ECON - Chapter 2 (The Economic Problem)

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Money

Money is any commodity or token that is generally acceptable as means of payment.

Production Possibilites Frontier (PPF)

The PPF is the boundary between those combinations of goods that can be produced and those that cannot be produced. We can produce at any point below or on the PPF.

Why is the PPF bowed outward?

The PPf is bowed outward because resources are not all equally productive in all activites. Opportunity cost increases as more and more resources are used to produce one kind of good or services.

Firm

A firm is an economic unit that hires factors of production and organizes them to produce goods and services.

Market

A market is any arrangement that enables buyers and sellers to get information and do business with each other.

Comparative Advantage

A person has a comparative advantage in an activity if that person can perform that activity at a lower opportunity cost than anyone else. This advtange involves comparing different people's opportunity costs of performing an activity.

Absolute Advantage

A person who is more productive than others has an absolute advantage. This advantage involves comparing productivities.

Opportunity Cost of Growth

Devoting resources to technological development and capital accumulation means forgoing consumption today of goods and services.

Economic Growth

Economic growth is the expansion of production possibilities and increases the standard of living. Economic growth comes from technological change and capital accumulation.

Opportunity Cost as a Ratio

Opportunity cost is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good.

Property Rights

Property rights are social arrangements that govern the ownership, use, and disposal of anything that people value. When property rights are enforced, people have the incentive to specialize and produce goods and services in which they have a comparative advantage.

Marginal Benefit as Opportunity Cost

The marginal benefit can also be seen as the quantity of other goods and services you are willing to forgo to consume one more unit of something.

Marginal Benefit

The marginal benefit of a good is the benefit received from consuming one more unit of it. We calculate marginal benefit by the most that people are willing to pay for an additional unit of a good.

Marginal Cost

The marginal cost of a good is the opportunity cost of producing one more unit of it. We calculate marginal cost from the slope of the PPF.

Opportunity Cost

The opportunity cost of an action is the highest valued alternative foregone. (Ex: The opportunity cost of producing another pizza is the cola we must forgo.)

Point of Allocative Efficiency

The point on the PPF that we prefer above all other points, where marginal cost meets marginal benefit, is the point of allocative efficiency.

Production Efficiency

We achieve production efficiency if we produce goods and services at the lowest possible cost. This outcome occurs at all points on the PPF.

Allocative Efficiency

When goods and services are produced at the lowest possible cost and in quantities that provide the greatest possible benefit, we have achieved allocative efficiency.


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