ECON 101 Study Guide - Midterm Guide: Human Capital, Barter, International Trade

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Econ101 Chapter Two Reading

Economic Models: Tradeoffs and Trade:

A model is a simplified representation of reality that is used to better understand real-life

situations; They are important because their simplicity allows economists to focus on the

effects of only one change at a time and hold everything else constant.

When building economic models, an important assumption is the other things equal

assumption, which means that all other relevant factors must remain unchanged

Production possibility frontier: is a model that helps economists think about the trade-offs

every economy faces

Comparative advantage: a model that clarifies the principle of gains from trade- trade

between individuals and between countries

Circular Flow Diagram: a schematic representation that helps us understand how flows of

money, goods, and services are channeled through the economy

Tradeoffs: The Production Possibility Frontier:

Resources are scarce

The idea behind the PPF is to improve our understanding of trade-offs

Points inside the frontier are feasible; points outside the frontier aren’t feasible

An economy is efficient if there are no missed opportunities, there is no way to

make some people better without making other people worse off

One key aspect of efficiency is that there are no missed opportunities in production-

there is no way to produce more of one good without producing less of other goods

If a point is on the frontier line, it is efficient

For example, an economy that has large numbers of workers who are involuntarily

unemployed, it is clearly inefficient in production and that’s a bad thing because the

economy could be producing more useful goods and services

Efficiency in production is only part of what’s required for the whole economy to

be efficient; efficiency also required that the economy allocates its resources so that

consumers are as well of as possible (Efficient in allocation)

Economy as a whole requires efficiency in production and allocation- must produce

as much of each good as it can and it must produce the mix of goods people want

Command economies are known to be inefficient

The true cost of any good isn’t the money it costs, but what must be given up in

order to get that good- the opportunity cost

Whenever we assume that the opportunity cost of an additional good doesn’t

change regardless of the output mix, the PPF is a straight line

The slope of a straight line PPF is equal to the opportunity cost-specifically, the

opportunity cost for the good measured on the horizontal axis in terms of the good

measured on the vertical axis

A straight line PPF= constant opportunity cost

The bowed-out shape of the PPF reflects increasing opportunity cost

When opportunity costs are increasing rather than constant, the PPF is a bowed-out

curve rather than a straight line

Economists believe that in reality, opportunity costs are typically increasing

As more of a good is produced, its opportunity cost typically rises because well-

suited inputs are used up and less adaptable inputs must be used instead

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ECON 101 Full Course Notes

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Document Summary

When building economic models, an important assumption is the other things equal assumption, which means that all other relevant factors must remain unchanged. Production possibility frontier: is a model that helps economists think about the trade-offs every economy faces. Comparative advantage: a model that clarifies the principle of gains from trade- trade between individuals and between countries. Circular flow diagram: a schematic representation that helps us understand how flows of money, goods, and services are channeled through the economy. The idea behind the ppf is to improve our understanding of trade-offs. Points inside the frontier are feasible; points outside the frontier aren"t feasible. An economy is efficient if there are no missed opportunities, there is no way to make some people better without making other people worse off. One key aspect of efficiency is that there are no missed opportunities in production- there is no way to produce more of one good without producing less of other goods.

Related Questions

The opportunity cost of one more slice of pizza in terms of sodas is the

		the total number of pizza slices that we have divided by the total number of sodas that we have.
		the number of sodas we have to give up to get one extra pizza slice.
		the number of pizza slices we have to give up to get one extra soda.
		the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

		how money can be allocated among two kinds of goods.
		the limits to the future growth of a nation.
		the various combinations of output a nation can produce at a certain time, given its available resources and technology.
		that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

		remains constant.
		might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		increases.
		decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

		the economy is producing at a point within its PPF.
		PPF disappears.
		the economy is producing at a point beyond its PPF.
		the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

		its PPF will shift inward.
		its economic growth will slow down.
		its PPF will shift outward.
		some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

		the attainable point with full employment of all resources.
		attainable point without full employment of all resources.
		unattainable point without full employment of all resources.
		the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

		the available factors of production and the state of technology
		the amount of money in the economy
		the prices of goods and services
		the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

		more of both goods can be produced.
		the possibilities of tradeoffs diminish.
		a tradeoff is not possible because nations need all goods.
		the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

		I and iii
		ii only
		I, ii, and iii
		I only

1 point

QUESTION 10

To achieve gains from trade, a country

		needs to have an absolute advantage in the production of all goods.
		specializes in producing a good in which it has a lower opportunity cost.
		must produce at a point beyond its PPF.
		should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

		a comparative advantage
		more production efficiency
		a marginal benefit
		a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

		iii only
		ii only
		I only
		I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

		John has a comparative advantage in producing cakes.
		Phyllis has an absolute advantage in both goods.
		Phyllis has a comparative advantage in producing cakes.
		John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

		It decreases.
		It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
		It remains constant.
		It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

		goods and services that people want.
		maximum combinations of goods and services that can be produced.
		resources the economy possesses, but not it is the level of technology.
		limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

		$14 billion
		$14 trillion
		$140 billion
		$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

		to increase the production of one product requires smaller and smaller sacrifices of the other good.
		to decrease the production of one product requires smaller and smaller sacrifices of the other good.
		to increase the production of one product requires larger and larger sacrifices of the other good.
		when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

		China will grow faster than India.
		India will be able to eliminate scarcity faster than China.
		India will be able to eliminate opportunity cost faster than China.
		India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

		zero opportunity cost.
		producing at a point that lies beyond the PPF.
		opportunity benefit.
		a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

		increasing the production of both goods.
		increasing the production of one good and decreasing the production of another.
		holding the production levels of both goods constant.
		decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

		but it can still benefit from specialization and trade.
		so does not need to trade with poor nations to achieve any gains from trade.
		so might not have a comparative advantage in producing any goods.
		so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

		more of all goods than another person.
		a good for a lower opportunity cost than another person.
		a good for a lower dollar cost than another person.
		more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

		the linear shape of the production possibilities frontier.
		bowed in the shape of the production possibilities frontier.
		bowed out the shape of the production possibilities frontier.
		the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

		I only.
		I and ii.
		I and iii.
		ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

		shift rightward.
		not shift because the society moves from one point on the frontier to a point inside the frontier.
		not shift because the society moves from a point inside the frontier to a point on the frontier.
		shift leftward.

1 point

ochresea-lion6

1.The production possibilities frontier can be used to demonstrate which of the following?
(i) The best tradeoffs that individuals and societies should make
(ii) The tradeoffs forced on individuals and societies because of scarcity
(iii) The wealth maximizing output combination that an individual or society should choose

Select one:

a. (ii) only

b. (i), (ii) and (ii)

c. (i) only

d. (iii) only

2. Unlimited wants and limited resources:

Select one:

a. Can be overcome through innovation

b. Are not problems faced by wealthy industrialized nations

c. Necessitate choices about the goods to services to consume

d. Can be overcome by increasing wealth

3. What are the two sub-fields of economics?

Select one:

a. For-profit economics and not-for-profit economics

b. Private markets and the public sector

c. Microeconomics and macroeconomics

d. Market and non-market economics

4. What do economists mean by "self-interested behavior"?

Select one:

a. It means undertaking activities that benefit yourself and a small group of others who are important to you

b. It means undertaking activities motivated by greed

c. It means undertaking activities that maximize one's own welfare

d. It means wanting to pursue a life of leisure

5. When economists say that people act rationally, they mean that:

Select one:

a. People do not make incorrect choices

b. People are governed by what others think about them and act accordingly

c. People consider the significant consequences of their actions and make decisions that further their self-interests

d. There are certain common codes of conduct that everyone adheres to

6. Which of the following actions reflect self-interested behavior?
(i) Warren Buffett, one of the world's wealthiest individuals, donated more than $30 billion to humanitarian causes such as AIDS and tuberculosis initiatives.
(ii) Pfizer Inc., a private pharmaceutical company, sponsored a disease-management program for Florida's Medicaid patients with chronic illnesses such as asthma, diabetes and heart disease.
(iii) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class.
(iv) You agree to babysit your 8-year-old brother instead of going to a kick-boxing class only if your mother pays you $8 an hour.

Select one:

a. All of the above actions except (iii)

b. All of the above actions

c. (ii) and (iii) only

d. (iv) only

7. Which of the following does not qualify as a market?

Select one:

a. Bloomingdales Department Store

b. The underground drug trade

c. Amazon.com

d. The French Immigration Department

8. Which of the following is not a key assumption of economics?

Select one:

a. People do not undertake activities that make others better off

b. People are self-interested

c. People have limited resources to acquire their wants

d. People are rational

9. Which of the following is not likely to cause the production possibility frontier to shift out?

Select one:

a. An increase in the quantity of innovations

b. An increase in specialization which allows people to develop higher levels of skill at their chosen profession

c. Developing markets where self-interested individuals can interact

d. Relying only on governments to allocate resources

10. Which of the following statements is false?

Select one:

a. Scarcity affects everyone, including very wealthy people

b. Rational people never make mistakes

c. Economists assume people are rational

d. Economists assume people have unlimited desires

11. Which of the following statements is false?

Select one:

a. When you volunteer to help at a soup kitchen, you face an opportunity cost of your time

b. Mother Teresa faced trade-offs when deciding to help lepers in India rather than some other needy group

c. Economics brings tradeoffs to light but does not inform us of which trade-offs society should make

d. When the government funds research into cancer, it is able to avoid trade-offs because public funds are used rather than private funds

12. Which of the following topics does economics study: (i) the study of human behavior; (ii) the market for organ transplants; (iii) cost and benefits of building a suicide barrier in the Golden Gate Bridge; (iv) the functioning of political institutions.

Select one:

a. (i) and (iii) only

b. (ii) and (iii) only

c. All of the topics listed

d. All of the topics except (iv)

13. Which the following would be likely to raise your opportunity cost of going to college full-time?
(i) You have been offered a full-time job as wardrobe assistant to Paris Hilton that pays $60,000 per year.
(ii) You have been offered a merit scholarship that pays for two years of tuition.
(iii) Your landlord increases the rent on the apartment you are currently living in and will continue to live in even if you choose to attend college full-time.
(iv) An increase in the value of your college trust fund set up by your grandfather.

Select one:

a. All of the above

b. (i) and (iii) only

c. All of the above except (ii)

d. (i) only

14. While microeconomics is concerned with the behavior of individuals and firms, macroeconomics:

Select one:

a. Does not make use of "micro" ideas such as opportunity cost or self-interest

b. Is concerned with the performance of entire economies

c. Is concerned with normative matters such as fairness, equality and ethics

d. Is only concerned with government activity

15. You own a Ford car that has lousy gas mileage. You finally trade it for a Hyundai, which is equal in virtually every aspect except that the Hyundai gets much better mileage. What is likely to happen to your gas consumption?

Select one:

a. I get better gas mileage and since the cost of driving has gone down, I will drive more so my gas consumption will remain the same

b. It will fall since I will now use less gas

c. I get better gas mileage and since the cost of driving has gone down, I will drive more so the effect on my gas consumption is indeterminate

d. It will go up since I will now drive more

azurewoodchuck319

Economists use economic models to guide their thinking in regards explaining and predicting that which is otherwise unknown. These models are generalizations that rest on assumptions we use in creating a simplified setting, where only that which is most-pertinent is allowed to come into play directly, and at the same time, that which is not pertinent is rendered excluded by being held constant. Simply put, if you change your founding assumptions, you change the model for you have changed the simplified setting. If you change a variable that is included directly into the model, you can then assume the variable changes marginally then trace out the effects of this marginal change on the variable being explained. Similarly, If you allow a change of a variable that has been excluded, you are relaxing an assumption so you can reason out what the effects of such a change could be.

What is important to understand here, is the description I have just relayed to you describes how economists use models. It is but one example of how models are used more-generally in ALL the other sciences and social sciences. And to go a step further, it is but a description or formalization of how we in an all-inclusive sense use assumptions when we are reasoning about that which we reason about. Our assumptions are our foundations for our thoughts about all that we consider in our efforts towards understanding the world in which we live and the people, both individually and collectively inclusive of their institutions, with whom we come into contact.

Using this knowledge, describe what you think are the dangers to our thinking and actions based on our thinking of our using simplifying assumptions that are wholly untrue or are too strong, too constricting, are way too over-generalizing. Choose whatever context you wish and provide an example. Then describe why having at the very least a small measure of skepticism may be considered healthy for one's own sake and the sake of others.

ECON 101 Study Guide - Midterm Guide: Human Capital, Barter, International Trade

ECON 101 Full Course Notes

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