Scarcity, Choice, and Economic System

Countries are divided into what two general categories?

1. Advanced economies 2. Emerging market and developing economies.

What are the 2 Reasons the economy can produce outside ITS PPF?

1. Economic growth 2. Technological advances

What are the shapes of the production possibilities frontier?

1. Linear 2. Concave

The global economy is made up of what?

1. People 2. Countries

Every society has an economic system with what 2 features?

1. Specialization and 2. Exchange

WHERE DO THE GAINS FROM SPECIALIZATION AND EXCHANGE COME FROM?

2 main sources: 1. Development of expertise 2. Comparative advantage.

production possibilities frontier

A curve (or graph) showing all possible combinations of 2 goods that can be produced with the resources and technology currently available. • The PPF tells us the maximum quantity of the 2 good that can be produced for each quantity of the resources. • The PPF is a valuable tool for illustrating the effects of scarcity and its consequences.

Specialization:

A method of production in which each person (or country) concentrates on a limited number of activities.

productive inefficiency

A situation in which MORE of at least one good can be produced without sacrificing the production of any other good.

Production efficiency

A situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else.

Recession:

A slowdown in overall economic activity. Some consequences of a recession are: 1. There is widespread unemployment (joblessness) 2. Some factories shut down so that the economy is not using all of its available capital. An end to a recession could move the economy from a point inside its PPF to a point ON its PPF, using the resources to produce more goods and services without sacrificing anything.

Economic growth:

Economic growth is the increase in a nation's production of goods and services that occur over a long period of time.

What are the 3 Reasons why an Economy Might Be Operating INSIDE its PPF?

Points or combinations of production inside the PPF are affordable but inefficient. There are 3 main reasons an economy or a country may be operating inside its PPF: 1. Productive inefficiency 2. Recessions 3. Natural disasters

Economist use what expression to describe a situation that puts us inside the production possibilities frontier?

Productive inefficiency.

Developing economies

The 118 countries in Africa, Asia, the Middle East, Europe, and Central and South America that have not yet achieved high average incomes for their people. More than 5 billion people live in developing economies.

Emerging market and developing economies.

The 28 countries in Central and Eastern Europe and Asia that were, until the 1990s, part of the Soviet Union. Russia is the largest of these countries. These also include Czech Republic, Hungary, Poland, Ukraine, and Mongolia. Almost 500 million people live in these countries. These countries are emerging from a system of state owned production, central economic planning, and heavily regulated markets to a system of free enterprise and unregulated markets.

Comparative advantage:

The ability to produce a good or service at a lower opportunity cost than some other producers. That is, comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower OC than competitors.

Absolute advantage:

The ability to produce a good or service using fewer resources than other producers use. Equivalently: •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.

Exchange:

The act of trading with each other to obtain what we desire.

Law of increasing opportunity cost:

The more of something we produce, the greater the opportunity cost of producing even more of it. The Law of increasing opportunity cost causes the PPF to have a Concave(upside down) shape.

Linear shape:

The production possibilities frontier is negatively sloped straight line. • Indicates that resources are equally productive. • Indicates constant opportunity cost • The production possibilities frontier is a straight line.

Advanced economies:

The richest 29 countries : Including The U.S., Canada, Japan, Italy, Germany, France, The UK, Australia, New Zealand, and most of the rest of Western Europe. 4 new industrial Asian countries: Hong-Kong, Singapore, Taiwan, South Korea.

The Comparative advantage principle:

Total production of every good or service is greatest when nations shift production toward their comparative advantage goods and trade with each other. • 2 key points to keep in mind. 1. It is possible to have an absolute advantage in producing a good or service or an activity without having a comparative advantage. 2. It is possible to have a comparative advantage in producing a good or service without having an Absolute advantage.

Points inside the frontier are:

attainable and indicates a free lunch and are inefficient.

A firm, an industry, or a country or an an entire economy is productively inefficient if:

it could produce more of at least one good or service without producing less of any other good or service.

Points outside the frontier are:

unattainable with the resources and technology at the economy's disposal.

Concave shape:

• Indicates increasing opportunity cost • The PPF bows outward. This is the common form of a PPF.