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

Flashcards covering key vocabulary from Microeconomics Chapter 2 on Trade-offs, Comparative Advantage, and the Market System.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Opportunity Cost

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

Economic Growth

The ability of the economy to increase the production of goods and services.

Trade

The act of buying and selling.

Absolute Advantage

The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.

Comparative Advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Market

A group of buyers and sellers of a good or service, and the institution or arrangement by which they come together to trade.

Households

Consist of individuals who provide the factors of production: labor, capital, natural resources, and other inputs used to make goods and services.

Firms

Purchase factors of production from households and use them to create goods and services.

Labor

All types of work, from part-time labor to senior management.

Capital

Refers to physical capital, such as computers, office buildings, and machine tools, used to produce other goods.

Natural Resources

Land, water, oil, iron ore, and other raw materials (or

Entrepreneur

Someone who operates a business and has the ability to bring together the other factors of production to successfully produce and sell goods and services.

Factor Market

A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

Product Market

A market for goods

such as computers

or services

such as medical treatment.

Circular-Flow Diagram

A model that illustrates how participants in markets are linked.

Free Market

A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

Property Rights

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.