Economic Tools & Economic Systems

Flashcards covering key concepts from Chapter 2 on Economic Tools & Economic Systems.

What is a model in economics?

A simplification of reality.

What is opportunity cost?

The value of the best alternative forgone when an item is chosen.

What does 'increasing opportunity cost' signify?

Resources are not perfect substitutes.

What is comparative advantage?

The ability to produce a product at a lower opportunity cost than someone else.

Who first enunciated the Law of Comparative Advantage?

David Ricardo.

What does the Law of Comparative Advantage state?

The individual, firm, region, or country with the lowest opportunity cost of producing a particular good/service should specialize in that good/service.

What are the benefits of specialization according to the Ricardian Theory?

Increases output and beneficial trade between partners/regions/countries.

What is a Production Possibilities Curve (PPC)?

A curve that shows the various maximum combinations of two goods that can be produced by a given amount of economic resources and technology.

What indicates points of efficiency on the PPC?

Any point (A, B, C, D, E) is an efficiency point, showing an economy's maximum potential.

What does an unattainable point on the PPC represent?

It cannot be achieved given the existing resources and technology.

What factors can cause the PPC to shift?

Change in the quantity of resources or technology.