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

Production Possibilities Frontier

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. A positive tool, shows “what is”

Bowed out PPF

Opportunity costs are often increasing, economic growth

Straight PPF

Opportunity costs are constant

outwards or Inward Shifts of PPF

Caused by changes in amount of available production factors, like labor or capital.

Opportunity Costs

The loss of potential gain from other alternatives when one alternative is chosen

Absolute Advantage

Ability to produce more of a good or service using the same amount of resources.

Trade

The act of buying and selling

Comparative Advantage

Ability to produce at a lower opportunity cost than competitors

Basis for Trade

Comparative advantage, not absolute advantage

Factors of Production

Land, Labor, Capital Natural Resources

Factor Markets

Where factors of production are bought and sold, prices in these markets are determined by supply and demand.

Product Markets

Exchange of goods and services between producers and consumers

Free Market

A market with few government restrictions on how a good can be produced or sold, or on how a factor 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 — are essential

Entrepreneur

Someone who brings together the factors of production — Land labor, and capital — to produce goods and services

Land

Includes any natural resource

Labor

The effort that humans contribute

Capital

Includes machinery, tools, and buildings

Entrepreneurship

Combines land, labor, and capital in new ways

Circular Flow Diagram

A model that shows how participants in markets are linked

households - Factor Markets - firms - product market

Free markets…..

…. raise the standard of living, but that doesn’t mean there is no role for governments

Inward shift of PPF

Economic Contraction, BUT should never happen