midterm 1 Flashcards
Economics
How society manages its scarce resources
marginal change
Incrementally alters an existing plan
Invisible Hand of Adam Smith
The ability of free markets to reach desirable outcomes, despite the self-interest of market participants
factor of production
Inputs that firms use in order to produce goods and services (labor and capital)
Agents:
Households: Factor of production owners, consume goods and services
Firms: Produce goods and services, use
factors of production
The Circular Flow Diagram
Shows how dollars flow through markets among households and firms
Production possibility frontier
graph that shows various
combinations of outputs that the
economy can possibly produce,
given the available factors of
production and the available
production technology.
Microeconomics
Study of how households and firms
make decisions and how they
interact in markets
Macroeconomics
The study of economy-wide
phenomena, including inflation,
unemployment, and economic
growth
Imports
Goods produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Absolute advantage
The ability to produce a good using fewer inputs than another producer
The measurement of the cost of a good in terms of the
inputs required to produce
2 measure of the cost of a good
absolute advantage and opportunity cost
Why do we trade?
everybody can push the “production frontier”, gaining from trade
The Price of the Trade
The value of the trade must lie
between their opportunity costs
