Chapter 5: Basic Economic Concepts

Scarcity

occurs because __unlimited__ desire for goods and services exceeds __limited__ ability to produce them due to constraints on time and resources

Resources

capital, labor, entrepreneurship, natural resources

(also referred to as inputs or factors of production)

Labor

physical and mental effort of people

Human capital

knowledge and skill from training and experience

Entrepreneurship

ability to identify opportunities and organize production, and willingness to accept risk to pursue rewards

Economics

study of how societies allocate scarce resources among competing ends

Positive economics

__describes__ the way things

Normative economics

way things __should__ be

Opportunity cost

value of the best alternative sacrificed compared to what actually takes place

Production-possibilities frontier

illustrates the opportunity cost of making one good rather than another one

Efficency

all resources are used productively

Slope

Greater absolute value of slope = greater opportunity cost

Consumer goods

products for sale in a retail or consumer market used directly by consumers

Capital goods

things purchased to produce other goods

Specialization

particular area where a person concentrates in or has expertise in

Division of labor

allows people to develop expertise in certain tasks, where practice improves performance

Absolute advantage

when a country can produce a good using __fewer resources__ per unit of output compared to another country

Comparative advantage

when a country can produce a good at a __lower opportunity cost__ compared to another country

Consumption-possibilities frontier

With trade, countries can have a consumption possibilities frontier that exceeds its own production possibilities frontier

Cost-benefit analysis

comparing value of cost vs. benefits

Distributive efficiency

those who place the highest relative value on goods should receive them

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Marginal rate of substitution

ratio of marginal utility for two goods