Chapter 2 Study Guide: Production Possibilities Frontier and Market Systems

Vocabulary flashcards covering core concepts of Chapter 2, including the Production Possibilities Frontier (PPF), opportunity costs, comparative advantage, trade, and the foundations of market systems.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced given a fixed set of resources, a constant level of technical knowledge, and full and efficient use of all resources.

Linear PPF

A production possibilities frontier represented as a straight line, which signifies that the opportunity cost of switching production between two goods remains constant.

Increasing Marginal Opportunity Cost

The economic principle that as more resources are devoted to one activity, the smaller the payoff of devoting additional resources becomes, forcing larger sacrifices of the alternative good because resources are not equally well suited to all production.

Economic Growth

Represented by an outward shift of the Production Possibilities Frontier, which occurs due to an increase in resources (labor and/or capital), advancements in technology, or improvements in institutions.

Absolute Advantage

The ability to produce more of a good or service than competitors when using the exact same amount of resources.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than competitors; it acts as the underlying basis for trade.

Product Market

A market dedicated to the trading of finished goods and services, such as clothes.

Factor Market

A market dedicated to buying and selling the factors of production (inputs) needed to produce goods and services.

Factors of Production

The core inputs required to make goods and services, categorized into labor, capital, natural resources, and entrepreneurial ability.

Free Market

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

Invisible Hand Principle

An economic principle attributed to Adam Smith stating that allowing prices to freely coordinate decisions yields superior economic outcomes compared to central decision-makers.

Market Mobilization of Knowledge

An economic theory associated with Fredrich Hayek asserting that market economies provide higher standards of living because competition mobilizes and makes better use of dispersed knowledge.

Private Property Rights

Legal foundations that include exclusive use of property, protection against trespass, and rights to transfer, sell, exchange, or mortgage property, thereby forcing owners to bear opportunity costs and encouraging stewardship and conservation.