Micro Chapter 2 - Trade Offs, Comparative Adv, and Market System
In a simple circular-flow model, there are flows of ___________ and flows of ____________-
- Factors of production; goods and services - Funds received from the sale of factors of production; spending on final goods and services
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
An independent court system
In what ways does a free market economy differ from a centrally planned economy?
Centrally Planned economies have extensive government controls
In a free market system, which group brings together the factors of production in order to producing goods and services?
Entrepreneurs
Factor Markets
Factors of production, such as labor, capital, natural resources, and entrepreneurial ability are traded
According to Adam Smith, what is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest
If a country has a comparative advantage in the production of a good, then that country....
Has a lower opportunity cost in the production of that good.
Opportunity Cost
Highest valued alternative that must be given up to engage in any activity
What is the outcome of enforcing contracts and property rights in a market system?
Increased economic activity
According to Adam Smith....
Individuals usually act in a rational, self-interested way.
Product Markets
Markets where goods such as computers or services such as medical treatment are offered
Free Market
One where the government does not control the production of goods and services
What instrument is the invisible hand used to direct economic activity?
Price
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, and entrepreneurial ability.
What are copyrights designed to do?
Protect intellectual property rights
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
For a market system to work, individuals must..
Take risks and act in rational, self-interested ways
If the opportunity cost of producing one good increases as more of that good is produced, then
The PPF is bowed out.
Absolute Advantage
The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.
What happens if a country produces a combination of goods that uses all of the resources available in the economy?
The country is operating on its production possibilities frontier
What is the role of an entrepreneur?
To operate a business that produces a good or service, to bring together the factors of production, and to take risks
Property Rights
are guaranteed by two amendments to the U.S. Constitution
In the circular flow diagram showing how a market system works,
income flows to households through factor markets
What creates economic growth, that is, sfits the PPF outward?
increase in the available labor, increase in technology that affects production, and increase in available natural resources
Which is critical to the success of a market system?
to allow individuals or firms to have exclusive use of their property