Mankiw Principles of Economics Ch. 2 & Ch. 3

absolute advantage

ability to produce a good using fewer inputs than another producer (adam smith)

opportunity cost

whatever must be given up to obtain some item

comparative advantage

ability to produce a good at a lower opportunity cost than another producer (david ricardo)

imports

goods produced abroad and sold domestically

exports

goods produced domestically and sold abroad

circular flow diagram

visual model of economy that shows how money flows through markets among firms and households

markets for goods and services

in this market households are buyers, firms are sellers

markets for factors of production

in this market households are sellers and firms are buyers

production possibilites frontier

graph that shows the combinations of output that the economy can possibly produce given the available factors of production and available production technology

microeconomics

study of how households and firms make decisions and how they interact in markets

macroeconomics

study of economy-wide phenomena including inflation, unemployment, and economic growth

positive statements

claims that attempt to describe the world as it is (can be analyzed)

normative statements

claims that attempt to prescribe how the world should be (involve opinion)

model

simplification of reality

liberalism

age of enlightenment that introduced the revolutionary idea that everyone has a natural right to life, liberty, and property

industrial revolution

new manufacturing technologies and improved transportation gave rise to modern factory systems and a massive movement of the population from the countryside to the cities

The Wealth of Nations

progress of human well being is due to the free exchange which makes possible the division of labor, therefore increasing productivity

Theory of Moral Sentiments

human behavior is driven by others regarding sympathy, mutual trust, and generosity

invisible hand

private interests and passions of men are led in the direction "which is most agreeable to the interests of the whole society"

Goods and services 1

What does a firm give to the product market 1

revenue

What does a product market give to a firm

Resources (Land, labor, capital, and entrepreneur)

What does a factor market give to firms

Cost (rent, wages)

What does a firm give to the factor market

Government expenditures 1

What does the government give to factor markets 1

Government expenditures 2

What does the government give to the product market2

Goods and services 2

What does the product market give to the government 2

goods and services 3

What does the product market give to households 3

consumer spending

What do households give to product markets

Resource Income

What does the factor market give to the government

taxes 1

What do firms give to governments 1

taxes 2

What do households give to governments 2

government services 1

What does the government give to firms 1

government services 2

what does the government give to households 2

Resources (land, Labor, entrepreneurship, capital)

What do households give to factor markets

trade-offs

All alternatives that we give up when we make a choice

Scarcity

limited resources in relation to unlimited wants and needs.

Scientific approach

Uses the scientific method to make generalizations and abstractions to develop theroies

Policy approach

Apply theories to try to fix problems or meet economic goals

factors of production

resources that are used by the economy to produce goods and services

Capital goods

Items that can be used to produce something else

Command economy

Government owns everything and controls the government

Free market economy

Individuals own resources and control economic decisions

Mixed economy

Free markets with some intervention

Increasing opportunity cost

Bow shaped PPF since resources aren’t all equal caused by

Constant opportunity cost

Staright line PPF since it uses the same resources to make things. Is a

Productive efficiency

Products are produced in the cheapest way

Allocative efficiency

Products that are produced are the most desired ones