Chapter 2 - THE ECONOMIC PROBLEM Flashcards
PPF (Production Possibilities Frontier)
graph that shows the maximum combinations of two or more products that can be produced using available resources and technology
Tradeoff along the PPF
A tradeoff occurs along the production possibilities frontier (PPF) when moving from one point on the curve to another, giving up some of one good to produce more of another
Productive efficiency
When it’s impossible to produce more of one good without decreasing production of the other good. This means that the economy is operating on the PPF
Opportunity Cost (points on the PPF, Points inside vs outside of the PPF)
points on the PPF represent efficient production where all resources are fully utilized, while points inside the curve indicate inefficient production with underutilized resources, and points outside the curve are unattainable with current resources
Production and Marginal Cost (MC)
marginal cost is the change in total production cost that comes from making or producing one additional unit. MC=slope
Preferences and Marginal Benefit (MB)
Preferences are a person’s likes and dislikes, and marginal benefit (MB) is the benefit gained from consuming or producing one more unit of a good or service
Allocative Efficiency when MC = MB
occurs when the marginal benefit (MB) of a good or service is equal to the marginal cost (MC) of producing it. equilibrium=allocative efficiency.
Gains from Trade (Trade is mutually beneficial)
when countries specialize in producing goods where they have a comparative advantage and trade with each other, both countries can benefit and experience a net increase in their overall welfare
Comparative Advantage (based on lower opportunity cost)
when a country, business, or individual can produce a good or service at a lower opportunity cost than another producer
Absolute Advantage (based on lower resource cost or higher productivity)
An absolute advantage arises when a country has a good with a lower unit labor requirement and a higher labor productivity than another country
absolute advantage vs comparative advantage
absolute advantage refers to a producer’s ability to produce more of a good than competitors, while comparative advantage considers the opportunity cost of producing a good
Circular Flows through Markets
an economic model that shows how money moves through a market economy, from producers to households and back again
Role of prices in the market to achieve allocative efficiency
acting as a signal that communicates resource scarcity and guiding producers and consumers in their decision-making process
