Unit 1: Introduction to Economics Flashcards
What is economics?
The study of allocation of resources
3 economic choices
- What to produce?
- How to produce it?
- For who to produce it?
Invisible hand
Metaphor for self-interested buyers and sellers pressuring market supply and demand, causing the natural movement of prices, flow of trade, and production of what is socially necessary
Opportunity cost
Value of the next best alternative that is forgone when making a choice
Free good
Zero opportunity cost
Production Possibilities Frontier/Curve (PPF/PPC)
Shows the maximum combinations of 2 goods that an economy can produce in a given period of time with all its resources (land, labor, capital) fully and efficiently employed
Law of increasing opportunity cost
As resources are reallocated from production of one good to another, opportunity cost increases due to loss of efficiency
Point on PPF curve
Productive efficiency
Point inside PPF curve
Productive inefficiency
Point outside PPF curve
Unattainable
Allocative efficiency
How well is production satisfying consumer demand (not indicated on PPF)
Pareto efficiency
When any change in production balance will make some better off and others worse off (on PPF curve)
Pareto inefficiency
Inside PPF curve (market failure)
Cause of PPF shift
Quality/quantity of factors of production increases/decreases
Long run impact of focusing production on capital goods
Outward shift of PPF, as investment in capital goods increases efficiency of all production
