Midterm 1: Chapter 1, & 2 Flashcards
What is the Production Possibilities Frontier?
Curve showing the maximum attainable combinations of two products produced with available resources
Combinations along the PPF
Are Efficient
Combinations inside the PPF
are inefficient
Combinations outside the PPF
are unobtainable
What is scarcity?
Human wants are unlimited but available resources are limited
What is the study of Economics
study of choices of consumers, business managers, and government officials make to attain goals, given scarce resources
What are Economic modeld?
simplified versions of reality used to analyze real world problems
What are 3 Key Economic Ideas- Describe too
- People are rational - using all available info to achieve there goals
- People respond to economic incentives -
- Optimal decisions are made at the margin
What is opportunity Cost?
Highest valued alternative that must be given up for an activity
What are 3 fundamental questions involving trade-offs
- What goods will be produced
- How will the goods be produced
- Who will receive the goods and services produced
Centrally planned vs. Market economy
Centrally planned decides on how economic resources are allocated
Market decisions of households and firms allocate resources
Mixed Economy
Economic decisions result from actions of buyers/sellers, but the government also plays a large role in allocation of resources
Productive Efficiency
when a good/service is produced at lowest cost
Allocative efficiency
production is in accordance to consumer preference, things are produced up until the marginal benefit equals marginal cost of producing it
Voluntary exchange
When both buyer and seller are better off from exchange
Positive analysis
analysis concerned with “what is”
ex - data concerning minimum wage
Normative Data
analysis concerned with “what ought to be”
ex - should we raise minimum wage after looking at effects it has on economy
The more resources devoted to an activity on PPF
smaller payoff devoting additional resources to that activity
How does increase in labor force, capital stock, or technological growth affect the PPF
causes the line to shift outward, representing economic growth
Absolute Advantage
ability of a firm, country, or individual to produce more of a good/service than competitors, using the same amount of resources
Comparative Advantage
ability of firm/country to produce something at a lower opportunity cost than its competitors
What is the basis of trade
Comparative advantage (not absolute)
What is a market and describe 2 types
Market is a group of buyers and sellers and arrangement they come together to trade.
- Product market - market for goods
- Factor Market - market for factors of production
What are four areas of factors of production
- Labor - people who do jobs
- Capital-physical capital used to produce other goods
- Natural Resources - raw materials (oil, iron ore)
- Entrepreneur- brings together factor of production to produce goods and services
What is a Free Market
A market with few government restrictions on how things should be produced/sold and how resources are employed
Who is father of modern Economics and what did he do?
Adam Smith - he wrote the book “An Inquiry into the Nature and causes of wealth of nations” argued that restrictions decreased overall wealth
Property Rights
Rights individuals and firms have to the exclusive use of their property, including right to buy and sell it
Define Intellectual property rights and patents
They are rights to books, films, software and ideas to produce goods.
Patent gives owner exclusive right to sell product for 20 years
