Economics Key Concepts: Scarcity, PPF, Trade, and Trade Policies

Scarcity

Unlimited wants exceed the limited resources available to fulfill those wants.

Households, firms, and governments face decisions about how to use scarce resources, requiring them to make...

Trade-offs.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Points on the PPF curve are...

Attainable and efficient.

Points above the PPF curve are...

Unattainable with current resources.

Points below the PPF curve are...

Attainable but inefficient.

Opportunity Cost

The highest-value alternative that must be given up to engage in an activity.

Example of opportunity cost (Tesla)

If Tesla produces 20 newer models, it must sacrifice 20 original models.

Why do opportunity costs often increase?

Some resources are better suited to one task than another; the more resources to an activity, the smaller the payoff.

How does economic growth affect the PPF curve?

It shifts the PPF curve outward, allowing more production of goods due to more resources or technological improvements.

Example of bowed-out PPF (studying economics vs. accounting)

The curve bows outward because the first hour of studying is more valuable than the last, reflecting increasing opportunity costs.

Trade

The act of buying and selling.

Absolute Advantage

The ability of an individual, firm, or country to use the same resources to produce more of a good or service than competitors.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than competitors.

Is the basis for trade comparative advantage or absolute advantage?

Comparative advantage.

Market

A group of buyers and sellers of goods or services, and the institution by which they trade.

How do the roles of households and firms differ within markets?

Households provide factors of production to firms and receive payments; firms supply goods/services to product markets, where households buy them.

What are the factors of production?

Labor, capital (physical capital like computers/machines), natural resources, and entrepreneurial ability.

Free Market

A market with few government restrictions on production, sales, or factor employment.

Market Mechanism

Individuals act in self-interest, but flexible prices signal the worth of goods/services.

Socialism

An economic system in which industries are owned by workers rather than private businesses.

Tariff

A tax imposed by a government on imports.

Imports

Goods and services bought domestically but produced in other countries.

Exports

Goods and services produced domestically and sold to other countries.

Autarky

A situation in which a country does not trade with other countries.

Terms of trade

The ratio at which a country can trade its exports for imports from other countries.

When a country specializes in goods for which it has comparative advantage and trades for others, what happens?

The country will have a higher level of income and consumption.

Why don't we see complete specialization in production?

1. Not all goods and services are traded internationally. 2. Production of most goods involves increasing opportunity costs. 3. Tastes for products differ across countries.

Sources of comparative advantage

Climate and natural resources, relative abundance of labor and capital, technology, and external economies.

External Economies

Reductions in a firm's costs that result from an increase in the size of the industry.

Free Trade

Trade between countries without government restrictions.

Government policies that interfere with trade

Tariffs, quotas, and voluntary export restraints.

Quota

Numerical limit imposed by a government on the quantity of a good that can be imported into the country.

Voluntary Export Restraint (VER)

Restriction negotiated between two countries that places a numerical limit on the quantity of a good imported by one country from the other.

Is it more expensive or cheaper to save jobs using tariffs and quotas?

More expensive.

World Trade Organization (WTO)

International organization that enforces trade agreements among members.

Globalization

The process of countries becoming more open to foreign trade and investment.

Protectionism

The use of trade barriers to shield domestic firms from foreign competition.

Dumping

When an imported product is sold for a price below its cost of production.

Unlimited wants exceed the limited resources available to fulfill those wants.

Scarcity

Trade-offs.

Households, firms, and governments face decisions about how to use scarce resources, requiring them to make...

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Production Possibilities Frontier (PPF)

Attainable and efficient.

Points on the PPF curve are...

Unattainable with current resources.

Points above the PPF curve are...

Attainable but inefficient.

Points below the PPF curve are...

The highest-value alternative that must be given up to engage in an activity.

Opportunity Cost

If Tesla produces 20 newer models, it must sacrifice 20 original models.

Example of opportunity cost (Tesla)

Some resources are better suited to one task than another; the more resources to an activity, the smaller the payoff.

Why do opportunity costs often increase?

It shifts the PPF curve outward, allowing more production of goods due to more resources or technological improvements.

How does economic growth affect the PPF curve?

The curve bows outward because the first hour of studying is more valuable than the last, reflecting increasing opportunity costs.

Example of bowed-out PPF (studying economics vs. accounting)

The act of buying and selling.

Trade

The ability of an individual, firm, or country to use the same resources to produce more of a good or service than competitors.

Absolute Advantage

The ability to produce a good or service at a lower opportunity cost than competitors.

Comparative Advantage

Comparative advantage.

Is the basis for trade comparative advantage or absolute advantage?

A group of buyers and sellers of goods or services, and the institution by which they trade.

Market

Households provide factors of production to firms and receive payments; firms supply goods/services to product markets, where households buy them.

How do the roles of households and firms differ within markets?

Labor, capital (physical capital like computers/machines), natural resources, and entrepreneurial ability.

What are the factors of production?

A market with few government restrictions on production, sales, or factor employment.

Free Market

Individuals act in self-interest, but flexible prices signal the worth of goods/services.

Market Mechanism

An economic system in which industries are owned by workers rather than private businesses.

Socialism

A tax imposed by a government on imports.

Tariff

Goods and services bought domestically but produced in other countries.

Imports

Goods and services produced domestically and sold to other countries.

Exports

A situation in which a country does not trade with other countries.

Autarky

The ratio at which a country can trade its exports for imports from other countries.

Terms of trade

Climate and natural resources, relative abundance of labor and capital, technology, and external economies.

Sources of comparative advantage

Reductions in a firm's costs that result from an increase in the size of the industry.

External Economies

Trade between countries without government restrictions.

Free Trade

Tariffs, quotas, and voluntary export restraints.

Government policies that interfere with trade

Numerical limit imposed by a government on the quantity of a good that can be imported into the country.

Quota

Restriction negotiated between two countries that places a numerical limit on the quantity of a good imported by one country from the other.

Voluntary Export Restraint (VER)

More expensive.

Is it more expensive or cheaper to save jobs using tariffs and quotas?

International organization that enforces trade agreements among members.

World Trade Organization (WTO)

The process of countries becoming more open to foreign trade and investment.

Globalization

The use of trade barriers to shield domestic firms from foreign competition.

Protectionism

When an imported product is sold for a price below its cost of production.

Dumping