Chapter 2 - The Economic Problem Flashcards
A person has a comparative advantage in an activity if…
That person can perform the activity at a lower opportunity cost than anyone else.
It involves comparing opportunity costs
A personas an absolute advantage if…
That person is more productive than others.it involves comparing productivities
Economic Growth
The expansion of production possibilities
An increase in the standard of living
What are the two key factors that influence economic growth
Technological change and capital accumulation
What is technological change
It is a factor that influences economic growth that is the development of new goods and of better ways of producing goods and services
What is Capital Accumulation
Capital Accumulation is the factor that influences economic growth that is the growth of capital resources which includes human capital.
What is the cost of economic growth?
The opportunity cost of economic growth is less current consumption.
Economic growth is not free
We must decrease our production of consumption of goods and services in order to use resources in research and development and to produce new capital.
What creates economic growth
Investment in capital and technology creates economic growth and increases income.
What does the model of specialization and trade explain?
It explains different patterns of production across countries
(Graphs will compare industry to agriculture and have a PPF along that)
How to reap the gains from trade?
To reap the gains from trade, the choices of individuals must be coordinated.
How to achieve gains from trade
Two parties each produce the good in which they have an Economic Comparative advantage.
How to make the choices of individuals Economically Coordinated (in order to reap the gains from trade)
To make coordination work, 4 complimentary social institutions have evolved over time:
- firms
- markets
- property rights
- money
What is a firm in terms of economic coordination
A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services
What is a market in terms of economic coordination
It is an arrangement that enables buyers and sellers to get information and do business with eachother
What are property rights in terms of economic coordination
Are the social arrangements that govern ownership, use, and disposal of resources, goods or services.
