Chapter 2 Microeconomics (Production, PPF, Opportunity Cost, and Trade)

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14 Terms

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Three Basic Economic Questions

  • What goods/services will be produced?

  • How will they be produced (use of land, labor, capital)?

  • Who will receive them (distribution)?

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Factors of Production (FOPs)

  • Land → natural resources (rent)

  • Labor → human effort/skills (wages)

  • Capital → tools/machines (interest)

  • Entrepreneurship → risk-taking, organizing FOPs (profit)

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Production Possibilities Frontier (PPF)

  • On curve = efficient

  • Inside curve = inefficient

  • Outside curve = unattainable

  • Concave shape = increasing opportunity cost

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Productive efficiency

least cost

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Allocative efficiency

right mix of goods society wants

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Opportunity Cost

  • Formula: Opportunity Cost = What you give up ÷ What you gain

Law of Increasing OC: Costs rise as more resources are shifted.

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Economic Growth (PPF shifts outward)

  • ↑ Resources (labor, land, capital)

  • ↑ Human capital (education, training)

  • ↑ Technology (innovation, productivity)

  • ↑ Investment in capital goods

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Absolute advantage

 Produce more with the same resources.

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Comparative advantage

Produce at lower opportunity cost.

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Imports

 goods produced abroad and sold domestically

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Exports

 goods produced domestically and sold abroad

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Autarky

 no trade

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Moving along

 change in what we produce.

Cause: A change in the price of the good or service.

Effect: A change in the quantity demanded or quantity supplied, but the underlying relationship between price and quantity remains the same.

Example: If the price of bread rises, a bakery may produce and sell more bread, moving along its supply curve to a higher quantity supplied at the new, higher price.

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Shifting

change in how much we can produce overall.

  • change in production

  • Cause:

    A change in any factor other than the price of the good or service. 

    • Demand shifts: are caused by changes in consumer income, tastes and preferences, the price of related goods (substitutes or complements), and consumer expectations. 

    • Supply shifts: are caused by changes in input costs, technology, the number of sellers, or expectations about future prices. 

  • Effect:

    The entire demand or supply curve moves to the left or right, meaning that a different quantity is demanded or supplied at every given price. 

  • Example:

    If consumers' incomes rise, they might buy more bread at the original price, causing the entire demand curve for bread to shift to the right.