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45 Cards in this Set
- Front
- Back
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Production Possibilities Frontier (PPF) |
The boundary between those combinations of goods and services that can be produced and those that can not. |
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What limits the quantity of goods and services that we can produce? |
Resources and technology. |
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How does the PPF illustrate scarcity? |
The points outside the frontier are unattainable and describe wants that can’t be satisfied. |
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Why are points inside the PPF considered inefficient? |
Because resources are wasted or misallocated. |
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Production Efficiency |
Producing goods and services at the lowest possible cost. |
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When do you incur production efficiency? |
When you produce on the PPF. |
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When are resources unused? Misallocated? |
Unused: idle but could be working. Misallocated: assigned to tasks for which they are not the best match. |
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Define opportunity cost. |
The highest valued alternative forgone. |
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Define opportunity cost as a ratio. |
The decrease of quantity produced of one good divided by the increase of quantity produced of another good. |
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What does the outward-bowed shape of the PPF reflect? |
Increased opportunity cost. Resources are not equally productive in all activities. |
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Allocative efficiency |
When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit. |
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The more we have of any good or service the smaller is its _______ ________ and the less we are willing to pay for an additional unit of it. |
Marginal benefit |
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What is the principle of decreasing marginal benefit? |
The more we have of any good or service, the smaller is it’s marginal benefit and the less we are willing to pay for an additional unit of it. |
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When ______ _______ equals _______ _______, resources are being used efficiently. |
Marginal benefit Marginal cost |
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Specialization |
Producing only one or a few goods. |
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Comparative advantage |
When a person or organization can perform an activity at a lower opportunity cost than anyone else. |
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Absolute advantage |
Being more productive than others. |
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What is the difference between absolute advantage and comparative advantage? |
Absolute advantage involves comparing productivities (production per hour) whereas comparative advantage involves comparing opportunity costs. |
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Economic growth |
The expansion of production possibilities. |
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Economic growth increases our standard of living, but does not overcome _______ and avoid ______ ______. |
Scarcity Opportunity cost |
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To make our economy grow we face a Tradeoff - the faster we make ______ grow, the greater is the opportunity cost of economic growth. |
Production |
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Marginal cost |
The opportunity cost of producing one or more unit of it. |
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Technological change |
The development of new goods and of better ways of producing goods and services. |
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How is marginal cost calculated |
From the slope of the PPF. |
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Marginal benefit |
The benefit received from consuming one or more unit of a good or service. |
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Why is marginal benefit subjective? |
Because it depends on people’s preferences. |
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Preferences |
Peoples likes and dislikes and the intensity of those feelings. |
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How do marginal benefit and preferences stand in sharp contrast to marginal cost and production possibilities? |
Preferences describe what people like and want while production possibilities describe the limits or constraints on what is feasible. |
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Marginal benefit curve |
A curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good. |
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Can the marginal benefit curve be derived from the PPF? Why or why not? |
No, the marginal benefit curve is unrelated to the PPF. |
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How do we measure the marginal benefit from a good or service? |
By the most that people are willing to pay for an additional unit of it. |
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Capital accumulation |
The growth of capital resources, including human capital |
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The amount by which our production possibilities expand depends on the resources we devote to _______ _______ and ________ _________. |
Technological change Capital accumulation |
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The amount by which our production possibilities expand depends on the resources we devote to _______ _______ and ________ _________. |
Technological change Capital accumulation |
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Economic growth brings enormous benefits in the form of increased _______ in the future, but economic growth is not free and does not abolish ______. |
Consumption Scarcity |
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The amount by which our production possibilities expand depends on the resources we devote to _______ _______ and ________ _________. |
Technological change Capital accumulation |
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Economic growth brings enormous benefits in the form of increased _______ in the future, but economic growth is not free and does not abolish ______. |
Consumption Scarcity |
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The decrease in today’s consumption is the ________ ______ of tomorrow’s increase in consumption. (Context of economic growth) |
Opportunity cost |
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Why does central economic planning work badly? |
Because economic planners don’t know peoples production possibilities and preferences, so production ends up inside the PPF, and the wrong things are produced. |
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Decentralized coordination needs what 4 complimentary institutions? |
Firms, markets, property rights, and money |
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Firm |
An economic unit that hires factors of production and organizes them to produce and sell goods and services. |
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Market |
Any arrangement that enable buyers and sellers to get information and to do business w/ each other. |
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Property rights |
The social arrangement that govern the ownership, use, and disposal of anything that people value. |
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Money |
Any commodity or token that is generally acceptable as a means of payment. |
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Markets coordinate decisions through ______ ________. |
Price adjustments |
