs: producing more of one good requires sacrificing some of the other.

Given ΔCars = +100 and ΔComputers = −200, what is the opportunity cost of one car?

2 computers per car.

How is the opportunity cost of cars represented on the PPF?

As the slope of the segment (ΔComputers/ΔCars).

What is the slope of the PPF between points a and b in the example?

-2 computers per car; magnitude 2 equals the OC per car.

Why is the PPF bowed outward (concave to the origin)?

Because opportunity costs increase as more cars are produced.

Where on the frontier is the opportunity cost of a car high?

On steeper segments of the frontier (e.g., point E).

Where on the frontier is the opportunity cost of a car low?

On flatter segments of the frontier (e.g., point F).

What explains increasing opportunity costs across the frontier?

Resources are not perfectly adaptable between computer and car production; reallocating to more cars uses resources less suited to car production.

What basic ideas does the PPF capture?

Scarcity, efficiency, trade-offs, opportunity cost, and economic growth.

What causes outward growth of the PPF?

Technological progress in computers increases productivity.

If the economy has a fixed number of cars, what does a computer productivity improvement allow?

More computers and potentially more of both goods for any production mix.

What is an endpoint on the growth example?

An endpoint may stay the same, e.g., no computers produced but 1,000 cars.

How is the PPF used in economic modeling?

As a simplified representation of scarcity and trade-offs in production choices.

What is microeconomics?

The study of how households and firms make decisions and interact in specific markets.

What is macroeconomics?

The study of the economy as a whole.

Give examples of microeconomic topics.

Rent control effects, foreign competition, and education on earnings.

Give examples of macroeconomic topics.

Federal borrowing, unemployment trends, and growth policies.

What is the relationship between micro and macro?

Macro outcomes arise from aggregated micro decisions; they are interconnected but distinct fields.

What is the circular flow diagram?

A simple model showing households and firms exchanging goods/services and factors of production.

What are positive statements?

Descriptive claims about how the world works; testable with data.

What are normative statements?

Prescriptive claims about how the world ought to be; involve value judgments.

Provide a positive vs normative example about minimum wage.

Positive: 'Minimum wage laws cause unemployment.' Normative: 'The government should raise the minimum wage.'

Why distinguish positive from normative analyses?

To separate what we can test with data from what policy should aim to achieve.

What is the trade-offs principle?

Policies often improve one dimension at the expense of another (e.g., efficiency vs. equality).

What roles do economists play in policymaking?

They provide scientific analysis (positive) and value-based policy advice (normative); advice is one input among many.

List some key policy institutions.

CEA, OMB, Department of the Treasury, Department of Labor, Department of Justice, CBO, Federal Reserve.

What did Keynes say about the power of economists' ideas?

The ideas of economists and political philosophers can be more powerful than is commonly understood.

Why is economists' advice not always followed?

Policy decisions involve communications, feasibility, public opinion, coalitions, and other constraints.

Why might economists disagree?

Differences in scientific judgments and differences in normative values.

In tax policy debates, what underlies normative disagreements about income vs consumption tax?

Different positive assumptions about how saving responds to incentives.

What does perception vs reality in public policy involve?

Value judgments about fairness and how costs/benefits are distributed.

What is a notable economist consensus about rent controls and tariffs?

Rent controls typically reduce housing quantity/quality; tariffs often reduce overall welfare (about 93% agreement on each).

How have tech companies engaged economists?

To analyze data trails, improve digital marketplaces, and design pricing/markets; notable figure Hal Varian.

What is AdWords market design an example of?

Economists helped refine auction mechanisms for ads on search pages.

What are common themes in tech economics work?

Market design, pricing, incentives, risk, and data-driven analysis.

How do economists operate in policy practice?

As scientists (positive) and policy advisers (normative); ethical judgments can influence conclusions.

What non-economic factors shape policy decisions?

Communications, media framing, legislative requirements, coalitions, and public opinion.

Describe the 'master economist' idea per Keynes.

A rare blend of mathematician, historian, statesman, philosopher, and artist in communication.

What is the practical implication of Keynes's master economist idea?

Economics requires both rigorous analysis and understanding real-world constraints and values.

Name two models emphasized in the chapter.

Circular Flow Diagram and Production Possibilities Frontier.

What is the key difference between microeconomics and macroeconomics?

Micro focuses on individual decisions/markets; macro focuses on the economy as a whole.

What is the difference between positive and normative statements again?

Positive describes how the world is; normative prescribes how it should be.

Why might policy advice be adopted or ignored?

Because of political realities and constraints beyond technical correctness.

What is a real-world ethical consideration in policy decisions?

Equity and distribution of costs and benefits (fairness).

What modern trend uses data, experimentation, and market design?

Pricing, incentives, and resource allocation in digital platforms and traditional industries.

What is the quick reference formula for OC per car in the example?

OC_car = 200/100 = 2 computers per car.

What is the quick reference slope of the PPF segment between a and b?

-2 (computers per car).

What happens to the PPF when there is growth in computers?

The frontier shifts outward; for any given number of cars, there are more computers.

What is an endpoint example illustrating growth in the PPF?

If no computers are produced, the economy could still produce 1000 cars.

What is an exam focus for this chapter?

Explain the PPF, identify opportunity costs, interpret slope as OC, understand bow-out and growth, and distinguish micro vs macro and positive vs normative.