Econ chapter 2
If consumers demand more of a good, its price will
rise
Firms are likely to produce more of a good or service when its price ___________ and less of a good or service when its price ______________.
rises, falls
The PPF is used to illustrate the trade-offs that arise from
scarcity
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
economic growth
the ability of the economy to increase the production of goods and services
absolute advantage
the ability to produce a good using fewer inputs than another producer
free market
a market 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
What does increasing marginal opportunity costs mean? What are the implications of this idea for the shape of the production possibilities frontier?
increasing marginal opportunity costs means that increasing production of a certain good or service by a given quantity requires larger and larger decreases production of another good or service. This changes the PPF from a line to a curve.
points on the PPF are
efficient
What role do they play in the working of a market system?
encourage a significant number of people to be willing to risk funds by investing them in business encourage firms to spend money on research and development
points inside the PPF are
inefficient
An individual, a firm, or a country has a absolute advantage in producing a good or service if
it can produce more of that good or service using the same amount of resources
An individual, a firm, or a country has a comparative advantage in producing a good or service if
it can produce the good or service at the lowest opportunity cost
factors of production
labor, capital, natural resources, and other inputs used to make goods and services
why are independent courts important for a well-functioning economy ?
-to make their decisions based on the law -to make their decisions free of influence form other parts of the government to make their decisions free of influence form other parts of the government -to make their decisions free of intimidation by criminal gangs.
factor market
a market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
circular flow diagram model
1. Households -buy & consume goods & services -own & sell flow of goods 2. Factor Market -Where households sell -Where firms buy 3. Firms -Produce & sell goods and services -Hire and use flow of goods 4. Products -Firms sell -Households buy
4 categories of factors of production
1. Labor -All types of work 2. Capital - Physical capital, such as computers, office buildings, and machine tools, used to produce other goods 3. Natural resources -land, water, oil, iron ore, and other raw materials that are used in producing goods 4. Entrepreneur -someone who operates a business
What are the possible shapes of PPF?
1. Linear PPF -O.C is constant 2. Concave/bow-shaped PPF -O.C is rising
In what ways does a free market economy differ from a centrally planned economy?
A centrally planned ecomony is an economy is an economy in which the gov't decides how economic resources will be allocated
What are the possible shifts in PPF?
1. Parallel shift -A rise in both quantity and quality of all factors in production 2. Outward shift - indicates economy is growing, 3. Inward shift - indicates economy is shrinking
What are the 2 types of markets?
1. The market for goods & services (product market) 2. The market for factors of production (FOP)
What are the 2 types of actors?
1. households / consumers / buyers 2. Firms / Producers / sellers
What is a circular-flow diagram, and what does it demonstrate?
A circular-flow diagram is a model and demonstrates illustrates how participants in markets are linked.
What is a free market?
A free market is a market with few government restrictions on how a good/service can be provided or sold or on how a factor of production can be employed
What is a production possibilities frontier?
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
What is absolute advantage?
Absolute advantage is 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
Can you think of anything that is not scarce according to the economic definition?
Because we do not have unlimited resources, everything is scarce
What is comparative advantage?
Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
What causes a PPF to shift outward?
Economic growth causes the PPF to shift outward
How can we show economic efficiency on a PPF? How can we show inefficiency?
Efficiency is shown on the PPF curve and occurs when all available resources are being fully utilized Inefficiency is shown below or inside the PPF curve and occurs when maximum output is not being obtained from the available resources
How can an individual or a country gain from specialization and trade?
Individuals and countries are better off specializing in producing goods and services they need by trading because they will have an equal amount of what they specialize in and what they get from trading
Opportunity cost=slope of PPF=
Rise/run
What is the basis for trade: absolute advantage or comparative advantage?
The basis for trade is comparative advantage
What are two main categories of participants in markets? Which participants are of greatest importance in determining what goods and services are produced?
The two main categories of participants in markets are households and firms. Households determine what goods and services are produced because they are the demanders of the market.
Production Possibilities Frontier (PPF)
a curve showing the maximum attainable combinations of two goods that may be produced with available resources & technology
Product market
are markets for goods and services ex: smartphones & Medical treatment
Factor market
are markets for the factor of production; the inputs used to make goods and services
Free market
exists when the government places few restrictions on how goods and services can be produced or sold or on how factors of production can be employed
If consumers demand less of a good, its price will
fall
The opportunity cost of any activity is the
highest-valued alternative that must be given ip to engage in that activity
Because of increasing marginal opportunity costs, PPF's are usually bowed
outward rather than straight lines
What are private property rights?
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property
property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
why do entrepreneurs play a key role in the market system?
they bring together factors of production
Points outside the PPF are
unattainable
What do economists mean by scarcity?
when unlimited wants exceed limited resources