CHAPTER 2 Flashcards
PPF
production possibilities frontier. tells us the maximum quality of good A that can be produced for each quantity of good B produced(vice versa)
point outside of frontier
unattainable with the technology and resources at the economy’s disposal
increasing opportunity cost
greater oc along the PPF. “the law of increasing opportunity cost. the more of sth we produce, the greater the OC of producing even more of it.
The law of increasing opportunity cost
Most resources are better suited to some purpose than others.
operating within the PPF
resources are not being used in the most productive way
productive efficiency
absence of any productive inefficiency
examples of productive inefficiency
empty seats on an airline flight
starbucks -> moving whipped cream and caramel drizzle closer to reduce preparation time
Operating within ppf by recession
slowdown in economic activity, many resources are idle. workers without jobs
factories shut down- inefficient use of resource(capital)
Economic growth(PPF)
greater productivity, ppf outwards due to
- increase in productive capacity of economy
- technological advance
Consumption vs Growth(capital)
capital is a resource to produce goods and service
itself is a resource, using resources!
Capital is long lasting, but resources this year is sacrificed. = less consumer goods.
How to produce more goods and services in the future?
shift resources towards Research and Development and capital production.
Economic interdependance
everyone is producing goods and service for other people.
specialization
a method of production in which each person concentrates on a limited number of activities
exchange
the act of trading with others to obtain what we desire
specialization and exchange
enables us to enjoy a greater production and higher living standards than would otherwise be possible. as a result, all economies exhibit high degrees of SnE
Gains from specialization and exchange
- development of expertise
- minimise downtime
- comparative advantage
Comparative advantage
the ability to produce a good or service at a lower opportunity cost.
absolute advantage
absolute advantage by using less resources to produce goods and services than the other individual
Total production of every good or service will be greatest when
individuals specialize according to comparative advantage.
resource allocation problem
deciding how society’s scarce resources will be divided among competing claims and desires
resource allocation questions
- which goods and service should be produced with society’s resources?
- how should they be produced? how much capital used
- who should get them?
- -> politics.
Traditional Economy
resources are allocated according to long lived practices from the past
Command Economy
resources are allocated mostly by explicit instruction from some higher(central) authority
ex) North Korea, Cuba
Market Economy
resources are allocated through individual decision making.
freedom of choice is proportional to the amount of resource one controls.
how are resources allocated in a market economy?
market price
Market
A group of buyers and sellers who have the potential to trade with one another.
Price
The amount of money a buyer must pay to a seller for a good or service. Confronts individual decision makers with the costs of their choices.
price is not the same as cost
cost = total sacrifice needed to buy a good, but price is a significant part of cost
OC of society making a car is
converted to an OC to an individual
important
when resources are allocated by the market, and people must pay for their purchases, they are forced to consider the opportunity cost to society of the goods that they consume. In this way, markets help to create a sensible allocation of resources.
Market and Capitalism
market describes how resources are allocated
capitalism is a way resources are owned.
capitalism
resources are owned by private citizens. free to sell or rent
socialism
resources are owned by the state i.e. Soviet Union
private ownership of resources incentivises
individuals to make careful decision
trade in market is voluntary
no trade is made unless both sides benefit. resources are used to make others better off.
producers income only when
product is useful and demanded
buyers buy things only when
it is the most incentive
mixed economics
market economy in which the government plays an important role in allocating resources
why is market simple and complicated at the same time?
simple - no rules or command to be memorized. no concern about allocation of resources.
complicated - resources are allocated indirectly. Hard to predict individual behavior and allocation of resources.
