Unit 1 Economic Profit Flashcards
Definition of Economics
Social science that studies choices made when coping with scarcity and incentives that influence these choices
Scarcity is…
Our inability to satisfy our unlimited wants as there are not unlimited resources
What is the big trade-off?
Equity vs. efficiency: Distributing efficiently but fairly among society
Unlimited wants are satisfied by goods/services … continue the rest:
Goods/services are produced by factors of production and there are rent, wages, interest and profit included in this
Factors of production:
Labour, land, capital, entrepreneurship
Circular flow model in the market economy:
Top= Households Right = Good Markets Left = Factor Markets Bottom = Firms
Production Possibility Frontier Facts
- Increasing opportunity cost
- Have to lose to gain another thing
- Line of efficiency + Attainability
- Downward sloping
- Inside of line is inefficient
- Outside of line is unattainable
Opportunity Cost Equation + Facts
what we give up/what we get
ex. 500-300/400-200 = 0.75 guns/butter
Resources are homogenous and have different opportunity costs
What will it naturally gravitate towards?
Allocative efficiency where marginal benefit = marginal cost
How does PPF grow?
1) Technological change
2) Captial accumulation
What is the cost of economic growth?
Less current consumption today (Fewer cookies today for more tomorrow)
What is comparative advantage?
If a person can perform an activity at a lower opportunity cost than anyone else
What is an absolute advantage?
If a person is more productive than others overall
Explain how comparative and absolute advantage is linked?
A person can have an absolute advantage in all activities but not a comparative advantage in all b/c of opportunity cost
What does land, labour, capital, and entrepreneurship earn?
Land = earns rent Labour = wages Capital = interest Entrepreneurship = profit
