econ chapter 2

law of comparative advantage

the individual, firm, region with the lowest opportunity cost of producing a particular good should specialize in that good

opportunity cost

the value of the best alternative forgone when an item or activity is chosen. the opportunity lost. is subjective

law of increasing opportunity cost

to produce more of one good, successively larger amount of the other good must be sacrificed

Opportunity cost is an objective measure of cost.

FALSE. Opportunity cost is a subjective measure of cost. Only the individual can estimate the expected benefits and costs to himself or herself.

The opportunity cost of an activity is the total value of all the alternatives passed up.

FALSE. The opportunity cost is the value of only the single best alternative forgone.

What are the major differences between a pure capitalist system and a pure command system? Is the United States closer to a pure capitalist system or to a pure command system?

Laws about resource ownership and the extent to which the government attempts to coordinate economic activity vary among economic systems from the most free (the capitalist system) to the most regimented (command system). A pure capitalist system is characterized by private ownership of all resources and coordination of all economic activity based on prices generated in free markets. A pure command economy is characterized as government control of both resources and production. The United States represents a mixed system with government accounting for about one third of all economic activity. In addition, government regulates the private economy in a number of ways

Under what conditions would an economy be operating inside its PPF? On its PPF? Outside its PPF?

The economy is inside its PPF if some resources are idle (unemployed) or if resources are allocated inefficiently. An economy is producing on its PPF if all resources are employed efficiently. An economy cannot operate outside of its PPF. Points outside the PPF represent unattainable combinations, given the resources, rules of the game, and the technology available

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; getting the most from available resources.

production possibilities frontier

a curve showing alternative combination of goods that can be produced when available resources are used efficiently: a boundary line between inefficient and unattainable combination

economic system

a set of mechanisms and institutions that resolve the what, how and for whom questions

pure capitalism

an economic system characterized by the private ownership of resources and the use of price to coordinate economic activity in unregulated markets. deals with private property rights and unrestricted markets

mixed economic system

an economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are regulated by government.

pure command system

an economic system characterized by the public ownership of resources and centralized planning. have government planners

private property rights

an owners right to use, rent, or sell resources or property

specialization of labor

breaking down the production of a good into separate tasks

division of labor

breaking down the production of a good into separate tasks. increases production, takes advantage of indivual preferences, natural abilities, relevant experience. reduces need to shift between tasks. allows use of labor saving machinery. tasks become tedious and robots may replace workers.

what causes a shift in the p p f

changes in the resources available, increase in capital stock, technological change, improvements in rules of the game

sunk cost

cost that has already been incurred, cannot be recovered, and this is irrelevant for present and future economic decisions. the ten minutes wasted in a line that isn't moving cannot be recovered.

what we learn from the p p f

efficiency, scarcity, choice

government planners

establish central plans, direct resources, coordinate production. answer three economic questions

flaws in pure capitalism

lack of central authority, people with no resources could starve, monopoly may emerge, side effects for people not in transaction, private firms lack incentives to produce public goods

why is p p f bowed out

reflects the law of increasing opportunity cost

flaws in pure command system

resources are often used inefficiently, lack of incentives to use efficiently leads to wasted resources, preferences of planners may rule, limited variety of products, less freedom of economic choice.

slope of p p f

shows how many units of a consumer goods must be given up per additional unit of capital goods

comparative advantage

the ability to make something at a lower cost than other producers face

absolute advantage

the ability to make something using fewer resources than other producers use