Chapter 2 The Economic Problem: Scarcity And Choice

Front 1

Positive or Descriptive Economics

Back 1

Limited or scarce resources force individuals and societies to choose among competing uses of resources--

alternative combinations of produced goods and services--

and among alternative final distributions of what is produced among households.

Front 2

Capital

Back 2

Things that are produced and then used in the production of other goods and services

Front 3

Factors of Production

Back 3

The inputs into the process of production. Also called resources. Land Labor and Capital

Front 4

Production

Back 4

The process that transforms scarce resources into useful goods and services

Front 5

Inputs or Resources

Back 5

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

Front 6

Outputs

Back 6

Goods and services of value to households

Front 7

Opportunity Cost

Back 7

The best alternative that we forgo when we make a choice or decision

Front 8

Theory of Comparative Advantage

Back 8

Ricardo's theory

That specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producer

Front 9

Absolute Advantage

Back 9

A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources

Front 10

Comparative Advantage

Back 10

A producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost

Front 11

Consumer Goods

Back 11

Goods produced for present consumption

Front 12

Investment

Back 12

The process of using resources to produce new capital

Front 13

Production Possibilities Frontier

Back 13

A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently

Front 14

Output efficiency

Back 14

To be efficient, an economy must produce what people want. The economy must be operating at the right point on the PFF.

Front 15

Production Efficiency

Back 15

The economy must be operating on the PPF.

Front 16

Marginal Rate of Transformation

Back 16

The slope of the production possibility frontier.

Front 17

Economic Growth

Back 17

An increase in the total output of an economy.

It occurs when a society acquires new resources or when it learns to produce more using existing resources.

Front 18

Economic Systems

Back 18

Command Economy

Laissez-faire Economy

Front 19

Command Economy

Back 19

An economy in which a central government either directly or indirectly sets output targets, incomes and prices

Front 20

Laissez-faire Economy

Back 20

Literally from the French: "allow [them] to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.

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Market

Back 21

The institution through which buyers and sellers interact and engage in exchange

Front 22

Consumer Sovereignty

Back 22

The ideas that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase)

Front 23

Free enterprise

Back 23

The freedom of individuals to start and operate private businesses in search of profits

Front 24

Microeconomic Theory

Back 24

Price Theory

Front 25

Three Basic Questions that must be answered to understand the functioning of the economic system

Back 25

What gets produced?

How is it produced?

Who gets what is produced?

Front 26

Presumption

Back 26

Human wants are unlimited but resources are not

Front 27

Positive or Descriptive Questions

Back 27

Scarce resources force individuals and societies to choose among COMPETING USES of resources (ALTERNATIVE COMBINATIONS of produced goods and services) and Among alternative FINAL DISTRIBUTION of what is produced among households.

Front 28

most important resource

Back 28

human workforce

Front 29

factors of production

Back 29

land labor capital

Front 30

GAINS

Back 30

SPECIALIZING AND TRADING

SPECIALIZATION AND FREE TRADE

DAVID RICARDO

Front 31

INVESTMENT

Back 31

CREATION OF CAPITAL

Front 32

PRODUCTION EFFICIENCY

Back 32

STATE IN WHICH A GIVEN MIX OF OUTPUT IS PRODUCED AT THE LEAST COST

Front 33

POINTS ON THE PPF

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FULL RESOURCE EMPLOYMENT AND PRODUCTION EFFICIENCY

Front 34

UNEMPLOYMENT

Back 34

POINTS INSIDE THE PPF

Front 35

INNEFICIENCY

Back 35

WASTE AND MISMANAGEMENT

Front 36

OUTUT EFFICIENCY

Back 36

produce what people want

Points at the RIGHT point in the PPF

Front 37

Scarcity

Back 37

Illustrated by the negative slope of the ppf

Front 38

Marginal Rate of Transformation

Back 38

Slope of a society's ppf

Front 39

Negative slope PPF

Back 39

indicates the trade-off that a society faces between two goods

Front 40

PPF

Back 40

scarcity

unemployment

inefficiency

opportunity cost

law of increasing opportunity cost

economic growth

gains from trade

Front 41

laissez-faire

Back 41

allow [them] to do

central institution = market

Front 42

Business rise and fall in response to consumer demand

Back 42

making a profit means selling goods or services for more than it costs to produce them

you cannot make a profit unless someone wants the product you are selling

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if a producer produces inefficiently, competitors will come along, fight for business, and eventually take it away

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competition forces producers to use efficient techniques of production. competition then dictates how output is produced

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Income is the amount that a household earns each year

Back 44

Wealth is the amount that households have accumulated out of past income through saving or inheritance

Front 45

all parties will gain

Back 45

if they specialize in producing goods in which they have a comparative advantage

Front 46

Basic coordinating mechanism in a free market system

Back 46

price