Chap 1 Reading

ECO2013

Scarcity

The condition in which resources are limited relative to unlimited wants

Opportunity Cost

The best alternative forgone when making a choice

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods or services an economy can produce

Production Efficiency

Producing goods and services at the lowest possible cost

Allocative Efficiency

Producing the combination of goods and services that people value most

Marginal Cost (MC)

The opportunity cost of producing one additional unit of a good or service

Marginal Benefit (MB)

The benefit received from consuming one additional unit of a good or service

Preferences

What people like, want, or value

Absolute Advantage

The ability to produce more of a good or service using the same resources

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than someone else

Specialization

Concentrating production on goods or services in which you have a comparative advantage

Trade

The exchange of goods and services between people or economies

Gains from Trade

The increase in consumption possibilities that results from specialization and trade

Terms of Trade

The rate at which one good is exchanged for another

Economic Growth

The expansion of an economy's production possibilities

Capital Accumulation

An increase in the amount of capital available for production

Technological Change

The development of new or improved methods of producing goods and services

Capital

Tools, equipment, buildings, and other resources used to produce goods and services

Property Rights

The legal rights to own, use, control, and transfer property

Market

An arrangement that allows buyers and sellers to exchange goods and services

Firm

A business organization that produces goods or services

Money

A medium of exchange that makes trade easier than barter

Economic Coordination

The coordination of the economic decisions of consumers, workers, and businesses

Production Possibilities

All the combinations of goods and services that can be produced with available resources

Efficient Point

A point on the PPF where resources are fully and efficiently used

Inefficient Point

A point inside the PPF where resources are not being used efficiently

Unattainable Point

A point outside the PPF that cannot currently be produced

Increasing Opportunity Cost

The situation in which producing additional units of one good requires giving up increasing amounts of another good

Law of Decreasing Marginal Benefit

The principle that marginal benefit generally decreases as more of a good is consumed

Opportunity Cost Formula

Opportunity Cost = Amount of good given up ÷ Amount of good gained

Marginal Cost Formula

MC = Opportunity cost of producing one additional unit

Allocative Efficiency Formula

MB = MC

Comparative Advantage Rule

The person or country with the lower opportunity cost has the comparative advantage

Absolute Advantage Rule

The person or country that can produce more with the same resources has the absolute advantage

Economic Growth on a PPF

Economic growth is shown by an outward shift of the PPF

Economic Decline on a PPF

A decrease in productive capacity is shown by an inward shift of the PPF

Terms of Trade Rule

For both sides to benefit, the terms of trade must fall between their opportunity costs

PPF Point on the Curve

A point on the PPF represents production efficiency

PPF Point Inside the Curve

A point inside the PPF represents inefficient production

PPF Point Outside the Curve

A point outside the PPF is currently unattainable

MB Greater Than MC

If MB > MC, produce more because the additional benefit exceeds the additional cost

MB Less Than MC

If MB < MC, produce less because the additional cost exceeds the additional benefit

MB Equals MC

If MB = MC, the quantity produced is allocatively efficient

Cause of Economic Growth

Economic growth is primarily caused by capital accumulation and technological change

Opportunity Cost of Economic Growth

The opportunity cost of economic growth is reduced current consumption because resources are devoted to investment

Opportunity Cost

What you give up ÷ What you gain

Comparative Advantage

Lower opportunity cost = comparative advantage

Absolute Advantage

Greater output with the same resources = absolute advantage

Allocative Efficiency

MB = MC

If MB > MC

Produce more

If MB < MC

Produce less

If MB = MC

The quantity is allocatively efficient

Economic Growth

PPF shifts outward

Economic Decline

PPF shifts inward

Terms of Trade

Must fall between the two parties' opportunity costs