Chapter 2 Flashcards
(26 cards)
Absolute advantage
The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
Circular-flow diagram
A model that illustrates how participants in markets are linked
Comparative advantage
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
Economic growth
The ability of an economy to produce increasing quantities of goods and services
Entrepreneur
Someone who operates a business, bringing together the factors of production–labor, capital, and natural resources–to produce goods or services
Factor market
A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
Factors of production
Labor, capital, natural resources, and other inputs used to make goods and services
Free market
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity
Product market
A market for goods–such as computers–or services–such as medical treatment
Production possibilities frontier (PPF)
A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology
Property rights
The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Trade
The act of buying and selling
Bowed-Outward Shape
Indicates increasing marginal opportunity costs, which occur because resources such as labor and machinery are not equally efficient in all possible uses
Increasing Marginal Opportunity Costs
This principle states that as more resources are allocated to producing one good, the opportunity cost of producing additional units of that good increases
Resource Allocation
The concept emphasizes the diminishing returns of continuously allocating additional resources to a single activity, leading to a smaller payoff or output increment from each additional unit of resource used
Benefit from Trade
PPFs also demonstrate how trading can be beneficial even if one party has an absolute advantage in producing all goods. By engaging in trade, parties can focus on producing goods where they have the most efficiency or least opportunity cost
Comparative vs. Absolute Advantage
The real basis for trade is not absolute advantage but comparative advantage
Specialization and Trade
Individuals, firms, and nations gain by specializing in productions where they hold a comparative advantage and trading to obtain other goods and services. This specialization allows for a more efficient allocation of resources, enhancing overall productivity and economic welfare
Adam Smith’s Advocacy
Adam Smith, in his 1776 work “An Inquiry into the Nature and Causes of the Wealth of Nations,” promoted the benefits of free markets, arguing that minimal government interference in markets enhances economic outcomes
Rational Self-Interest
Assumes that individuals act rationally and in their own self-interest, a fundamental premise of economic theory that promotes efficient market outcomes
Decentralized Knowledge
Markets are effective at utilizing localized knowledge, which is crucial for optimal decision-making regarding production and distribution, making them more efficient than centrally planned economies
