Chapter 2: Trade-offs, Comparative advantage, and the market system

Production possibilities frontier (ppf)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology

A production possibilities frontier (PPF) is

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

Market

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

Product market

A market for goods-such as computers-or services such as medical treatment

In the​ circular-flow diagram showing how a market system​ works,

In the circular-flow diagram showing how a market system works, income flows to households through factor markets

Factors of production

Labor, capital, natural resources and other inputs used to make goods and services

The primary difference between product markets and factor markets is that

Product markets are markets for goods, while factor markets are markets for factors of production --- labor, capital, natural resources, and entrepreneurial ability.

Entrepreneur

Someone who operates a business, bringing together the factors of production-labor,capital, and natural resources-to produce goods and services

Comparative advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Absolute advantage

The ability of an individual, a firm, or a country to produce more of a good or 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 happens if a country produces a combination of goods that efficiently uses all of the resources available in the​ economy?

The country is operating on its production possibilities frontier

Opportunity cost

The highest valued alternative that must be given up to engage in an activity

In a free market, the actions people take are largely determined by

The motivation of financial reward

Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart​ disease?

The reduction in funding to research to cure other diseases

Property rights

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

Property rights are

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

Do you agree with Baum that the economic system in Oz​ wouldn't work in the contemporary United​ States?

The system in Oz wouldn't work. The wants of people in the united states exceed the resources available to fulfill those wants

We can show economic​ inefficiency

With points inside the production possibilities frontier

Factor market

a market for the factors of production such as labor, capital, natural resources, and entrepreneurial ability

Free market

a market with few government restrictions on how a good or service can be produced or sold or how a factor of production can be employed

Circular-flow diagram

a model that illustrates how participants in markets are linked

State government Medicaid programs provide medical insurance to poor and disabled people. Under federal​ law, the programs must provide reimbursements to people who use any prescription drug that has been approved as effective by the U.S. Food and Drug Administration​ (FDA). In recent​ years, pharmaceutical firms have developed new prescription drugs that cost as much as​ $1,000 per pill to treat Hepatitis​ C, a liver disease. A news story notes​ that, "State Medicaid programs are particularly sensitive to annual cost​ increases...[because] coverage is paid​ for, in​ part, out of state​ budgets, which have to be balanced every​ year." When new prescription drugs are introduced with much higher prices than existing​ drugs, state governments face a​ trade-off between

a reduction in spending on another worthwhile program or an increase in taxes

Scarcity

a situation in which unlimited wants exceed the limited resources available to fulfill those wants

The primary difference between absolute and comparative advantage is

absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

Which of the following events would create economic​ growth, that​ is, shift the production possibilities frontier​ outward?

an increase in the available natural resources, an increase in the available labor, an increase in technology that affects the production of both goods

the basis for trade is

comparative advantage

Capital​ goods

goods used to produce other goods such as machinery, equipment, and computers

Two key groups participate in markets. A household consists of all the individuals in a home. Firms are suppliers of goods and services. We can use a simple economic model called the circular-flow diagram to see how participants in markets are linked.

household, firms, circular-flow diagrams

The production possibilities frontier will shift outward

if technological advances occur

What does increasing marginal opportunity costs​ mean?

increasing the production of a good requires larger and larger decreases in the production of another good.

The Scottish philosopher Adam Smith argued in 1776 that

prices would do a better job of coordinating the activities of buyers and sellers than guilds could

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

Lawrence Summers served as secretary of the treasury in the Clinton administration and as director of National Economic Council in the Obama administration. He has been quoted as giving the following moral defense of the economic approach. ​"There is nothing morally unattractive about​ saying: We need to analyze which way of spending money on health care will produce more benefit and which​ less, and using our money as efficiently as we can. I​ don't think there is anything immoral about seeking to achieve environmental benefits at the lowest possible​ costs." It would be more moral to reduce​ pollution,

taking the cost into account because money spent on pollution reduction is not available for other worthy activities

One of the great benefits of trade is

that it makes it possible for society to become better off by increasing both its production and its consumption.

Trade

the act of buying and selling

What are the implications of this idea for the shape of the production possibilities​ frontier?

the production possibilities frontier will be bowed outward.

Do you agree with the federal law requiring that Medicaid programs must cover every drug that has FDA​ approval?

this is a normative economic issue that people will often disagree about

The opportunity cost of​ Tesla's investment in a new battery factory in Nevada is

what the company considered to be the best foregone option to the factory.

A free market exists

when the government places significant restrictions on how a good or service can be produced or sold or how a factor of production can be employed

How should policymakers determine the amount of money that should be allocated for research curing heart​ disease? They should base their decision on

whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases

We can show economic​ efficiency

with points on the production possibilities frontier.