Micro Chapter 2 - Trade Offs, Comparative Adv, and Market System

In a simple circular-flow model, there are flows of ___________ and flows of ____________-

- Factors of production; goods and services - Funds received from the sale of factors of production; spending on final goods and services

If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?

An independent court system

In what ways does a free market economy differ from a centrally planned economy?

Centrally Planned economies have extensive government controls

In a free market system, which group brings together the factors of production in order to producing goods and services?

Entrepreneurs

Factor Markets

Factors of production, such as labor, capital, natural resources, and entrepreneurial ability are traded

According to Adam Smith, what is necessary for the proper functioning of the market system?

For markets to work, people must be free to pursue their self-interest

If a country has a comparative advantage in the production of a good, then that country....

Has a lower opportunity cost in the production of that good.

Opportunity Cost

Highest valued alternative that must be given up to engage in any activity

What is the outcome of enforcing contracts and property rights in a market system?

Increased economic activity

According to Adam Smith....

Individuals usually act in a rational, self-interested way.

Product Markets

Markets where goods such as computers or services such as medical treatment are offered

Free Market

One where the government does not control the production of goods and services

What instrument is the invisible hand used to direct economic activity?

Price

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, and entrepreneurial ability.

What are copyrights designed to do?

Protect intellectual property rights

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

For a market system to work, individuals must..

Take risks and act in rational, self-interested ways

If the opportunity cost of producing one good increases as more of that good is produced, then

The PPF is bowed out.

Absolute Advantage

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

What happens if a country produces a combination of goods that uses all of the resources available in the economy?

The country is operating on its production possibilities frontier

What is the role of an entrepreneur?

To operate a business that produces a good or service, to bring together the factors of production, and to take risks

Property Rights

are guaranteed by two amendments to the U.S. Constitution

In the circular flow diagram showing how a market system works,

income flows to households through factor markets

What creates economic growth, that is, sfits the PPF outward?

increase in the available labor, increase in technology that affects production, and increase in available natural resources

Which is critical to the success of a market system?

to allow individuals or firms to have exclusive use of their property