Lectures I, II, and III Flashcards
Economics
the study of choices that individuals make in the presence of scarcity
Scarcity
occurs when there are limited resources but unlimited wants
Technology vs. Capital
1) Technology – knowledge, techniques, and tools used to produce goods and services
2) Capital – physical assets like machinery and buildings
Positive Economics
allows us to study the facts about how the economy works
Normative Economics
used to identify problems and prescribe solutions
Economic Decision Rule
if the marginal benefit of an action exceeds the marginal cost, then do it
Opportunity Cost
the highest valued benefit that must be sacrificed as the result of choosing an alternative
Economic Models
simple abstract models used to study larger, more complex concepts
The Invisible Hand
the market price acts like an invisible hand to guide economic forces to coordinate actions and allocate scarce resources to their highest-valued usage
The Invisible Handshake
social and historical forces (cultural norms)
The Invisible Foot
political and legal forces
Ceteris Paribus
“holding all else constant”
There is No “Free Lunch”
nothing is free because everything has an opportunity cost
Production Possibility Frontier (PPF)
a graph that shows possible combinations of two products that can be produced given a fixed level of technology and resources (including time) being used efficiently at a fixed point in time
What does the slope of the PPF represent?
opportunity cost
Why does the slope of the PPF change?
because of the law of diminishing marginal returns – does the fifth bowl of ice cream taste as good as the first?
Law of Increasing Marginal Opportunity Costs
as an economy produces more of a good, the opportunity cost of an additional unit, as expressed in terms of other goods sacrificed, will increase
Comparative Advantage
if you have the lowest opportunity cost of producing something
Absolute Advantage
if you can produce more of a good with the same amount of resources as someone else
Law of Comparative Advantage
individuals and firms can gain by specializing in the production of goods that they produce cheaply and exchanging them for goods that they cannot produce at a low opportunity cost
How do you know who has the comparative advantage by looking at a graph?
whoever has the flattest slope with respect to the x axis has the lowest opportunity cost of producing x
What are the 4 factors that can shift the PPF outward?
1) Advancements in technology
2) Improvement in the rules under which the economy functions
3) Working harder and giving up current leisure
4) An increase in the economy’s resource base
Patent
legal document that give inventor exclusive rights to their invention for 20 years
Why is trade not a “zero sum game”?
when individuals engage in voluntary trade, both parties are made better off – TRADE CREATES VALUE
