Chapter 1 - Basic Economics Concepts Flashcards
5 key elements of a market economy
Freely determined prices Property rights and incentives Freedom to trade Role for government (defense and protection) Role of private organizations
What roles do prices play in a market economy?
1- Prices serve as signals about what should be produced and consumed
2- Prices provide incentives to people to alter their production or consumption
3- Prices affect the distribution of income, (or who gets what in the economy).
Financial Crises
Disruptions to financial markets which make it difficult for people and business firms to borrow and obtain loans
Recession
A decline in production and employment that lasts for six months or more
The 3 fundamental questions of a society
What to produce?
How to produce it?
For whom to produce?
Opportunity Cost
The value of the next-best foregone alternative that was not chosen because something else was chosen
Gains from trade
Improvements in income, production or satisfaction owing to the exchange of goods and services
Specialization
A concentration of production effort on a single specific task
Division of labor
The division of production into various parts in which different groups of workers specialize
Comparative advantage
A situation in which a person or group can produce a good or service at a lower opportunity cost than another person or group
International trade
The exchange of goods and services between people or firms in different nations
For every choice that has been made, there is also an __________________ of not doing one thing because another thing has been chosen
opportunity cost
Gains from trade occur because trade permits ______________ through the _______________
specialization; division of labor
Production possibilities
Alternative combinations of production of various goods that are possible, given the economy’s resources
Increasing opportunity costs
A situation in which producing more of one good requires giving up an increasing amount of production of another good.`
Production possibilities curve
A curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources.
Market Economy
An economy characterized by freely determined prices and the free exchange of goods and services in markets.
Command Economy
An economy in which the government determines prices and production. (aka a “centrally planned economy”
Market failure
Any situation in which the market does not lead to an efficient economic outcome and in which the government has a potential role
Government failure
A situation in which the government fails to improve on the market or even makes things worse.
Economic production is _________ if the economy is on the production possibilities curve.
efficient
Production is _______________ if the economy is inside the production possibilities curve
inefficient
Points outside the production possibilities curve are ____________ .
impossible
How can financial crises cause inefficiencies?
An inability to obtain loans causes people and firms to reduce their purchases of goods and services. As a result, producers cut production
