MacroEcon Chapter 2

Capital

Things that are produced and then used in the production of other goods and services

Factors of Production

The inputs into the process of production

Another term for resources

Production

The process that transforms scarce resources into useful goods and services

Inputs/Resources

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

Outputs

Goods and services of value to households

Comparative Advantage

A producer has comparative advantage over another in the production of a good or service if they can product that product at a lower opportunity cost.

Theory of Comparative Advantage

Ricardo’s theory that specialization and free-trade will benefit all trading parties, even those who may be “absolutely” more efficient producers

Abosolute Advantage

A producer has an absolute advantage over another in the production of a good or a service if they can produce that product using fewer resources (lower absolute cost per unit)

Consumer Good

Produced for present consumption

Investment

Process of using resources to produce new capital

Production Possibility Frontier (PPF)

Graph that shows all combinations of goods and services that can be produced if all of society’s resources are used efficiently

• illustrates economics concepts specifically opportunity cost

• Opportunity cost of producing more capital goods is fewer consumer goods

Marginal Rate of Transformation

The slope of the production possibility frontier (PPF)

• Negative slope tells us how much society has to give up of one output to get a unit of another output

Output Efficiency

Occurs when the economy is operating at the “right point” on the production possibility frontier (PPF)

• To be efficient, an economy must produce what people want

Economic Growth

increase of total output of an economy

• society acquires new resources

• learns to produce more using existing resources

Command Economy

An economy in which a central government either directly or indirectly sets output targets, incomes, and prices

Lassez-Faire Economy

An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.

Market

The institution through which buyers and sellers interact and engage in exchange

Consumer Sovereignty

Idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purache (and what not to purchase)