Chapter 2 Flashcards
Other things equal
only one variable changes at a time, all other factors remain constant
other things equal simplifies
the world to make it easier to understand and study
model
simplified representation of real situation that is used to better understand real life situations (generalization of world)
production possibility frontier model
illustrates trade offs facing economy that produces only two goods, shows maximum quantity of one good that can be produced given quantity of other good
does everyone benefit from trade
mostly everyone benefits from international trade
describe production possibility graph ex what combinations are feasible and efficient
shaded=possible, not efficient
line=possible, efficient
above line= not possible
Macro
is measurement obsession, how much country can produce with limited (scarce resources) and trade offs they make
Efficiency of resources in production of g/s and opportunity cost
no way to produce more of good without producing less of another good, produce max quantity can produce with given, no left overs,
opportunity cost
the value or cost of good to produce the other good
opportunity cost thought process
what am i foregoing to achieve more of the other product.
PPF increasing opportunity cost shape, and describe resource efficiency as more goods are produced
shape is concave, the more we make the more each one costs, resources not completely adaptable to alternative uses
economic growth allows for a country to produce…
outside its PPF, growing ability of economy to produce g/s
what causes economic growth
increase in factors of production, better technology
factors of production
Land, Human capital, physical capital, Labour
land
gifts of nature, all natural resources
labour
mental activity and physical actions used to produce g/s, physical abilities of workforce
physical capital
manufacturing aids used in production of g/s
human capital
educational achievements and skills of the labor force
Comparative advantage rule when purchasing and producing goods
produce the things you are good at, buy everything else from others when comparing countries for trade,
How do you know if country/individual has comparative advantage
countries/individuals who have comp advantage will have a lower oppt cost for producing that specific good
Absolute Advantage in comparison of production of 2 countries or people
comparing max good country or individual can produce if they focus all resources on one particular good
barter
the direct exchange of goods and services without any money involved
what is the diagram that shows the flow of transactions and money
circular flow diagram
household definition in circular flow diagram
person or group of people that share income
firm
organization that produces goods and services for sale
Describe Circular Flow diagram (Firms 3)
- Firms sell g/s they produce to households, in markets for g/s. 2. Firms buy resources they need to produce goods and services in factor markets. 3. Firms gets income and money.
Describe Circular Flow diagram (households)
- Households pay for goods and services, rent capital, and provide factors to the firms.
positive economic statement
describes the way the economy actually runs THE FACTS
normative economic statement
describes the way the economy SHOULD run, THE OUGHT TO BE
why is PPF curve down and not constant
explain about diminishing returns when resources are moved
some resources are better suited for producing one good then another or are not as productive at producing both goods the same, so there are diminishing returns when moving such resources away from producing what they are best suited for
resource endowments
how much of the resource factors a country has
when low developed countries trade with developed countries, can low developed countries have comp advantage and do they benefit from trade as well
low developed countries can have com advantage in some products, and can benefit from trade as well
Allocative Efficiency and representation on PPF
optimal distribution and allocative of resources of g/s economy prefers, represented by specific points on PPF
productive efficiency and representation of PPF
concerns the max g/s an economy produces represented by all the points on the line of PPF
economy’s income distribution is they way in which….
total income is divided among the owners of the various factors of production
