eco 201 uk ch3
Terms
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- production possibility curve
- a curve tat outlines all possible combinations of total output that could be produced assuming the following: 1)a fixed amount of productive resources, 2)a given amount of technical knowledge, and 3)full and efficient use of those resources
- law of increasing marginal opportunity cost
- as an economy produces more of a good, the opportunity cost of an additional unit (expressed in terms of other goods sacrificed) will increase because all resources are not equally efficient
- law of comparative advantage
- individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce cheaply and exchanging them for goods they cannot produce at a low cost
- absolute advantage
- if you can produce more of a good with the same amount of resources as someone else (due to previous experience and/or natural endowments)
- comparative advantage
- if you have the lowest opportunity cost of producing something
- middleman
- the person in the middle that reduces costs
- transaction costs
- costs such as time, effort, and other resources need to search out, negotiate, and complete an exchange; can inhibit trade
- zero sum game
- when individuals engage in a voluntary exchange, both parties are made better off
- trade creates value
- 1) when individuals engage in a voluntary exchange, both parties are made better off. 2) by channeling goods and resource to those who value them most, trade creates value and increases the wealth created by a society's resources
- property rights
- the rights to use, control and obtain the benefits from a good or service
- Adam Smith
- the father of economics; published Wealth of Nations; came up with the idea of the invisible hand
- private property rights
- 1) the right to exclusive use of the property. 2)legal protection against invasion from others who would see to use or abuse the property without the owner's permission. 3) the right to transfer, sell, exchange, or mortgage the property.
- four incentives of private property rights
- 1) private owners can gain by employing their resources in ways that are beneficial to others. 2) private owners have a strong incentive to take care for and properly manage what they own. 3)private owners have an incentive to conserve for the future. 4) private owners have an incentive to lower the chance that their property will cause damage to the property of others
- 4 factors that shift the ppc outward
- 1)increase in economy's resource. 2)advancements in technology. 3)improvement in the rules under which the economy functions. 4)by working harder and using less leisure time
- technology
- determines the max amount of output an economy can produce given the resources it has
- invention
- the creation of a new product or process, often facilitated by the knowledge of engineering and science.
- entrepreneur
- a person who introduces new products or improved techniques to satisfy consumers at a lower cost
- innovation
- the practical and effective adoption of new techniques.
- investment
- the purchase, construction, or development of resources including physical assets, such as plants and machinery
- division of labor
- a method that breaks down the production of a product into a series of specific tasks
- market organization
- a method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices
- capitalism
- an economics system in which productive resources are owned privately and goods and resources are allocated through market prices
- collective decision making
- the method of organization that relies on public sector decision making to resolve basic economic questions
- socialism
- a system of economic organization in which the ownership and control of the basic means of production rest with the state, and resource allocation is determined by centralized planning rather than market forces
- mixed economy
- a mix between socialism and capitalism. the regulations never produce positive results because they always force people to act against their own interests. when a policy fails, it is propped up by other regulations in the hopes that more control will produce better results.
- tragedy of the commons/common pool problem
- problem of overuse of a resource when property rights not clearly established
- essentials to effective transition from command to market economy
- 1) achieve price stability. 2)establish and maintain private property rights. 3)allow market incentives to motivate decision-makers. 4)allow prices to fluctuate in response to supply and demand. 5)establish a broadly obeyed legal system and climate of trust. 6) individuals must be able to think in market-oriented way
- laissez-faire
- no intervention by gov't except as referee
- foundation of trade
- mutual gain....both sides gain from the trade
- the inside frontier (located inside the PPC)
- unemployed resources or resources used inefficiently
- expanding frontier (located outside the PPC)
- occurs when resources are increased and/or due to technological advancements
- market mechanism
- supply and demand determine the price; owners allocate resources to obtain the highest monetary rewards
- command economy
- central authority determines the price and allocates reources to achieve goals