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Introduction to Economic Activity and Production Possibilities Frontier, Study notes of Economics

Katholieke Universiteit Leuven, Campus KortrijkEconomics

The basic concepts of economics, including economic activities, production possibilities frontier, opportunity costs, and the three spheres of economic activity. It also explains the concept of 'economics in context' and key terms such as positive and normative questions, intermediate and final goals, and technological progress.

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2021/2022

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Chapter 1 – Economic Activity in Context 1
Chapter 1
ECONOMIC ACTIVITY IN CONTEXT
Microeconomics in Context (Goodwin, et al.), 4th Edition
Chapter Overview
This chapter introduces you to the basic concepts that underlie the study of economics.
The four essential economic activities are resource management, the production of goods
and services, the distribution of goods and services, and the consumption of goods and
services. As you work through this book, you will learn in detail about how economists
analyze each of these areas of activity.
Objectives
After reading and reviewing this chapter, you should be able to:
1. Define the difference between normative and positive questions.
2. Differentiate between intermediate and final goals.
3. Discuss the relationship between economics and well being.
4. Define the four essential economic activities.
5. Illustrate tradeoffs using a production possibilities frontier.
6. Explain the concept of opportunity costs.
7. Summarize the differences between the three spheres of economic activity.
8. Understand what is meant by “economics in context.”
Key Terms
economics well-being
positive questions normative questions
intermediate goal final goal
gross domestic product (GDP) economic efficiency
economic actor (agent) negative externalities
positive externalities resource management
production distribution
exchange transfer
consumption scarcity
production possibilities frontier (PPF) opportunity cost
technological progress microeconomics
macroeconomics model
circular flow diagram factor markets
product markets core sphere
business sphere public purpose sphere
pf3
pf4
pf5
pf8
pf9
pfa

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Chapter 1

ECONOMIC ACTIVITY IN CONTEXT

Microeconomics in Context (Goodwin, et al.), 4 th^ Edition Chapter Overview This chapter introduces you to the basic concepts that underlie the study of economics. The four essential economic activities are resource management, the production of goods and services, the distribution of goods and services, and the consumption of goods and services. As you work through this book, you will learn in detail about how economists analyze each of these areas of activity. Objectives After reading and reviewing this chapter, you should be able to:

  1. Define the difference between normative and positive questions.
  2. Differentiate between intermediate and final goals.
  3. Discuss the relationship between economics and well being.
  4. Define the four essential economic activities.
  5. Illustrate tradeoffs using a production possibilities frontier.
  6. Explain the concept of opportunity costs.
  7. Summarize the differences between the three spheres of economic activity.
  8. Understand what is meant by “economics in context.” Key Terms economics well-being positive questions normative questions intermediate goal final goal gross domestic product (GDP) economic efficiency economic actor (agent) negative externalities positive externalities resource management production distribution exchange transfer consumption scarcity production possibilities frontier (PPF) opportunity cost technological progress microeconomics macroeconomics model circular flow diagram factor markets product markets core sphere business sphere public purpose sphere

Active Review Questions Fill in the blank

  1. You buy a new book. If you didn’t buy the book, you would have purchased a pizza instead. Economists would call the pizza your __________________ of buying the book instead.
  2. A new factory begins discharging pollutants into a previously pristine river. Fish in the river begin to die, and people who make their living through fishing have trouble maintaining their catch. This factory is generating a ________________.
  3. Protecting wildlife in a national park is an example of the economic activity of _______________________________.
  4. Your grandmother sends you a check for $100. This form of resource distribution is referred to as a ____________________.
  5. A diagram that shows the tradeoffs between production of two goods is called a(n) ____________________________________________________________.
  6. A professional musician practices piano every afternoon. Her neighbor listens to the music and enjoys it. Through her activity, the musician is creating a(n) _____________________. Questions 7 to 9 refer to the production possibilities frontier shown below. A

Quantity of Butter

Quantity of Guns

B D C 50 100 120 30 0

  1. Technological innovations can vastly increase a society’s productive capacity. How might a technological innovation affect a society’s production possibilities frontier?
  2. What is the distinguishing characteristic of institutions in the public purpose sphere?

Self Test

  1. Which of the following best exemplifies an intermediate goal? a. Spending a relaxing vacation with your family. b. Spending a day at the art gallery. c. Going fishing for fun. d. Getting a summer job so you can afford a trip abroad. e. Reading a novel.
  2. Which of the following statements is positive (as opposed to normative)? a. One should always be polite at the dinner table. b. There are ten people in this class. c. A young person’s top priority should be job security. d. The best professor is one who meets with students individually each week. e. Resources should be distributed equally across society.
  3. Which of the following is an example of a positive externality? a. A musician performs in a concert. People pay to listen to the concert. b. An architect designs a house for herself to live in. She enjoys spending time in the house. c. A student volunteers in a shelter for the homeless. d. A homeowner plants a tree for shade around her house. The tree also provides shade for her next-door neighbor. e. A teacher drives his car to work and gets stuck in a traffic jam.
  1. Which of the following is an example of a negative externality? a. A student receives a failing grade on a French exam. b. Your roommate throws a loud party that keeps you awake all night. c. You decide to take public transportation to work every day. d. A group of farmers pool their resources to purchase seeds for next year. e. You receive a letter saying your bank account is overdrawn.
  2. Enjoying art at a museum is an example of … a. Production b. Consumption c. Exchange d. Transfer e. Resource management
  3. Which of the following statements is false? a. Final goals could include fairness, freedom, or a sense of meaning in one’s life. b. You are offered a very interesting job, but you need a car to get there. Getting a car is an example of a final goal. c. Resource management refers to activities associated with tending to, preserving, or improving natural, social, and other resources. d. Production is the conversion of resources into goods or services. e. Distribution is the sharing of products and resources among people.
  4. Which of the following is an example of the economic activity of resource management? a. cooking dinner b. operating a factory c. providing worker education d. drilling for oil e. buying a bicycle
  5. Which of the following factors could expand a society’s production possibilities frontier? a. Increased butter production. b. Shifting from one product to another. c. Producing air pollution. d. Depleting resources now instead of later. e. Technological innovations.
  1. Which of the following events could cause the economy to move from point B to point D? a. Workers become less productive due to poor working conditions. b. A hurricane destroys vital resources for pencil production. c. A new machine is invented that makes it easier to produce both pencils and erasers. d. All production costs rise proportionally. e. The cost of eraser inputs goes up.
  2. Which of the following statements is true? a. Moving from point C to point B requires shifting resources away from eraser production and into pencil production. b. Point B represents a less efficient resource mix than point C. c. Depletion of nonrenewable resources could lead the economy to shift from point C to point D. d. Utility is maximized at point A. e. At point A, society is producing all the pencils it can.
  3. The nation of Anyplace produces two goods, chairs and tables. Anyplace can produce the chairs and tables using either sustainable methods or resource-depleting methods. If Anyplace chooses resource-depleting methods, which of the following statements is true? a. Eventually the PPF of Anyplace will shift outward (away from the origin). b. Eventually the PPF of Anyplace will shift inward (toward the origin). c. Eventually the PPF of Anyplace will pivot, causing a change in the slope of the curve. d. Eventually Anyplace will have to choose between producing only chairs or producing only tables. e. None of the above.

Question #15 refers to the graph shown below.

  1. Which of the following statements is true? a. Point A is inefficient. b. Point B is inefficient. c. Point A is preferred to point B. d. Point B is preferred to point A. e. Point C cannot be attained with current technology.
  2. Suppose there is a production possibilities frontier (PPF) for wine and cheese. Which of the following situations would shift the PPF inward (toward the origin)? a. A severe weather event that destroys much of the economy’s productive capacity. b. Discovery of a new, cheaper source of milk for making cheese. c. Increased popularity of wine, as compared with cheese. d. A technological breakthrough. e. Improved education of the work force.
  3. In general, as production of a good increases, the opportunity cost of production increases. How is this notion reflected in the graph of production possibilities frontier (PPF)? a. The PPF bows inwards (that is, looks like a slide or a valley) b. The PPF bows outwards (that is, looks like a hillside). c. The PPF shifts in response to technological change. d. The PPF shows production of one good at a time. e. The PPF becomes flatter as resource availability increases. A Apples Oranges B^ C

Answers to Active Review Questions

  1. opportunity cost
  2. negative externality
  3. resource maintenance
  4. transfer
  5. production possibilities frontier
  6. positive externality
  7. False. Society could produce more butter by producing fewer guns.
  8. False. To move from A to B, society would have to decrease butter production and increase gun production.
  9. True. At point B, society is already employing many of its resources to produce guns. Increasing gun production further will present high opportunity costs.
  10. True.
  11. False. Microeconomics focuses on activities that take place within and among the major economic organizations of a society. Macroeconomics is the study of broader patterns in the national and international economy.
  12. True. An experience can be “consumed” without using up material resources.
  13. production, distribution, consumption, and resource management
  14. normative
  15. positive
  16. What should be produced and maintained? How? For whom?
  17. Exchange and transfer. Exchange occurs when one actor provides a good or service, or money, in return for something else. Transfer is a one-way transaction, when one actor gives something to another.
  18. intermediate
  19. A technological innovation can expand the production possibilities frontier (move it “out,” away from the origin).
  20. The distinguishing characteristic of institutions in the public purpose sphere is that they exist for a purpose related to the public good (e.g. national defense, poverty alleviation, healthcare, education, environmental protection, etc.). Answers to Self Test Questions
    1. d 11. c
    2. b 12. c
    3. d 13. a
    4. b 14. b
    5. b 15. e
    6. b 16. a
    7. c 17. b
    8. e 18. d
    9. e 19. a
    10. d 20. c