Econ Chap 3

Smith listed three reasons for productivity to increase with specialization, with each worker performing a single production task:

1. Repetition. The more times a worker performs a particular task, the more proficient the worker becomes at that task. 2. Continuity. A specialized worker doesn't spend time switching from one task to another. This is especially important if switching tasks requires a change in tools or location. 3. Innovation. A specialized worker gains insights into a particular task that lead to better production methods.

Centrally planned economy

An economy in which a government bureaucracy decides how much of each good to produce, how to produce the good, and who gets the good.

Market economy

An economy in which people specialize and exchange goods and services in markets

Comparative advantage

The ability of one person or nation to produce a good at a lower opportunity cost than another person or nation.

Absolute advantage

The ability of one person or nation to produce a good or service at a lower resource cost than another person or nation

outsourcing or offshoring

When a domestic firm shifts part of its production to a different country

Adam Smith noted that specialization

actually increased productivity through the division of labor.

Although it appears that markets arose naturally, a number of social and government inventions have made them work better:

contracts, insurance, patents, accouting rules

Market failure

happens when a market doesn't generate the most efficient outcome. ex) Pollution, Public goods, Imperfect information. Imperfect competition.

Patents

increase the profitability of inventions, encouraging firms to develop new products and production processes.

Accounting rules

provide potential investors with reliable information about the financial performance of a firm.

Insurance

reduces the risk entrepreneurs face.

Contracts

specify the terms of exchange, facilitating exchange between strangers.