Ch 2.
Define Natural resources
Natural resources is part of the factor market which includes land, water, oil, iron ore, and other raw materials (or "gifts of nature") that are used in producing goods
what does a firm do in a circular-flow diagram?
it receives labor, capital, natural resources, and entrepreneurial ability from the factor market and gives it to the product market where it is sold and ultimately lands into households.
Define property rights
the rights individuals/firms have to the exclusive use of their property, including the right to buy/sell it. Property can be tangible, physical property such as stores and factories or it can be intangible such as the rights to an idea.
Define intellectual property rights
they include books, films, software, and ideas for new products/new ways of producing products.
What causes an economic growth which in turn causes a shift in the PPF?
1. Capital (which includes, HR, physical labor, and financial) 2. Technology (which can cause in an increase for one good, but not others
What are the factors of production
1. workers 2. capital 3. natural resources (including land) 4. entrepreneurial ability
How can a country gain from specialization and trade?
A country can specialize in producing that for which it has a comparative advantage and then trade it for needs and services.
Give examples of product market
A market for goods like computers or services such as trade.
What did the market mechanism state and who was it stated by?
Adam Smith stated in 1776 - 1. individuals act in a rational, self-interested way; the motivation of financial reward usually provides the best explanation for actions taken. 2.for market mechanisms to work, prices must be flexible; he also stated firms would be led by the "invisible hand of the market to provide consumers with what the want. 3. firms respond to change in prices by making decision that end up satisfying the wants of consumers.
With the PPF, any point below the PPF line means
All available resources were not used, therefore anything below the PPF lines shows an inefficient result
With the PPF, any point on the PPF line means
All available resources were used, therefore anything on the PFF lines show an efficient result
With the PPF, any point above the PPF line means
All available resources would've been over-used, therefore anything above the PPF lines show an unattainable result
Define Capital
Capital is part of the factor market and it refers to the physical capital, such as computers and machine tools, that is used to produce other goods.
What is the basis for trade?
Comparative advantage
Define entrepreneur
Entrepreneurs are a part of the factor market and are people who brings together the factors of production to success.
According to Adam Smith, what is necessary for the proper functioning of a market system?
For markets to work, people must be free to pursue their self-interest.
Why are enforcement of contracts and property rights important?
If property rights are not well enforced, fewer goods and services will be produced. this reduces economic efficiency, leaving the economy inside its PPF.
What is a free market?
It is one where the government does not control the production of goods/services.
What does a household do in the circular-flow diagram?
It obtains wages and other payments from the factor market and then goes to the product market to receive goods and services.
Why does an increase in marginal opportunity cost occur?
It occurs because some workers, machines, and other resources are better suited to one use than to another.
What is the circular flow diagram and what does it illustrate?
It shows how firms and households are linked through product and factor markets. Note that in the diagram, households and firms are not linked to each other; rather, they are linked to the two markets.
Define Labor
Labor is a part of the factor market and it includes all types of work, from part-time labor of teens to the work senior managers in large corporations
What protects intellectual property rights?
Patents and copyrights
According to Adam Smith, what is the instrument the invisible hand uses to direct economy?
Prices
Scarcity requires ________
Scarcity requires trade-offs because goods/services and the economic resources or the factors of production are scarce.
Define Economic Growth
The ability of the economy to increase the production of goods and services. This ultimately raises the standard of living.
Define Trade
The act of buying and selling
The idea of increasing marginal opportunity cost illustrates what important economic concept?
The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. Example: the more hours you have already to spend studying economics, the smaller the increase in your test grade from each additional hour you spend - and the greater the opportunity cost of using the hour in that way.
Describe a curve to show the effect that improved fertilizer would have on the growth of cotton and the growth of soybeans via the initial PPF.
The new curve would shift right because the new fertilizer represents new technology which shows an increase in the possibility of production.
In what way does a free market differ from a centrally planned market?
Unlike a free market, centrally planned markets have extensive government controls.
Define Production Possibilites frontier
a curve showing the maximum attainable combination of two products that may be produced with available resources and current technologies
Define market
a group of buyers and sellers of a good/service and the institution/arrangement by which they come together to trade
What is absolute advantage? a. the ability to use all available resources to produce output b. the gain from selling a product for more than it costs to produce it. c. the ability to produce more of a good/service than competitors using the same amount of resources. d. the ability to produce a good/service at lower opportunity cost than other producers.
c. the ability to produce more of a good/service than competitors using the same amount of resources. Note - this is the idea of who can out-perform the other
What is comparative advantage? a. the ability to use all available resources to produce output b. the gain from selling a product for more than it costs to produce it. c. the ability to produce more of a good/service than competitors using the same amount of resources. d. the ability to produce a good/service at lower opportunity cost than other producers.
d. the ability to produce a good/service at lower opportunity cost than other producers. Note - it is always in term of the other good.
We can show economic efficiency a. with points inside the PPF b. with points inside and on the PPF c. with points on and outside the PPF d. with points on the PPF e. with points outside the PPF
d. with points on the PPF
The primary difference between product market and factor markets is that
product markets are markets for goods, while factor markets are made for factors of production - capital, labor, natural resources, and entrepreneurial ability.
Explain if it is a factor or product market and if it is demanding or supplying the goods/services. question a - George is buying a Tesla Model S. This takes place in a _______________ market. The household ________ the goods and the firms _____________ the good. question b - Tesla increases at its Freemont Plant This takes place in a _______________ market. The household ________ the labor and the firms _____________ the labor. question c - George works 20 hours per week at McDonalds. This takes place in a _______________ market. The household ________ the labor and the firms _____________ the labor. question d - George sells land he owns to McDonald's so it can build a new restaurant. This takes place in a _______________ market. The household ________ the factor and the firms _____________ the factor.
question a - product; demand; supply question b - factor; supply; demand question c - factor; supply; demand question d - factor; supply; demand