Chapter 2 - Economic Models: Trade-offs And Trade Flashcards
What is created to understand real life situations
A model
What is the production possibility frontier (PPF)
An illustration of trade-offs facing an economy that produces only two goods. Shows that maximum of one good that can be produced given production for the other good
When is an economy efficient on production
When there are no missed opportunities in production
When is an economy inefficient in production
When it can produce more of one good without producing less of another
When is the economy efficient in allocation
When it allocates resources so that consumers are as well off as possible
What two things does efficiency in an economy require
Efficiency in allocation and production
What is economic growth
An expansion in the economy’s production possibilities
What causes economic growth
- An increase in factors of production: resources used
- Better technology: the technological means for producing
What is a comparative advantage
A lower opportunity cost compared to other nations or people
What is absolute advantage
When a country can produce more of both goods and services
Why shouldn’t absolute and comparative advantage be confused
Because although one country can produce more of both goods doesn’t mean they can do it cheaper. They may still be better off with trade
Positive economics
The branch of economic analysis that describes the way the economy actually works
Normative economics
Makes prescriptions about the way the economy should work
