Choices and Trade-offs: Macroeconomic Foundations (Chapter 2)

Twenty-two vocabulary flashcards covering key terms from Chapter 2 on choices, trade-offs, comparative advantage, and the market system.

Scarcity

The incompatibility between limited resources and unlimited human wants.

Production Possibility Frontier (PPF)

A curve that shows the maximum attainable combinations of two goods producible with current resources and technology.

Opportunity Cost

The highest-valued alternative that must be sacrificed to engage in an activity.

Increasing Marginal Opportunity Costs

The principle that producing additional units of one good requires ever-larger sacrifices of the other good, giving the PPF its bowed-out shape.

Economic Growth

An outward shift of the entire PPF resulting from an expansion of resources or improvements in technology across the economy.

Technological Change (Industry-specific)

Advances that raise output in one sector, rotating the PPF outward along that good’s axis while leaving the other unchanged.

Specialisation

Concentrating production on goods for which an individual or nation has a comparative advantage.

Trade

The act of buying or selling goods and services in a market to obtain mutual gains.

Absolute Advantage

The ability to produce more of a good or service than competitors using the same amount of resources.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than others, forming the basis for beneficial trade.

Gains from Trade

Increases in consumption possibilities that arise when parties specialise according to comparative advantage and exchange output.

Market

A group of buyers and sellers and the institutional arrangements that enable them to trade a good or service.

Product Market

A market where final goods and services, such as computers or medical treatment, are bought and sold.

Factor Market

A market where factors of production—labour, capital, natural resources, entrepreneurial ability—are traded.

Factors of Production

Inputs used to produce goods and services: labour, capital, natural resources, and entrepreneurial ability.

Free Market

A market with minimal government restrictions on production, sale, and factor employment.

Price Mechanism

The process in free markets whereby price changes coordinate producers’ and consumers’ decisions, directing resources to their most valued uses.

Invisible Hand

Adam Smith’s metaphor for the self-regulating nature of markets, whereby self-interested actions can promote societal welfare.

Property Rights

Legal rights to exclusive use, transfer, or sale of property, critical for a functioning market system.

Private Property Rights

Property rights held by individuals or firms, providing incentives for production and exchange.

Independent Court System

A judiciary that impartially enforces contracts and property rights, supporting market efficiency.

Adam Smith

18th-century Scottish philosopher whose work ‘The Wealth of Nations’ championed free markets and the benefits of self-interest.