Econ Chapter 2 (test 1) – Flashcards
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absolute advantage
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the ability to produce more of a good or service than competitors using the same amount of resources
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comparative advantage
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the ability to produce more of a good or service at a lower opportunity cost than other producers. LOWER OPPORTUNITY COST
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What is the primary difference between absolute and comparative advantage?
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absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
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In economics, the term capital refers to...
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physical capital, such as machinery, that is used to produce other goods.
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In economic terminology, the inputs used to produce output are referred to as...
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factors of production
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Can individuals who have never been the best at doing anything still have a comparative advantage in producing some product?
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Yes
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In the circular-flow diagram showing how a market system works...
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income flows through firms to product markets.
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In economic technology, the inputs used to produce output are referred to as...
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factors of production
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Production possibilities frontier (PPF)
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a curve that shows the maximum attainable combinations of two products that may be produce with available resources. We use it to illustrate the trade-offs that arise from scarcity. (points on the frontier are technically efficient, points inside the frontier are inefficient, and points outside the frontier are unattainable)
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Opportunity cost
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the highest-valued alternative that must be given up to engage in that activity
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How do we illustrate economic growth?
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by shifting a PPF outward
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Market System
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a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
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Product markets
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markets for goods and services, such as computers and medical treatment.
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Factor markets
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markets for the factors of production
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Factors of production
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labor, capital, natural resources, and entrepreneurial ability
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circular-flow diagram
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shows how participants in product markets and faction markets are linked.
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free market
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the government does not control the production of goods and services, changes in prices lead firms to produce the goods and services most desired boy consumers.
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entrepreneur
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someone who operates a business
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What are entrepreneurs responsible for in the market system?
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They are responsible for organizing the production of goods and services.
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What is the only way that the market system will work well?
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If there is protection for property rights, which are the rights of individuals and firms to use their property.
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Economic growth
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the ability of the economy to increase the production of goods and services. (growth may lead to greater increases in production of one good than another.
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attainable
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anything on the frontier
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inefficient
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anything inside the frontier
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unattainable
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anything outside the frontier
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What does a straight line on a PPF tell us?
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the opportunity cost remains constant
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What does a bow shape on a PPF tell us?
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opportunity cost of a good rises as the economy produces more of the good
