ECON 101 - Chp. 2 Flashcards
Define the production possibilities frontier
the boundary between those combinations of goods + services that be produce and those that cannot
what limits the production possibilities frontier
the total resources and technology available
how does PPF illustrate scarcity
points outside the frontier are unattainable - describes wants that can’t be satisfied
what does it mean for the points on or inside the PPF?
these points are attainable.
points on the PPF are when we use the all available resources + technology - efficient
points inside are when we do not use all available resources + technology - which is inefficient
why are points inside the PPF considered inefficient?
because resources are unused and/or misallocated when not used at the most efficient points as fewer needs and wants are met.
regarding the PPF, we are giving up more than necessary of 1 good to produce a given quantity of the other good.
describe how we can achieve production efficiency
if we produce goods + services at the lowest possible cost.
why do we strive to produce on the PPF?
most efficient and where we incur the lowest possible cost of production (maximize the largest amount of wants + needs).
define when a resource is unused
when they are idle but could be working
define when a resource is misallocated
when they are assigned to tasks for which they are not the best match.
describe how the opportunity cost is a ratio? in relation to the PPF?
it’s the decrease in the quantity produced of 1 good divided by the increase in the quantity produced of another good as we move along the PPF
Why is the PPF bowed outward? relate it to opportunity cost
resources are not all equally productive in all activities - opportunity cost increase as more of 1 good is increased
define allocative efficiency
when goods + services are produced at the lowest possible cost + in quantities that provide the greatest possible benefit
define marginal cost of a good or service
the opportunity cost of produce one more unit of it
how to calculate the marginal cost on the PPF?
from the magnitude of the slope of the PPF - putting it into a vertical bar chart to see the slope
define the marginal benefit of a good or service
the benefit received from consuming 1 more unit of it
what does the production possibilities describe?
the limits or constraints on what is feasible
define the marginal benefit curve
a curve that shows the relationship ebtween marginal benefit of a good and the quantity consumed of that good
is PPF and marginal benefit curve related?
no, they are unrelated
How can we measure marginal benefit of a good or service
Willingness to pay - the most people are willing to pay for an additional unit of it
Define the principle of decrease marginal benefit
the more we have of any good or service, the smaller the marginal benefit and the less we are willing to pay for an additional unit of it.
Define the point of allocative efficiency
the point on the PPF that meets the marginal cost and marginal benefit
- satisfies/maximizes the most wants + needs of people for 2 different goods or services.
define specilalization
producing only 1 or a few goods
define comparative advantage (in an activity)
if that person can perform the activity at a lower oppourtunity cost than anyone else
describe where differences in oppourtunity costs arise?
differences arise from differences in individual abilities and in the characteristics of other resources.
define absolute advantage
a person who is more productive than others
absolute vs comparative advantage - difference in what they compare
absolute - compares productivity (production per hour)
comparative - compares the oppourtunity cost
describe a situation where the PPF is linear and not bowed outward
when the oppourtunity cost stays constant
define economic growth
the expansion of production possibilities
where does economic growth come from?
technological change + capital accumulation
define techonological change
development of new goods + of better ways of producing goods + services
define capital accumulation
the growth of capital resources - includes human capital
economic growth characteristics
increases our standard of living but its doesn’t overcome scarcity and avoid oppourtunity cost
What’s the oppourtunity cost of economic growth?
decrease of our production of the consumption of goods + services aka less current consumption
what’s a benefit of economic growth in terms of consumption?
brings benefit in the form of increased consumption in the future.
how does the pattern of of what is produced change from the expansion of production possibilities? Why?
goes from mainly agriculture to industry/manufacturing to services.
due to more resources allocated efficiently for people to meet more of their wants + needs more satisfactorily
what’s happens in terms of the PPF when the workforce chooses to stay unemployed?
the economy moves inside its PPF.
Why does Central economic planning work badly?
economic planners do not know people’s production possibilities + preferences so production ends up inside the PPF and the wrong things are produced.
What type of coordination works best?
decentralized coordination
what are the 4 complementary social institutions decentralize coordination needs?
- firms
- markets
- property rights
- money
define a firm
an economic unit that hires factors of production + organizes them to produce + sell goods + services
what’s a characteristic of a firm
firms coordinate a huge amount of economic activity + there’s a limit to the efficient size of a firm
Define market in terms of econ
any arrangement/network that enables buyers + sellers to get info and to do business with each other
What’s a characteristic of a market?
can only work when property rights exist
Define property rights
the social arrangement that govern the ownership, use, and disposal of anything that people value
define real property
land + buildings - physical infrastructure + durable goods (plants + equipment)
Define financial property
stocks, bonds, money in the bank
Define intellectual property
intangible product of creative effort - protected by copyrights + patents
What’s a characteristic of when property rights are enforced?
people have the incentive to specialize + produce goods/services where they have a comparative advantage in.
As well, where people can steal the production of others, resources are devoted not to production but to protecting possessions
Define money in econ
any commodity or token that is generally acceptable as a means of payment
Why do we use money in markets?
makes tracing in markets more efficient than bartering
How is a circular flow of expenditures + incomes created?
from trading in markets for goods + services + factors of production
Please draw the Circular flow (in a market economy) and explain the process
how do markets coordinate decisions?
price adjustments
When does an economy face a tradeoff?
only when it uses all the available resources
Define when production is unnattainable
if production uses more resources than are available
What happens to the oppourtunity cost of all goods when the production of the good increase?
it increases
