Chapter 2 Flashcards
What does the scarcity principle entail?
This entails that the opportunity cost of spending more time on one activity, reduces the amount of time you have to spend on other activities. However, this also shows us that people may be better off concentrating on the activities that they are strongest at in comparison to others.
This follows the principle of parenting where the child is bad at maths but is good at tennis. Don’t get the child a maths tutor, but book more tennis lessons. This can be related to the scarcity principle- this scares the shit out of parents if the child no longer wants to play tennis.
Define and explain an absolute advantage
This is that one person has an absolute advantage over another in terms of efficiency. It is measured on the efficiency of earning of one person against another in the span of an hour.
If someone can perform a task in 20 minutes where the other person can perform the same task in 10 minutes and the earnings are equal per task, then the person that can complete the task in 10 minutes has an absolute advantage as they will earn more money.
Define and explain an comparative advantage
This is based on the opportunity cost- this may be in terms of ratio of time in completing 2 tasks, or could be the number of something collected between 2 or more activities- this is focused more towards the comparison between tasks that the individual completes as a whole.
Explain the principle of comparative advantage-
Everyone does best when each person concentrates on the activities they perform the best in. Comparative advantage is generally due to level of education, training, or experience. There are minor details which may also improve countries economies based on comparative advantages, such as English being the universal language, meaning English-speaking countries are put to an advantage.
Due to comparative advantages and specialization, these allow economies to flourish and produce more than if the people within the economy were to produce a little bit of everything.
What is the production possibility curve? (PPC)
The PPC is a graph which describes the maximum amount of one good that can be produced for every possible level of production of the other good. This graph teaches us that the downward slope represents the scarcity principle, once again where having more of one good leads to having less of another.
Any point that lies either along the PPC or within the PPC is known as an attainable point. If anything were to be located outside of the PPC point,
What is an attainable point?
This is found in a PPC graph which means a product within the PPC curve or along it can be produced with available resources. If the product exceeds or lies outside of the PPC curve, then it will be known as unattainable.
Where in a PPC graph is the product considered an inefficiency?
These are the points which lie within the curve and this means there are existing resources which would allow for production of more of at least one good without sacrificing the production of another good.
Where in a PPC graph is the product considered an efficient point?
These are the points which are located on the line of the curve. This means that if they were to produce any more of one good, this would mean they would have to reduce the amount of the other good.
What shifts the economy’s PPF
Economic Growth
Examples:
- Improvements in knowledge and technology.
- Investments into new factories and equipment.
- Population density or population growth.
What is economic growth?
This is an outward shift in the economy’s PPF, meaning the curve will grow larger. It can be due to the increases in the number of productive resources available or from improvements in knowledge or technology that render existing resources more productive.
Opportunity cost definition
More efficient if each specializes in the activity in which holds a comparative advantage.
What are the differences between the origins of comparative advantage?
Micro: Individual- Talent, education, training, experience
Macro: Land, labor, capital, entrepreneurship, knowledge, natural resources, political restrictions, etc…
