Micro Chapter 2 – Trade Offs, Comparative Adv, and Market System – Flashcards
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Opportunity Cost
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Highest valued alternative that must be given up to engage in any activity
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What happens if a country produces a combination of goods that uses all of the resources available in the economy?
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The country is operating on its production possibilities frontier
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If the opportunity cost of producing one good increases as more of that good is produced, then
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The PPF is bowed out.
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The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the ________ the payoff to devoting additional resources to that activity.
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Smaller
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What creates economic growth, that is, sfits the PPF outward?
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increase in the available labor, increase in technology that affects production, and increase in available natural resources
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Absolute Advantage
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The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.
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If a country has a comparative advantage in the production of a good, then that country....
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Has a lower opportunity cost in the production of that good.
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Product Markets
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Markets where goods such as computers or services such as medical treatment are offered
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Factor Markets
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Factors of production, such as labor, capital, natural resources, and entrepreneurial ability are traded
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In a simple circular-flow model, there are flows of ___________ and flows of ____________-
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- Factors of production; goods and services
- Funds received from the sale of factors of production; spending on final goods and services
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According to Adam Smith....
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Individuals usually act in a rational, self-interested way.
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What instrument is the invisible hand used to direct economic activity?
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Price
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According to Adam Smith, what is necessary for the proper functioning of the market system?
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For markets to work, people must be free to pursue their self-interest
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What is the role of an entrepreneur?
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To operate a business that produces a good or service, to bring together the factors of production, and to take risks
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In a free market system, which group brings together the factors of production in order to producing goods and services?
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Entrepreneurs
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Which is critical to the success of a market system?
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to allow individuals or firms to have exclusive use of their property
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For a market system to work, individuals must..
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Take risks and act in rational, self-interested ways
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What are copyrights designed to do?
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Protect intellectual property rights
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What is the outcome of enforcing contracts and property rights in a market system?
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Increased economic activity
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Property Rights
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are guaranteed by two amendments to the U.S. Constitution
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If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
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An independent court system
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Free Market
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One where the government does not control the production of goods and services
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In what ways does a free market economy differ from a centrally planned economy?
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Centrally Planned economies have extensive government controls
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In the circular flow diagram showing how a market system works,
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income flows to households through factor markets
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Primary difference between product markets and factor markets is that
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Product markets are markets for goods, while factor markets are markets for factors of production, and entrepreneurial ability.
