MACRO Chapter 2

Law of increasing oppurtunity cost

holds that as an economy moves along its production possibilities curve in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase.

Specialization

implies that an economy is producing the goods and services in which it has a comparative advantage.

Key Takeaways 2.2

A production possibilities curve shows the combinations of two goods an economy is capable of producing. The downward slope of the production possibilities curve is an implication of scarcity. The bowed-out shape of the production possibilities curve results from allocating resources based on comparative advantage. Such an allocation implies that the law of increasing opportunity cost will hold. An economy that fails to make full and efficient use of its factors of production will operate inside its production possibilities curve. Specialization means that an economy is producing the goods and services in which it has a comparative advantage.

mixed economies

Between these two categories lie mixed economies that combine elements of market capitalist and of command socialist economic systems.

Efficient Production

When an economy is operating on its production possibilities curve, we say that it is engaging in efficient production.

Factors of production

Choices concerning what goods and services to produce are choices about an economy's use of its factors of production, the resources available to it for the production of goods and services.

Key takeaway 2.1

Factors of production are the resources the economy has available to produce goods and services. Labor is the human effort that can be applied to the production of goods and services. Labor's contribution to an economy's output of goods and services can be increased either by increasing the quantity of labor or by increasing human capital. Capital is a factor of production that has been produced for use in the production of other goods and services. Natural resources are those things found in nature that can be used for the production of goods and services. Two keys to the utilization of an economy's factors of production are technology and, in the case of a market economic system, the efforts of entrepreneurs.

Full employment

If all the factors of production that are available for use under current market conditions are being utilized, the economy has achieved full employment. An economy cannot operate on its production possibilities curve unless it has full employment.

inefficient Production

If it is using the same quantities of factors of production but is operating inside its production possibilities curve, it is engaging in inefficient production. Inefficient production implies that the economy could be producing more goods without using any additional labor, capital, or natural resources.

Human Capital

Skills a worker has as a result of education, training, or experience that can be used in production are called human capital.

Key Takeaways 2.3

The ideas of comparative advantage and specialization suggest that restrictions on international trade are likely to reduce production of goods and services. Economic growth is the result of increasing the quantity or quality of an economy's factors of production and of advances in technology. Policies to encourage growth generally involve postponing consumption to increase capital and human capital. Market capitalist economies have generally proved more productive than mixed or command socialist economies. Government plays a crucial role in any market economy.

Economic Growth

The process through which an economy achieves an outward shift in its production possibilities curve is called economic growth.

Any resource is capital if it satisfies two criteria:

The resource must have been produced. The resource can be used to produce other goods and services.

Utility

The value, or satisfaction, that people derive from the goods and services they consume and the activities they pursue

Capital

a factor of production that has been produced for use in the production of other goods and services. Office buildings, machinery, and tools are examples of capital. Stones for swords. Score of concert b/c its used to produce more.

Entrepreneur

a person who, operating within the context of a market economy, seeks to earn profits by finding new ways to organize factors of production.

Natural Resources

are the resources of nature that can be used for the production of goods and services 1. Found in nature 2. Can be used for production of goods/servicves.

comparative Advantage

comparative advantage in producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other.

Financial Capital

includes money and other "paper" assets (such as stocks and bonds) that represent claims on future payments. These financial assets are not capital, but they can be used directly or indirectly to purchase factors of production or goods and services.

production possibilities curve

is a graphical representation of the alternative combinations of goods and services an economy can produce. It illustrates the production possibilities model.

market capitalist economy

resources are generally owned by private individuals who have the power to make decisions about their use. A market capitalist system is often referred to as a free enterprise economic system.

command socialist economy

the government is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production

Labor

the human effort that can be applied to the production of goods and services. People are the labor.

Technology

the knowledge that can be applied to the production of goods and services.