chapter 2

Production Possibility Frontier (PPF)

A curve that shows the trade-offs and efficiency of producing two goods in an economy.

Opportunity Cost

The value of what must be given up to produce more of a good.

Efficiency in production

When an economy cannot produce more of one good without producing less of another.

Efficient allocation

When an economy allocates its resources so that consumers are as well off as possible.

Economic growth

The ability of the economy to produce more goods and services, indicated by an outward shift of the PPF.

Comparative advantage

The ability to produce a good at a lower opportunity cost compared to another producer.

Absolute advantage

When a country can produce both goods more efficiently than another country.

Circular-flow diagram

A model that shows the flow of physical things and money in an economy between households and firms.

Barter

The direct exchange of goods for other goods without using money.

Positive economics

An approach that focuses on describing how the economy actually works using facts.

Normative economics

An approach that prescribes how the economy should work, often using subjective terms like 'should'.

Income distribution

The way income is shared among different people in an economy.

Factors of production

Resources used to produce goods, including land, labor, physical capital, and human capital.

Economic efficiency

Occurs when an economy cannot improve the well-being of one individual without harming another.

Slope of PPF

Represents the opportunity cost of one good in terms of the other good that must be sacrificed.