CoreMicroEconomics_CH_2 Flashcards
What are the three basic questions that must be answered for any economy?
WHAT - What goods and services are to be produced?
HOW - How are these goods and services to be produced?
WHO - Who will receive these goods and services?
What is production?
The process of converting resources (land, labor, capital, and entrepreneurial ability) into goods and services
What are resources?
Productive resources include land, labor, capital (manufactured products used to produce other products) and entrepreneurial ability (the combining of other factors to produce products and assume the risk of the business)
What is land?
Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment to land as a resource is called rent
What is labor?
Includes the mental and physical talents of individuals who produce products and services. The payment to labor is called wages
What is capital?
Includes manufactured products such as welding machines, computers, and cell phones that are used to produce other goods and services. The payment to capital is called interest
What is an entrepreneur?
Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. In return, they receive profits for this effort
Production efficiency vs allocative efficiency?
Production efficiency requires that products be produced at the lowest cost. Allocative efficiency occurs when the mix of goods and services produced is just what society wants (it would be inefficient to be producing vinyl records in the age of digital music players)
What is production possibilities frontier (PPF)
Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are feasible, and those outside of the frontier are unattainable
What is opportunity cost in a production possibility frontier?
The cost paid for one product in terms of the output (or consumption) of another product that must be forgone. So the price an economy or individual must pay, measured in units of one product, to increase its production of another product
How can the production possibility frontier have an outward shift?
Expansion in resources (shift the frontier outward for all commodities) or improvements in technology (allows previous output to be produced using fewer resources, thus leaving some resources available for use in other industries)
What are the sources of economic growth that result in higher standards of living (per capita GDP)?
Greater investment by business (physical capital), higher level of education (human capital), high levels of research and development, lower inflation rates, reduced tax burdens, and greater levels of international trade
How can economic growth be enhanced?
Increasing the quantity or quality of labor available for production. Population growth, caused by higher birthrates or immigration, increases the quantity of labor available. Investments in human capital improve labor’s quality. Greater capital accumulation further improves labor’s productivity and thus increases growth rate
