Chapter 1-2 (Economic Specialization)

Define goods&services and production.

• Goods and services are outputs of a process called production.

• Production is the process by which inputs are transformed into outputs.

What are the primary producers and consumers of goods and services? Define the two.

• Primary producers are firms, whose goals are to create goods and services for consumers.

• Primary consumers are households, whose goals are to obtain benefits from consuming goods and services.

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What are the three fundamental economic questions?

• Production decision — what to produce? What mix of goods and services should be created?

• Resource use decision — how to produce? What resources should be used to produce which goods and services?

• Distribution decision — for whom to produce? Who gets to consume which goods and services.

Define a PPF, attainable/unattainable // feasible/unfeasible goods, and productive efficiency/inefficiency.

• A PPF shows all combinations of goods that an economy may produce.

• A combination of goods is attainable or feasible if it can be produced with the available resources. If it cannot, then it is unattainable/unfeasible.

• Productive efficiency means that the combination of goods cannot be created without decreasing production of another good. Productive inefficiency means that the combination of goods can be created without decreasing production of another good.

Differentiate absolute advantage, comparative advantage, and define opportunity cost.

• Absolute advantage refers to when one producer can produce more of a good with the same amount of inputs.

• Comparative advantage refers to when one producer can produce a good with a smaller opportunity cost.

• Opportunity cost is the value of the next best alternative that must be foregone in order to undertake some activity.

What is the law of comparative advantage?

• When increasing the production of a good, a society should do so by using the available productive resource with the lowest opportunity cost.