Chapter 2: The Economic Problem Flashcards
what is a trade-off
increase in production of one good, must decrease our production of something else (trade-off)
Production Possibilities Frontier (PPF)
boundary between those combinations of goods & services that can be produced & those that cannot
Points outside the frontier are _______.
Points Inside the frontier are ______.
- unattainable
- attainable
Production efficiency
producing goods & services at the lowest possible cost
Unused resources are ____.
Idle
E.g. leave factories idle or workers unemployed when they could be working
Resources are _misallocated____ when _____.
they are assigned to tasks for which they are not the best match
E.g. assign pizza chefs to work in cola factory; more production is done if roles assigned accordingly
RECAP: what is opportunity cost? Explain using PPF
of an action is the highest valued alternative forgone
2 goods along the PPF - one alternative is forgone for some quantity of the other
E.g. produce more pizzas we must produce less cola; opportunity cost of producing an additional pizza is the cola we must forgo
How does opportunity cost increase?
increases as quantity of good produce increases
Opportunity cost is a ____.
ratio - decrease in the quantity produced of one good divided by the increase in the quantity
What is allocative efficiency?
goods & services produced at the lowest possible cost & in quantities that provide the greatest possible benefit
RECAP: what is marginal cost?
opportunity cost of producing one more unit of it
E.g. as quantity of pizzas produced increases, the PPF gets steeper & marginal cost increases
How is the marginal benefit measured?
Measure by the most that people are willing to pay for an additional unit of it
What is the principle of decreasing marginal benefit?
more we have of a good/service, the smaller the marginal benefit & less willing to pay for an additional unit
Marginal benefit decreases due to_____
variety - more we consume, the more tired we get & prefer to switch to something new
E.g. if pizza is hard to get & you can only have a few slices a year, may be more willing to pay a high price for additional slices
What is a specialization?
Producing only one good or a few goods
What is the difference between comparative advantage & absolute advantage
Comparative Advantage - person has it in an activity if they can perform the activity at a lower opportunity cost than anyone else
Absolute Advantage - person who is more productive than others (compares production per hour) - can produce more of something than others using the same amount of resources
What is economic growth?
Expansion of production possibilities
Increases our standard of living; doesn’t overcome scarcity & avoid opportunity cost
Where does economic growth originate from?
Tech change - development of new goods & better ways of producing goods & services
Capital Accumulation - growth of capital resources (i.e. human capital)
How do we expand production possibilities?
devote fewer resources to producing current consumption goods & services & allocate resources to accumulating capital & developing new tech
List 2 economic coordination sx
- Central Economic Planning
- Decentralized Coordination
Describe why central economic planning is a poor coordination sx
○ Planners don’t know people production possibilities & preferences
○ Production occurs inside PPF (inefficient); wrong things produced
What are 4 aspects that make decentralized coordination the best choice sx?
Firms
Markets
Property Rights
Money
What are firms?
economic unit that hires factors of production & organizes them to produce & sell goods & service
E.g. Loblaws buys buildings, equips them w/ shelves, checkouts, & workers; Loblaws directs labour & decides what to buy & sell
What are markets?
enables buyers & sellers to get info & do business w/ each other
E.g. world oil market - network of producers, consumers, & brokers who buy & sell oil
Work only when property rights exists
What are property rights & list 3 diff types?
social arrangement that governs ownership, use & disposal of anything that people value
- Real property - land/buildings, durable goods
- Financial Property - stocks, bonds, money
Intellectual property - creative efforts (books, music, inventions)
- Protected by copyright
- Creates incentive to specialize & produce goods/services in comparative advantage
What is money?
means of payment
