Chapter 2: Economic Tools and Economic Systems Flashcards
Opportunity Cost
the value of the best alternative forgone when an item or activity is chosen
rationally choose the most valued alternative
Economists assume that people
the expected marginal benefit of gathering more information about your option exceeds the expected marginal costs
you assess alternatives as long as
your alternatives
Opportunity cost depends on
Subjective
Opportunity cost is not always an exact measure and can be subject
Leave out some important elements like time involved
The money measure of opportunity cost may
Sunk cost
a cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions
those costs that are affected by the choice
Economic decision makers should consider only
irrelevant
Sunk costs have already been incurred and are not affected by the choice, so they are
The Law of Comparative Advantage
the individual firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good
Absolute advantage
the ability to make something using fewer resources than other producers use
Comparative advantage
the ability to make something at a lower cost than other producers face
uses the fewest resources, what else those resources could produce
Absolute advantage focuses on _______________who , but comparative advantage focuses on ________________
conform to the law of comparative advantage
Resources are allocated most efficiently across the country and around the world when production and trade
Barter
the direct exchange of one product for another without using money
Medium of exchange
money, coins, bills, checks, and debit cards
Interdependence
Specialization and exchange create more __________ in an economy
Specialization
Adam Smith said that ___________ is limited by the extent of the market
Division labor
breaking down the production of a good into separate tasks
Specialization of labor
focusing work effort on a particular product or a single task
Takes advantage of individual preferences and natural abilities
Allows workers to develop more experience at a particular task
Reduces the need to shift among different
Permits the introduction of labor saving machinery
What are advantages of specialization?
Who owns the resources
What decision making process is used to allocate resources and products
What types of incentives guide economic decision makers
What questions are asked to distinguish between economic systems
pure capitalism
an economic system characterize by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets
Private property rights
an owner’s right to use, rent, or sell resources or property
Pure command system
an economic system characterized by the public ownership of resources and centralized planning
Mixed system
an economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are regulated by government
