Chapter 2

Ceteris Paribus:

"Holding all else constant." <-- common economic assumption.

Reasons PPF may shift outward:

- An increase in the capital stock. - A larger labor force. - Advances in technology.

Exogenous Variable:

A variable that is explaining our endogenous variable. (Ex. Resources [usually time] and Technology)

Trade will (or should) always leave you...

AT LEAST as well off as you were prior to trading.

Why do we experience trade-offs?

Because time and resources are scarce.

Opportunity cost of mowing lawns in terms of trimming bushes:

Bushes/Lawns.

What is the basis for trade?

Comparative Advantage.

Linear PPF:

Constant marginal opportunity cost.

Non-linear PPF:

If a PPF is bowed out, it has an increasing marginal opportunity cost.

As the economy moves down the production possibilities​ frontier, it experiences:

Increasing marginal opportunity costs.

Economic Inefficiency falls where?

Inside the Production Possibilities Frontier.

Factor Markets:

Markets for the four factors of production. (Labor, capital, natural resources, and entrepreneurship)

Whether carried out by an individual or a country, production beyond the PPF is:

Not physically possible.

Intellectual Property:

Patents- 20 years from file date. Copyrights- 70 years after the death of the creator.

A technology improvement is an improvement in...

Production. Technology = production.

Adam Smith:

Scottish philosopher. Believed greatly in the free market. Argued that restrictions reduced the income/wealth of a nation.

What can't you find on a non-linear PPF?

The max and min. You can only find the the opportunity cost from one point to another.

Opportunity Cost:

The next highest alternative to create a product/engage in an activity.

What allows us to consume outside of our PPF?

Trade.

What must the market be in order for market mechanism to work?

1. Flexible and 2. Relative The Market has to respond to supply and demand.

The two key groups in markets:

1. Households- Provide labor, then use wages to buy goods/services 2. Firms- Supply the goods/services. Use funds to purchase factors of production.

1. What does increasing marginal opportunity costs​ mean? 2.

1. Increasing the production of a good requires larger and larger decreases in the production of another good. 2. The production possibilities frontier will be bowed outward.

What can increase PPF?

An increase in resources (and/or) technology can increase a PPF.

Using the same amount of​ resources, suppose that Nicaragua can produce twice as much wheat as Columbia.​ Nevertheless, Columbia could still have the comparative advantage in producing wheat if:

It is even less efficient than Nicaragua in the production of goods other than wheat.

Causation:

The relationship between variables when ones causes the other to change.

Correlation:

The relationship between variables when their values changes at the same time.

Property Rights:

The rights individuals or firms have to the exclusive use of their property, including the right to buy/sell it. (Ideas are property)

Assumption:

This makes studying a complex part of the economy/economics simpler.

Production Possibilities Frontier:

A curve showing the maximum attainable combinations of two products that can be produced w/ available resources and technology.

Market:

A group of buyers and sellers of a good/service and the institution/arrangement by which they come together to trade.

Product Markets:

A market for goods/services. (Ex. Computers or Medical treatment)

Free Market:

A market with few government restrictions on how a good/service can be produced or sold or how the factors of production can be employed.

Economic Model:

A simplification of a complex portion of the economy. (Relies heavily on underlying assumptions)

Endogenous Variable:

A variable that the economic model is trying to explain. (Ex. production numbers [how many you can produce])

The Production Possibilities Frontier will shit outward...

If resources are used to produce capital goods.

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _______ the payoff to devoting additional resources to that activity.

Smaller.

Entrepreneur:

Someone who operates a business, and brings together the factors of production to produce goods and services.

Economic Variable:

Something measurable that can take on different values. (Ex. Unemployment rate, Income for a teacher)

Comparative Advantage:

The ability of a country (or individual) to produce a good or service at a lower opportunity cost than competitors.

Absolute Advantage:

The ability of a country (or individual) to produce more of a good/service than competitors, using the same amount of resources.

Economic Growth:

The ability of the economy to increase the production of goods and services.

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost than other producers.

What is absolute advantage?

The ability to produce more of a good or service than your competitors, using the same amount of resources.

Underlying Assumptions:

The assumption of something that might not always hold true.

What is the governments most important role in a free market?

To be legally involved.