Chapter 2: The Economic Problem: Scarcity and Choice

Vocabulary flashcards covering fundamental economic concepts from Chapter 2, including scarcity, opportunity cost, specialization, production possibility frontiers, and economic systems.

Capital

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

Factors of production (or factors)

The inputs into the process of production; another term for resources.

Production

The process that transforms scarce resources into useful goods and services.

Inputs or 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.

Three basic economic questions

The three fundamental questions every society must answer: (1) What gets produced? (2) How is it produced? and (3) Who gets what is produced?

Opportunity cost

The best alternative that we give up, or forgo, when we make a choice or decision.

Theory of comparative advantage

David Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.

Absolute advantage

The advantage a producer has over another in the production of a good or service if he or she can produce that product using fewer resources.

Comparative advantage

The advantage a producer has over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.

Consumer goods

Goods produced for present consumption.

Investment

The process of using resources to produce new capital.

Production possibility frontier (ppf)

A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently.

Marginal rate of transformation (MRT)

The slope of the production possibility frontier (ppf).

Economic growth

An increase in the total output of an economy; occurs when a society acquires new resources or 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.

Laissez-faire economy

Literally from the French meaning "allow [them] to do"; 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

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

Free enterprise

The freedom of individuals to start and operate private businesses in search of profits.

Income

The amount that a household earns each year in forms such as wages, salaries, interest, and the like.

Wealth

The amount that households have accumulated out of past income through saving or inheritance.