Foundational Economic Concepts and Production Possibilities

Vocabulary flashcards covering core principles of microeconomics, scarcity, marginal analysis, trade, and the production possibilities frontier.

Economics

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

Resources

Also called factors of production, these are commonly grouped into four categories: labor, physical capital, land or natural resources, and entrepreneurial ability.

Scarcity

The imbalance between limited productive resources and unlimited human wants.

Trade-offs

The dynamic wherein individuals, firms, and governments are constantly faced with difficult choices involving benefits and costs due to scarce resources.

Opportunity cost

The value of the sacrifice made to pursue a course of action.

Marginal

The next unit or increment of an action.

Marginal social benefit (MSB)

The additional benefit that society receives from the consumption of the next unit of a good or service.

Marginal social cost (MSC)

The additional cost that society incurs from the production of the next unit of a good or service.

Marginal analysis

Making decisions based on weighing the marginal benefits and costs of an action; a rational decision maker chooses an action if $MB > MC$.

Production possibilities

Different quantities of goods that an economy can produce with a given amount of scarce resources.

Production possibility curve or frontier (PPC or PPF)

A graphical illustration that shows the maximum quantity of one good that can be produced, given the quantity of the other good being produced.

Law of increasing costs

The economic principle stating that the more of a good that is produced, the greater the opportunity cost of producing the next unit of that good.

Absolute advantage

An advantage that exists if a producer can produce more of a good with the same quantity of resources, or the same quantity of goods with fewer resources, than all other producers.

Comparative advantage

it can produce a good at a lower opportunity cost than all other producers.

Specialization

When firms focus their resources on the production of goods for which they have comparative advantage.

Productive efficiency

Production of maximum output for a given level of technology and resources, represented by all points on the PPF.

Allocative efficiency

Production of the combination of goods and services that provides the most net benefit to society, achieved when $MB = MC$ of the next unit.

Market failure

A market outcome for which the quantity produced is not allocatively efficient ($MSB = MSC$) and either too many or too few units are produced.

Economic growth

An outward expansion of an economy's production possibilities (PPF) resulting from more resources, better resources, or improvements in technology.

Market economy (capitalism)

An economic system based on the fundamentals of private property, freedom, self-interest, and prices.