Chapter 2: Trade-offs, Comparative Advantage, and the Market System

Core vocabulary flashcards for Chapter 2 of Microeconomics covering production possibilities frontiers, opportunity costs, comparative advantage, specialization, factors of production, circular-flow models, and market systems.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Increasing Marginal Opportunity Costs

The economic principle that as more resources are devoted to an activity, the payoff to devoting additional resources shrinks because resources are not equally well-suited to all activities.

Economic Growth

The ability of the economy to increase the production of goods and services, represented by an outward shift of the production possibilities frontier.

Trade

The act of buying and selling.

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.

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.

Market

A group of buyers and sellers of a good or service, and the institution or arrangement by which they come together to trade.

Factors of Production

Inputs used to make goods and services, encompassing labor, capital, natural resources, and entrepreneurial ability.

Labor

All types of work, ranging from the part-time labor of teenagers to the work of senior managers in corporations.

Physical Capital

Manufactured goods used to produce other goods and services, including computers, factory buildings, and machine tools.

Natural Resources

Raw materials or 'gifts of nature'—such as land, water, oil, and iron ore—used in the production of goods.

Entrepreneur

An individual who operates a business by bringing together labor, capital, and natural resources to produce and sell goods and services.

Factor Market

A market where the factors of production, such as labor, capital, natural resources, and entrepreneurial ability, are bought and sold.

Product Market

A market for finished goods, such as computers, or services, such as medical care.

Circular-Flow Diagram

A simplified model illustrating how market participants (households and firms) are linked through the flows of resources, goods, services, and payments.

Free Market

A market with few government restrictions on how goods and services can be produced or sold, or on how factors of production can be employed.

Property Rights

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.