Economics 1-3

The Shape of the PPF

Any movement along the PPF involves producing less of one good to produce more of the other.

partnership

Law, accounting, and medical partnerships typify this business form. faces unlimited liability for any debts or claims against the partnership, so one partner could lose everything because of another partner's mistake

What goods and services

Most of us take for granted the incredible number of choices that go into deciding what gets produced—everything from which new kitchen appliances are introduced and which roads get built. Although different economies resolve these questions using different decision-making rules and mechanisms, all economies must somehow make such choices.

for whom are they to be produced (how will they be produced)

Who will actually consume the goods and services produced? The economic system must determine how to allocate the fruits of production among the population. Should everyone receive equal shares? Should the weak and the sick get more? Should it be "first come, first served," so that those willing to wait in line get more? Should goods be allocated according to height? Weight? Religion? Age? Gender? Race? Looks?

invisible hand

an unseen force that harnesses the pursuit of self-interest to direct resources where they earn the greatest reward. According to Smith, although each individual pursues his or her self-interest, the "invisible hand" of market forces promotes the general welfare

rules of the game

are the formal and informal institutions that support the economy—the laws, customs, manners, conventions, and other institutional underpinnings that encourage people to pursue productive activity

when finding PPF

Any production possibilities frontier assumes the economy's resources, technology and know-how, and rules of the game are fixed during the period under consideration.

ability-to-pay tax principle

First, a tax could relate to the individual's ability to pay, so those with a greater ability pay more taxes. Income or property taxes often rely on

benefits-received tax principle

For example, the tax on gasoline funds highway construction and maintenance, thereby linking tax payment to road use, since those who drive more pay more gas taxes.

sole proprietorship,

Most sole proprietorships consist of just the self-employed proprietor—there are no hired employees

bad things about capitalism (market)

People with no resources to sell could starve. Some producers may try to monopolize markets by eliminating the competition. The production or consumption of some goods involves side effects that can harm or benefit people not involved in the market transaction. Firms have no incentive to produce so-called public goods, such as national defense, because private firms cannot prevent nonpayers from enjoying the benefits of public goods. economic fluctuations, which are alternating periods of expansions and recessions in their level of economic activity, especially in employment and production.

How are they to be produced

The economic system must determine how output gets produced. Which resources should be used, and how should they be combined to make stuff? How much labor should be used and at what skill levels? What kinds of machines should be used?Millions of individual decisions determine which resources are employed and how these resources are combined

taxes

The federal government relies primarily on the individual income tax, state governments rely on income and sales taxes, and local governments rely on the property tax.

Three Questions Every Economic System Must Answer

What goods and services are to be produced? How are they to be produced? And for whom are they to be produced?

what the PPF demonstrates

efficiency: The PPF describes efficient combinations of output, given the economy's resources, technology and know-how, and rules of the game. scarcity: Given the resources, technology and know-how, and rules of the game, the economy can produce only so much output per period. The PPF slopes downward, because more of one good means less of the other good, thus demonstrating opportunity cost. choice. Selecting a particular combination determines not only the consumer goods available in this period, but also the capital stock available in the next period. One thing the PPF does not tell us is which combination to choose. The PPF tells us only about the costs, not the benefits, of the two goods. To make a selection, we need to know about both costs and benefits

the government

establishes rules so that market failure is prevented. tries to keep he game fair.

economic growth

expansion in the economy's production possibilities as reflected by an outward shift of the PPF. If people decide to work longer hours, the PPF shifts outward. An increase in the size or health of the labor force, an increase in the skills of the labor force, or an increase in the availability of other resources, such as new oil discoveries, also shifts the PPF outward In contrast, a decrease of resources shifts the PPF inward

production possibilities frontier, AF (PPF, AF)

identifies possible combinations of the two types of goods that can be produced when available resources are employed efficiently. Resources are employed efficiently when there is no change that could increase the production of one good without decreasing the production of the other good The PPF is bowed out to reflect the law of increasing opportunity cost; the economy must sacrifice more and more units of consumer goods to produce each additional increment of capital goods. Note that more consumer goods must be given up in moving from E to F than in moving from A to B

marginal tax rate, under progressive

indicates the percentage of each additional dollar of income that goes to taxes.

tax incidence

indicates who actually bears the burden of the tax.

sunk cost

is a cost that has already been incurred and cannot be recovered, regardless of what you do next. You should ignore sunk costs in making economic choices. Economic decision makers should consider only those costs that are affected by the choice. Sunk costs have already been incurred and are not affected by the choice, so they are irrelevant.

opportunity cost

is the value of the best alternative that is forgone

Households

play the starring role in a market economy. Their demand for goods and services determines what gets produced. And their supply of labor, capital, natural resources, and entrepreneurial ability produces that output.

command economy

resources are directed and production is coordinated not by market forces but by the "command," or central plan, of government. They also decide how to produce these goods and who gets them. flaws; Running an economy is so complicated and requires so much information that some resources are used inefficiently Central plans may be more reflective of the preferences of central planners, who in many cases are unelected dictators, than the preferences of society. Because government is responsible for all production, the variety of products tends to be more limited than in a capitalist economy. Because profit has no place in a command economy, people have less incentive to invent new and better products or find more efficient ways to make existing products

mixed

with government directly accounting for a little more than one-third of all economic activity. Although both ends of the spectrum have moved toward the center, capitalism has gained the most converts in recent decades