Economics: Scarcity, Trade, and the Market System

A comprehensive set of flashcards based on key concepts of economics, including scarcity, trade, production possibilities, opportunity costs, and market systems.

What is the basic concept of scarcity in economics?

Scarcity exists because we have unlimited wants but limited resources.

What does scarcity require in economic decision-making?

Scarcity requires trade-offs.

What is the opportunity cost of choosing one option over another?

The opportunity cost is the highest-valued alternative that must be given up.

What are the four factors of production?

Workers, capital, natural resources, and entrepreneurial ability.

How does scarcity affect resource allocation in firms?

Firms must make decisions on how to allocate limited resources among competing uses.

What is a production possibilities frontier (PPF)?

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

What does point A on Tesla's PPF represent?

The maximum output of Model 3 sedans (800 per day) with no Cybertrucks produced.

What does point E on Tesla's PPF represent?

The maximum output of Cybertrucks (800 per day) with no Model 3 sedans produced.

What is allocative efficiency?

Allocative efficiency occurs when a society produces the combination of goods and services most valued by consumers.

What does an outward-bowed PPF indicate?

Increasing marginal opportunity costs as resources are reallocated.

What happens if a firm operates inside the PPF?

It is considered inefficient because not all resources are being fully utilized.

What does movement along the PPF illustrate?

The trade-off and opportunity costs associated with reallocating resources.

What is the principle of increasing marginal opportunity costs?

As production of one good increases, the opportunity cost of producing that good rises.

How does trade benefit households and firms?

Trade allows specialization according to comparative advantage, raising both production and consumption.

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost than others.

What is absolute advantage?

The ability to produce more of a good or service than potential trading partners with the same resources.

What is the key role of markets in an economy?

To facilitate trade between buyers and sellers.

What do product markets involve?

Markets for goods and services where households demand and firms supply.

What do factor markets involve?

Markets for the factors of production where households supply labor and firms demand it.

What key groups participate in the circular flow model?

Households and firms.

Why are property rights important in a market system?

They provide the security needed for individuals to be willing to invest and take risks.

What is the role of contracts in a market economy?

They create legally binding agreements that facilitate trade and business operations.

What is the connection between market efficiency and property rights?

Weak property rights can lead to inefficiencies and limit economic output.

What drives the decisions of consumers in a market system?

The desires of consumers are communicated through prices.

How does the government support a successful market system?

By enforcing property rights and ensuring a legal environment where contracts are upheld.

What does figure 2.1 illustrate about Tesla's production choices?

The trade-offs between producing Model 3 sedans and Cybertrucks.

What happens when Tesla operates outside the PPF?

Those combinations of production are unattainable with current resources.

How does society determine the allocation of scarce resources?

Through market interactions and the price mechanism.

In the context of trade, what does specialization refer to?

Focusing on the production of goods for which one has a comparative advantage.

What can cause shifts in the PPF?

Increases in available resources or technological advancements.

How does technology affect production possibilities?

Technological progress can increase output while keeping other resource levels constant.

Why might households prefer older cars over newer, eco-friendly options?

Older cars may have lower upfront costs despite being less fuel efficient.

What defines the legal basis of a market system?

The enforcement of contracts and protection of property rights.

When is a firm considered productively efficient?

When it operates on the PPF, maximizing output from available resources.

How do consumers express their preferences in a market?

Through their purchasing decisions.

What happens to resource allocation if the economy experiences growth?

The PPF shifts outward, allowing for increased production of goods.

What is the significance of the circular-flow diagram?

It shows how money, goods, and services flow between households and firms.

What occurs when consumers’ desires change?

Firms must adapt their production to meet the new demand.

What does opportunity cost illustrate in decision-making?

The value of the next best alternative foregone when making a choice.

What is one of the benefits of trade that increases standard of living?

It allows individuals and firms to specialize and produce more efficiently.

How do households determine their income in a market economy?

By selling their labor and other factors of production to firms.

What does the slope of the PPF represent?

The opportunity costs involved in shifting resources from one product to another.

What is meant by 'gains from trade'?

The increased production and consumption that results from specialization and trade.

How can increasing opportunity costs impact production decisions?

Decisions may shift as more of a good is produced, requiring sacrifices of other goods.

What types of decisions do firms face in a market environment?

What to produce, how to produce, and who receives the produced goods.

Why do consumers seek environmentally friendly cars?

To reduce fuel costs and environmental impact.

In which situations could purchasing an older car be advantageous?

When initial costs or usage patterns favor less expensive or more practical vehicles.

What is a key difference between absolute and comparative advantage?

Absolute advantage focuses on overall productivity, while comparative advantage focuses on opportunity costs.

How is the circular flow model illustrated in market transactions?

Through the interaction of households and firms in product and factor markets.

What are the consequences of poor property rights enforcement?

Fewer goods and services are produced, reducing overall economic efficiency.

What is the relationship between trade, specialization, and economic efficiency?

Trade based on specialization enhances overall economic efficiency.

Why might some countries struggle with establishing successful market systems?

Due to weak legal frameworks and poor protection for property rights.

How does the market coordinate the decisions of billions of individuals?

Through prices that reflect the values and preferences of consumers.

What role does opportunity cost play when choosing between two jobs?

The job with lower opportunity costs in terms of forgone benefits will be chosen.

What is the effect of international trade on comparative advantage?

It enhances the benefits gained from specialization beyond domestic markets.

How do incentives shape the behavior of consumers and firms in a market?

Incentives motivate consumers to purchase certain goods and firms to adjust their offerings.

What are the likely motivations for consumers to choose hybrid vehicles?

A combination of environmental concerns and long-term cost savings.

How does the market system adapt to changing consumer preferences?

By guiding firms to adjust their production based on demand reflected in prices.

What does the term 'marginal cost' refer to in economic terms?

The additional cost incurred by producing one more unit of a good.

What role do entrepreneurs play in the economy?

They bring together resources to create goods and services, driving economic growth.

How does government intervention influence market efficiency?

By enforcing laws and regulations that may facilitate or hinder market transactions.