Chapter 2 Flashcards
Sarcity
a situation in which the ingredients for producing things that people desire are insufficient to satisfy all wants at a zero price
exists because human wants always exceeds what can be produced
Scarcity is not…
Scarcity is…
…not a shortage or poverty.
…is a fact of life - it has, does, and always will exist.
Production
any activity that results in the conversion of resources into products that can be used in consumption
5 Factors of Production
resources used
- Land (Natural Resource) - includes all nonhuman gifts of nature, such as timber, fish, water, etc.
- Labor (Human Resource) - productive contributions made by individuals who work
- Physical Capital - all manufactured resources that are used for production. This includes buildings, equipment, machines, and improvements to land
- Human Capital - accumulated training/education of workers
- Entrepreneurship - human resource component that performs functions of raising capital, organizing, managing, and assembling other factors of production
Goods
all things from which individuals derive satisfaction or happiness
includes everything from iPhones to the air we breathe
Economic Goods
goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price
ex: cars, smartphones, etc
Bads
goods for which the desired quantity is much less than what nature provides at a zero price
ex: weeds
Services
mental or physical labor or assistance purchased by consumers
ex: assistance of physicians, lawyers, dentists, etc.
Relationship between Wants and Needs:
wants =/= needs
typically, when people say they “need” something, they really just “want” it.
Ex: “I need new clothes”
- said by somebody dying of exposure to elements…NEED
- said by somebody who just wants a new shirt…WANT
Opportunity Cost
the highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want
not all alternatives, just the next-best one
In economics, cost is always a…
…forgone opportunity.
Trade Offs
when somebody engages in any activity using any resource, they are trading off the use of that resource for one or more alternative uses
ex: Studying for economics class means trading off some time that would be spent studying for accounting class.
Production Possibilities Curve (PPC)
a curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality
note: some can be straight-line
PPC:
Production possibilities
any point on the line tells us the maximum quantity of one good or service that can be produced, given that a specific quantity of another is produced
In a PPC, a point outside the curve is…
…impossible to reach
In a PPC, a point inside the curve is…
…possible to reach, but indicates resources are not fully utilized. Also called “inefficient point”.
typically found during periods of high unemployment.
4 Assumptions Made When a PPC is Constructed:
- Resources are fully utilized
- Production takes place over a specific time period
- The resource inputs, in both quantity and quality, used to produce goods are fixed over this time period
- Technology does not change over this time period
Technology
the total pool of applied knowledge concerning how goods and services can be produced
think of this as the formula used to combine factors of production
Efficiency
the case in which a given level of inputs is used to produce the maximum output possible
alternatively, the situation in which a given output is produced at minimum cost
Inefficient Point
any point below the PPC, at which the use of resources is not generating the maximum possible output
Law of Increasing Additional Cost
when people take more resources and apply them to the production of any specific good, the opportunity cost increases for each additional unit produced
PPC:
In general, the more specialized the resources…
…the more bowed the PPC.
PPC:
If resources are equally suitable for both productions…
…the more straight-lined the PPC.
Economic Growth occurs because…
…increases in number of workers, productive investment in equipment, etc.
Consumption
the use of goods and services for personal satisfaction
ex: food, clothes, etc.
Why we make capital goods:
they enable us to produce larger quantities of consumer goods, or to make them less expensively than we otherwise could
ex: before fish are produced for the market, equipment like boats, nets, and poles are purchased first.
Forgoing current consumption:
we’re waiting for a future time where we will consume the rewards which will be reaped from the use of our capital goods
Trade-off between consumption goods and capital goods:
to have more consumer goods in the future, we must accept fewer consumer goods today
opportunity cost: more goods today = fewer goods tomorrow
Specialization
the organization of economic activity so that what each person (or region) consumes is not identical to what that person (or region) produces
ex: an individual may specialize in law or medicine. A nation may specialize in the production of coffee.
Comparative Advantage
the ability to produce a good or service at a lower opportunity cost, compared to other producers
this is always a relative concept
Absolute Advantage
the ability to produce more units of a good or service, using a given quantity of labor or resource inputs
equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs
Between absolute adv. and comparative adv., which one matters in determining how time is allocated?
Comparative Advantage
this is because it involves the high-valued alternative in a decision about time allocation
Division of Labor
the segregation of resources into different specific tasks. Results in a higher level of efficiency
ex: one automobile worker puts on bumpers, another doors, and so on…
