Chapter 2 ECO

Production Possibilities Frontier

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Free Market

A merket with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

Circular Flow Diagram

A model that illustrates how participants in markets are linked. -in product markets, households use payments they earn in factor markets to purchase the goods and services supplied by the firms. -Firms produce these goods and services using the factors of production supplied by households. Diagram Page 51

Legal Basis of A Successful Market

Government has to take legal steps to provide a legal environment that will allow the market system to succeed. -Property Rights: The rights individuals or firms have to the exclusive use of their property including the right to buy or sell it.

Circular Flow of Income

Household: all individuals in a home. Suppliers of factors of production, particularly labor, employed by firms to make goods and services. -they also own firms, they supply the resources for the big corporation or they provide the income for small firms. -Households are suppliers and firms are demanders. Firms: are suppliers of goods and services. Firms use the funds they receive from selling goods and services to buy the factors of production needed to make the goods and services.

The Market

Households and firms interact in two types of markets, product markets and factor markets.

Product Markets

Markets for goods-such as computers-and services-such as medical treatment. -Households are demanders and firms are suppliers.

Factor Markets

Markets for the factors of production. -Factors of Production: are the inputs used to make goods and services. 4 Categories -Labor, includes all types of work, from the part time labor of teenagers to top managers in corporations. -Capital, physical capital, such as computers and machine tools that is used to produce other goods. -Natural Resources, land, water, oil, iron ore, and other raw materials. -Entrepreneur, someone who operates a business. Entrepreneur ability is the ability to bring together the other factors of production to successfully produce and sell goods and services.

Entrepreneur

Someone who operates a business, bringing together the factors of production, labor, capital, and natural resources to produce goods and services. -Central to the working of the market system. Must establish what consumers want and the cheapest way to provide it.

Comparative Advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. -The basis for trade is comparative advantage, not absolute advantage because they can obtain other goods that they do not specialize in through trade.

Absolute Advantage

The ability of an individual, a firm, or a country to produce more of a good or service that competitors, using the same amount of resources.

Economic Growth

The ability of the economy to increase the production of goods and services. -Over time resources to an economy may increase, increase in available labor force and capital stock will shift the PPF outward. -technological change also makes it possible to produce more goods with the same number of workers and the same amount of machinery.

Trade

The act of buying and selling. -direct trade includes trading a baseball card for a baseball card where indirect trade is trading a service or a product for money. -makes both people better off.

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.