Chapter 3- Value Creation Through Production Flashcards
The production process does what?
It turns inputs into consumable outputs
Consumable outputs are:
goods and services
Resource/input #1- Natural resources/land
tangible but not produced by anyone, cost: rent
Resource/input #2- Labor
physical and mental talents of individuals applied to production, cost: wage
Resource/input #3- Capital
produced means of production, cost: interest
Resource/input #4- Entrepreneurship
risk taking/risk bearing and innovation, cost: profit
technology
the way that inputs are combined to produce outputs
make work fallacy
the idea that jobs are valuable whether or not the production from the labor adds value (ex: using shovels to dig a canal in India instead of bulldozers to create more jobs)
Production Possibilities Frontier (PPF)
simplified way of understanding the production trade-offs that are made in an economy
The PPF assumes what three things?
- Only 2 goods are produced over some period of time
- A fixed amount of resources are used
- A given technology is used
Law of increasing opportunity cost (LIOC)
as one or more goods is produced, the opportunity cost of producing a unit of that good rises in terms of which good must be sacrificed- happens when applying the Principle of Optimal Arrangement to production of 2 goods where resources are not all the same
Economic growth comes from:
When:
1. more or better resources
2. better technologies
result in an expansion of an economy’s productive capabilities
Wealth depends on:
- Quantity of resources
- Quality of resources
- Freedom to use those resources
The invisible hand of self-interest
leads people to do more good (unintentionally) than people who are purposefully trying to serve others
What does Bastiat say about middlemen?
all middlemen add value or else they would not exist (even if that value is convenience)
What did Adam Smith say about the wealth of a country?
wealth of a country lies in lands, houses, and consumable goods (how much stuff country has)
In what ways is value created?
through trade and production
What does Bastiat say will control grain profits? What will control costs?
competition will bid profits down and will also give incentive to keep cost low
Grain would go to regions of famine first because…
they value it more than other regions, so individuals selling grain will make the most money off their grain there
Can you lower cost by using force?
by lowering the cost of one thing, you simply shift that cost to the amount that must be paid to actually use force, so no not really
