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Microeconomics: Production Possibilities and Comparative Advantage

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Termini in questo insieme (20)

  • What does the production possibilities curve (PPC) represent?
    The PPC shows all possible combinations of two goods that can be produced using available resources efficiently.
  • What do points inside, on, and outside the PPC represent?
    Points inside are inefficient, points on the curve are efficient, and points outside are unattainable with current resources.
  • What is the opportunity cost in production?
    The opportunity cost is the value of the next best alternative foregone when making a choice.
  • How is the slope of the PPC interpreted?
    The slope measures the opportunity cost of one good in terms of the other good.
  • Why do opportunity costs exist?
    Because resources are limited and producing more of one good requires using resources that could produce another good.
  • What is the difference between efficient and inefficient production?
    Efficient production uses all resources without waste; inefficient production wastes resources or produces less than possible.
  • What does specialization mean in trade?
    Specialization means focusing production on goods where a country has a comparative advantage.
  • What is comparative advantage?
    A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country.
  • What is absolute advantage?
    A country has an absolute advantage if it can produce more of a good with the same resources than another country.
  • Can a country benefit from trade if it has an absolute advantage in all goods?
    Yes, if it has a comparative advantage in producing some goods, trade can still be beneficial.
  • How do you calculate opportunity cost of cloth in the US example?
    Opportunity cost of cloth = units of wheat given up / units of cloth produced; in US, 1 unit cloth costs 2 units wheat.
  • How do you calculate opportunity cost of wheat in the GB example?
    Opportunity cost of wheat = units of cloth given up / units of wheat produced; in GB, 1 unit wheat costs 0.5 units cloth.
  • What happens to global production when countries specialize according to comparative advantage?
    Global production increases because each country produces more of the good with lower opportunity cost.
  • What is the global gain from trade in the cloth and wheat example?
    Global gain is the increase in total production of both goods after specialization and trade.
  • Why might some people oppose free trade despite overall gains?
    Because trade can cause job losses or wage reductions in certain industries or groups.
  • What is the role of opportunity cost in deciding production choices?
    Producers should choose to produce goods with the lowest opportunity cost to maximize efficiency.
  • How does moving resources affect production possibilities?
    Moving resources from one good to another changes the production mix and opportunity costs.
  • What does it mean if a country is 'better' at producing all goods?
    It means it has an absolute advantage in all goods, but comparative advantage still determines trade benefits.
  • What is the significance of the statement: 'It is important to carefully consider the likelihood of job losses'?
    Trade benefits must be weighed against potential negative impacts on workers in affected industries.
  • How do you solve for opportunity cost using production quantities?
    Set total resource use equal for both goods and solve for one good in terms of the other.