Chapter 2: Trade-offs, Comparative advantage, and the market system
Production possibilities frontier (ppf)
A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology
A production possibilities frontier (PPF) is
A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
Product market
A market for goods-such as computers-or services such as medical treatment
In the circular-flow diagram showing how a market system works,
In the circular-flow diagram showing how a market system works, income flows to households through factor markets
Factors of production
Labor, capital, natural resources and other inputs used to make goods and services
The primary difference between product markets and factor markets is that
Product markets are markets for goods, while factor markets are markets for factors of production --- labor, capital, natural resources, and entrepreneurial ability.
Entrepreneur
Someone who operates a business, bringing together the factors of production-labor,capital, and natural resources-to produce goods and services
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
Absolute advantage
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
Economic growth
The ability of the economy to increase the production of goods and services
What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?
The country is operating on its production possibilities frontier
Opportunity cost
The highest valued alternative that must be given up to engage in an activity
In a free market, the actions people take are largely determined by
The motivation of financial reward
Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart disease?
The reduction in funding to research to cure other diseases
Property rights
The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
Property rights are
The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
Do you agree with Baum that the economic system in Oz wouldn't work in the contemporary United States?
The system in Oz wouldn't work. The wants of people in the united states exceed the resources available to fulfill those wants
We can show economic inefficiency
With points inside the production possibilities frontier
Factor market
a market for the factors of production such as labor, capital, natural resources, and entrepreneurial ability
Free market
a market with few government restrictions on how a good or service can be produced or sold or how a factor of production can be employed
Circular-flow diagram
a model that illustrates how participants in markets are linked
State government Medicaid programs provide medical insurance to poor and disabled people. Under federal law, the programs must provide reimbursements to people who use any prescription drug that has been approved as effective by the U.S. Food and Drug Administration (FDA). In recent years, pharmaceutical firms have developed new prescription drugs that cost as much as $1,000 per pill to treat Hepatitis C, a liver disease. A news story notes that, "State Medicaid programs are particularly sensitive to annual cost increases...[because] coverage is paid for, in part, out of state budgets, which have to be balanced every year." When new prescription drugs are introduced with much higher prices than existing drugs, state governments face a trade-off between
a reduction in spending on another worthwhile program or an increase in taxes
Scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
Which of the following events would create economic growth, that is, shift the production possibilities frontier outward?
an increase in the available natural resources, an increase in the available labor, an increase in technology that affects the production of both goods
the basis for trade is
comparative advantage
Capital goods
goods used to produce other goods such as machinery, equipment, and computers
Two key groups participate in markets. A household consists of all the individuals in a home. Firms are suppliers of goods and services. We can use a simple economic model called the circular-flow diagram to see how participants in markets are linked.
household, firms, circular-flow diagrams
The production possibilities frontier will shift outward
if technological advances occur
What does increasing marginal opportunity costs mean?
increasing the production of a good requires larger and larger decreases in the production of another good.
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
Lawrence Summers served as secretary of the treasury in the Clinton administration and as director of National Economic Council in the Obama administration. He has been quoted as giving the following moral defense of the economic approach. "There is nothing morally unattractive about saying: We need to analyze which way of spending money on health care will produce more benefit and which less, and using our money as efficiently as we can. I don't think there is anything immoral about seeking to achieve environmental benefits at the lowest possible costs." It would be more moral to reduce pollution,
taking the cost into account because money spent on pollution reduction is not available for other worthy activities
One of the great benefits of trade is
that it makes it possible for society to become better off by increasing both its production and its consumption.
Trade
the act of buying and selling
What are the implications of this idea for the shape of the production possibilities frontier?
the production possibilities frontier will be bowed outward.
Do you agree with the federal law requiring that Medicaid programs must cover every drug that has FDA approval?
this is a normative economic issue that people will often disagree about
The opportunity cost of Tesla's investment in a new battery factory in Nevada is
what the company considered to be the best foregone option to the factory.
A free market exists
when the government places significant restrictions on how a good or service can be produced or sold or how a factor of production can be employed
How should policymakers determine the amount of money that should be allocated for research curing heart disease? They should base their decision on
whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases
We can show economic efficiency
with points on the production possibilities frontier.