chapter 2 economic tools and economic systems
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Chapter 2 Economic Tools and Economic Systems. These slides supplement the textbook, but should not replace reading the textbook. What is opportunity cost?. The value of the best alternative forgone when an item or activity is chosen. How is opportunity cost estimated?. - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 2 Economic Tools and Economic Systems
These slides supplement the textbook, but should not replace reading the textbook
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What is opportunity cost?
The value of the best alternative forgone when an item or activity is chosen
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How is opportunity cost estimated?
Opportunity cost is subjectively estimated by the individual decision maker
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What is the opportunity cost of a city to use local taxes to pay for a park?
The best alternative foregone by not building the park
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What is your opportunity cost of attending college?
If make $300 a week, but you expect you could make $500 without school - your opportunity cost is $200
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What is the opportunity cost of
cleaning your room?It’s greater on sunny days than on rainy days
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Why is opportunity cost subjective?
calculation requires time and information
time is the ultimate restraint may vary with circumstances
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What is a sunk cost?A cost that is irrelevant when an economic choice is being made
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What is an example of a sunk cost?
The $6.75 you pay to watch a boring movie is irrelevant to whether or not you watch it to the end
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What isabsolute advantage?The ability to produce something with fewer resources than other producers use
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You can paint a room in 2 hrs, a high school
student in 3 hrs, who has absolute advantage?
You do because you can do it faster
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What iscomparative advantage?
The ability to produce something at a lower opportunity cost than other producers face
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You can make $50 an hr, the high school student makes minimum wage,
who should paint?The high school student because of a lower opportunity cost
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What is barter?
The direct exchange of one good for another without using money
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What is adivision of labor?
The production of a single good into separate tasks in which people specialize
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What is aspecialization of labor?
Focusing an individual’s efforts on a particular product or a single task
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How does the specialization of labor increase productivity?
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Takes advantage of individual natural abilities
Allows workers to develop more experience at a particular task
Permits the introduction of labor-saving machinery
Reduces time required to shift between tasks
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What is the production possibilities frontier?
A curve showing all combinations of goods that can be produced when resources are used most efficiently
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What is efficiency?The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another
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What assumptions do we make with the
production possibilities model?
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Output is limited to two classes of products
Focus is on production during a given time period
Available supplies of resources are fixed
Technology is constant
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Capital goods(millions of units per year)
Con
sum
er g
ood
s(m
illi
ons
of u
nit
s p
er y
ear)
The Production Possibilities Frontier
10 20 30 40 50
50
30
20
10
0
4348
34
G
Inefficient
H
Unattainable
F
E
DC
BA
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What is the law of increasing opportunity?
As more of a good is produced, larger quantities of another good must be sacrificed if resources are already used efficiently
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What shifts the production
possibilities frontier?Changes in resourcesIncrease in the capital stock
Technological change
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Shifts in the Economy’s PPFPanel A: Increase in available resources
Con
sum
er g
ood
s
Capital goodsF F'
AA'
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Shifts in the Economy’s PPFPanel B: Decrease in available resources
Con
sum
er g
ood
s
Capital goodsF''F
A''A
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Shifts in the Economy’s PPFPanel C: Increase in resources or
technology that benefits consumer goodsC
onsu
mer
goo
ds
Capital goodsF
A
A'
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Shifts in the Economy’s PPFPanel D: Increase in resources or
technology that benefits capital goodsC
onsu
mer
goo
ds
Capital goodsF
A
F'
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What is true along the production
possibilities curve? resources are used fully maximized division of labor most efficient combination
of resources
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What choices are made along the production possibilities curve?
To have more of one product units of the other have to be given up
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Production Possibilities Curve analysis includes? opportunity cost scarcity maximum choices efficiency increasing opportunity costs economic growth
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What is an economic system?
A set of social institutions and mechanisms organized to answer the three economic questions
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What are the three questions?
Who gets what and how much?
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What ispure capitalism?
An economic system characterized by private ownership of resources and the use of prices to coordinate economic activity in unregulated markets
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What is acommand economy?
An economic system characterized by public ownership of resources and centralized economic planning
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What is amixed capitalist economy?An economic system
characterized by private ownership of some resources and public ownership of others; some markets are regulated, others are not
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What kind of economic system do we have?
A mixed capitalist economy
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