Chapter 1: Economic Issues and Concepts Flashcards
How do we calculate productivity growth?
(output or income)/(Hours of work effort)
What are the three typical types of factors of production, and what are examples of each?
- Land
- all natural endowments: forests, lakes, crude oil, minerals)
- Labour
- all mental and physical human resources)
- Capital
- all manufactured aids to production tools, machinery, and building)
What are the two types of production, and how are they different?
- Goods
- tangible, e.g. car
Services
- intangible, e.g. education
What is opportunity cost?
The value of the next best alternative that is forgone when one alternative is chosen.
What is a Production Posibility Boundary?
The boundary curve of all possible combinations of Investment Good (Beer) versus Consumption Good (Pizza)
In this case, you are investing (not buying) Beer money to Consume (buy) Pizza
Any combination of points BELOW the PBB represents a combination that is attainable with current resources
What is Resource Allocation?
The combination and configuration of resources which determines the produced quantities of various goods (X machines and Y workers)
What is the effect of economic growth on the PPB?
An outward shift of the PPB, meaning more configurations are now attainable
What is Adam Smith’s key idea about the nature of market economies?
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages”
The person isn’t selling you goods because he loves you, it’s because he needs to get paid to satisfy his own interests
What did early economist note about an economy based on free-market transactions?
It is self-organizing (invisible hand)
The collective outcome of independently acting consumers and producers
How do you define market efficiency?
How proficiently a nation’s available resources are organised, in a way that produces the goods/services that people want to buy, and does so with the fewest possible resources
What are 4 baseline facts about market economies?
- Individuals generally pursue their own self-interest
- Individuals respond to incentives
- Sellers want to sell more when prices are high
- Buyers want to buy more when prices are low
What are the 3 types of decision makers who operate in any economy?
Consumers
Producers
Government
What is a marginal decision?
A decision as to whether or not they will be better off by buying or selling a little more/less of any given product
Maximizing consumers/producers make marginal decisions to achieve their objectives
What is Specialization of labour?
The allocation of jobs to different people
More efficient than self-sufficiency because
- Individual abilities differ - comparative advantage
- Focusing on one activity leads to improvement
What is Division of Labour?
Breaking up of a production process into a series of specialized tasks
