EC001 - Chapter 2: Trade-offs, Comparative Advantage, and the Market System

Contains a list of concepts, vocabulary, and other such topics related to 'Chapter 2 Economics: Trade-offs, Comparative Advantage, and the Market System'

What are trade-offs?

Trade-offs are the alternatives that we give up when we choose one option over another.

What is opportunity cost?

Opportunity cost is the value of the next best alternative that is forgone when a decision is made.

What is comparative advantage?

Comparative advantage is the ability of an individual or group to carry out a particular economic activity more efficiently than another activity.

How does comparative advantage relate to trade?

Comparative advantage implies that trade can benefit all parties involved, as each can specialize in producing goods where they have a lower opportunity cost.

What is a production possibilities frontier (PPF)?

The production possibilities frontier is a curve that shows the maximum feasible amount of two goods that can be produced with available resources.

What does it mean when the PPF is bowed outwards?

A bowed outward PPF indicates increasing opportunity costs, meaning that as you produce more of one good, the amount of the other good that must be given up increases.

What is market equilibrium?

Market equilibrium is the point at which the quantity demanded equals the quantity supplied.

What factors can shift the demand curve?

Factors that can shift the demand curve include changes in consumer income, preferences, prices of related goods, and expectations about future prices.

What factors can shift the supply curve?

Factors that can shift the supply curve include changes in production costs, technology, number of sellers, and expectations about future prices.

What is the role of prices in a market economy?

Prices signal to producers and consumers about the scarcity and value of goods and services, guiding their decisions.

What is consumer surplus?

Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay.

What is producer surplus?

Producer surplus is the difference between what producers are willing to accept for a good or service and the price they actually receive.

What is the function of the market system?

The market system allocates resources efficiently through the forces of supply and demand.

What is the significance of specialization in an economy?

Specialization allows individuals or groups to focus on specific tasks, increasing efficiency and productivity.

How do government interventions affect the market system?

Government interventions can create price controls, taxes, and subsidies, which may lead to market distortions and inefficiencies.

What is a production possibilities frontier (PPF)?

A production possibilities frontier (PPF) is a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Is the PPF a positive or normative tool?

The PPF is a positive tool; it shows 'what is', not 'what should be'.

What is scarcity?

Scarcity is a situation in which unlimited wants exceed the limited resources available to fulfill those wants.

How does scarcity influence economics?

Scarcity requires trade-offs and economics teaches us tools to help make good trade-offs.

What can cause the PPF to shift?

The PPF may shift out (economic growth) or in (economic contraction) due to changes in technology, labor force, capital stock, or natural resources.

What is trade?

Trade is the act of buying and selling.

What is absolute advantage?

Absolute advantage is 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.

What is comparative advantage?

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

What is the basis for trade?

The basis for trade is comparative advantage, not absolute advantage.

How do specialization and trade benefit individuals, firms, and countries?

Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading.

What is a market?

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

What are the two key groups that participate in the modern economy?

The two key groups are households and firms; households provide factors of production, while firms supply goods and services to the market.

How do households participate in factor markets?

Households consist of individuals who provide factors of production and receive payments for these factors by selling them to firms in factor markets.

How do firms interact with households in product markets?

Firms supply goods and services to product markets, while households buy these products from the firms.

Property rights

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

Change in Quantity Demanded

It refers to the movement along the demand curve due to a change in the price of the good, leading to a different quantity that consumers are willing to purchase.