Economics: Chapter 2 – Trade-offs, Comparative Advantage, and the Market System

A set of flashcards covering key concepts from Economics Chapter 2 about trade-offs, comparative advantage, and the market system.

What does the Production Possibilities Frontier (PPF) represent?

It shows maximum combinations of two goods that can be produced with available resources and technology.

What does a point on the PPF curve indicate?

It indicates efficient production.

What is the opportunity cost?

The value of the next-best alternative you give up.

What is the difference between absolute advantage and comparative advantage?

Absolute advantage is the ability to produce more using fewer resources, while comparative advantage is the ability to produce at a lower opportunity cost.

What leads to higher total output and gains in an economy?

Specialization and trade.

What are the two main groups in the Circular Flow Diagram?

Households and Firms.

What do households provide in the factor markets?

Labor and Capital.

What is the role of the entrepreneur in the economy?

To bring together land, labor, and capital to produce goods and services while taking on risk.

What are property rights?

Legal protection of ownership over resources, goods, and services.

What is required for a free market to function?

Well-defined property rights, Rule of law, and Freedom to exchange goods and services.

What is the quick tip for calculating opportunity cost?

Opportunity cost = 'what you give up / what you gain.'