Economics Chapter 2 Flashcards

Questions and Answers

What are the factors of production?

Workers (correct)

Entrepreneurial ability (correct)

Natural resources (including land) (correct)

Capital (correct)

Scarcity requires ________

trade-offs

Define Production Possibilities Frontier.

A curve showing the maximum attainable combination of two products that may be produced with available resources and current technologies.

We can show economic efficiency with:

Points on the PPF Signup and view all the answers

Describe a curve to show the effect that improved fertilizer would have on cotton and soybeans via the initial PPF.

The new curve would shift right because the new fertilizer represents new technology which shows an increase in the possibility of production. Signup and view all the answers

With the PPF, any point below the PPF line means:

All available resources were not used, showing an inefficient result. Signup and view all the answers

With the PPF, any point on the PPF line means:

All available resources were used, showing an efficient result. Signup and view all the answers

With the PPF, any point above the PPF line means:

All available resources would've been over-used, showing an unattainable result. Signup and view all the answers

What causes economic growth, leading to a shift in the PPF?

Capital Signup and view all the answers

What is absolute advantage?

The ability to produce more of a good/service than competitors using the same amount of resources Signup and view all the answers

What is comparative advantage?

The ability to produce a good/service at lower opportunity cost than other producers Signup and view all the answers

What is the basis for trade?

Comparative advantage Signup and view all the answers

How can a country gain from specialization and trade?

A country can specialize in producing what it has a comparative advantage in and trade for needs and services. Signup and view all the answers

What is the circular flow diagram and what does it illustrate?

It shows how firms and households are linked through product and factor markets. Signup and view all the answers

What is a free market?

It is one where the government does not control the production of goods/services. Signup and view all the answers

In what way does a free market differ from a centrally planned market?

Unlike a free market, centrally planned markets have extensive government controls. Signup and view all the answers

The primary difference between product markets and factor markets is that:

Product markets are markets for goods, while factor markets are for factors of production. Signup and view all the answers

What happens in a product market when George is buying a Tesla Model S?

It takes place in a product market. The household demands the goods, and the firms supply the good. Signup and view all the answers

What happens in a factor market when Tesla increases at its Fremont Plant?

It takes place in a factor market. The household supplies the labor and the firms demand the labor. Signup and view all the answers

What happens in a factor market when George works 20 hours per week at McDonald's?

It takes place in a factor market. The household supplies the labor and the firms demand the labor. Signup and view all the answers

What happens in a factor market when George sells land he owns to McDonald's?

It takes place in a factor market. The household supplies the factor, and the firms demand the factor. Signup and view all the answers

According to Adam Smith, what is necessary for the proper functioning of a market system?

For markets to work, people must be free to pursue their self-interest. Signup and view all the answers

According to Adam Smith, what is the instrument the invisible hand uses to direct the economy?

Prices Signup and view all the answers

Why does an increase in marginal opportunity cost occur?

It occurs because some workers, machines, and other resources are better suited to one use than to another. Signup and view all the answers

The idea of increasing marginal opportunity cost illustrates what important economic concept?

The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. Signup and view all the answers

Define Economic Growth.

The ability of the economy to increase the production of goods and services, ultimately raising the standard of living. Signup and view all the answers

Define Trade.

The act of buying and selling. Signup and view all the answers

Define Market.

A group of buyers and sellers of a good/service and the institution/arrangement by which they come together to trade. Signup and view all the answers

Give examples of product markets.

A market for goods like computers or services such as trade. Signup and view all the answers

Define Labor.

Labor is a part of the factor market and includes all types of work, from part-time labor of teens to the work of senior managers in large corporations. Signup and view all the answers

Define Capital.

Capital is part of the factor market referring to physical capital, such as computers and machine tools, used to produce other goods. Signup and view all the answers

Define Natural Resources.

Natural resources is part of the factor market which includes land, water, oil, iron ore, and other raw materials used in producing goods. Signup and view all the answers

Define Entrepreneur.

Entrepreneurs are part of the factor market and are people who bring together the factors of production for success. Signup and view all the answers

What did the market mechanism state and who was it stated by?

Adam Smith stated that individuals act in a rational, self-interested way, and for market mechanisms to work, prices must be flexible. Signup and view all the answers

Define Property Rights.

The rights individuals/firms have to the exclusive use of their property, including the right to buy/sell it. Signup and view all the answers

Define Intellectual Property Rights.

They include books, films, software, and ideas for new products/new ways of producing products. Signup and view all the answers

What protects intellectual property rights?

Patents and copyrights Signup and view all the answers

What does a household do in the circular-flow diagram?

It obtains wages and other payments from the factor market and then goes to the product market to receive goods and services. Signup and view all the answers

What does a firm do in a circular-flow diagram?

It receives labor, capital, natural resources, and entrepreneurial ability from the factor market and gives them to the product market. Signup and view all the answers

Why are enforcement of contracts and property rights important?

If property rights are not well enforced, fewer goods and services will be produced. Signup and view all the answers

Study Notes

Factors of Production

Four main factors: workers, capital, natural resources (includes land), and entrepreneurial ability.

Scarcity and Trade-offs

Scarcity necessitates trade-offs due to limited goods/services and factors of production.

Production Possibilities Frontier (PPF)

Represents maximum combinations of two products producible with current resources and technology.

Economic Efficiency and PPF

Efficiency is represented by points on the PPF; points inside indicate inefficiency; points outside indicate unattainability.

Shifts in PPF

Improved technology, like enhanced fertilizer, shifts the PPF rightward, indicating increased production potential.

Economic Growth

Driven by factors such as capital (human resources, labor, financial) and technology, leading to shifts in the PPF.

Absolute Advantage

Defined as the ability to produce more of a good/service than competitors using the same resources.

Comparative Advantage

Refers to producing a good/service at a lower opportunity cost compared to others, forming the basis for trade.

Specialization and Trade

Specialization in goods with comparative advantage allows countries to trade for services and goods they need.

Circular Flow Diagram

Illustrates connections between firms and households through product and factor markets, depicting flows of money and goods.

Free Market Characteristics

A free market operates with minimal government control over production; contrasts with centrally planned markets that have significant government intervention.

Product versus Factor Markets

Product markets deal with goods/services, while factor markets focus on factors of production like labor and capital.

Market Dynamics Example

Product market example: George buying a Tesla; factor market example: Tesla hiring workers at its Fremont Plant.

Adam Smith's Market Principles

Markets function effectively when individuals can pursue self-interest; the invisible hand guides economic activity through price mechanisms.

Marginal Opportunity Cost

Increases as resources better suited for specific uses are allocated; highlights diminishing returns from excessive resource allocation.

Economic Growth Definition

Refers to the economy's capacity to boost production of goods/services, enhancing living standards.

Trade Definition

Involves the buying and selling of goods/services in markets.

Market Defined

A collection of buyers and sellers in institutional arrangements that facilitate trade.

Labor and Capital in Factor Markets

Labor includes all work types; capital encompasses physical tools and machinery used for production.

Natural Resources

Include essential materials like land, water, and minerals used in production processes.

Role of Entrepreneurs

Entrepreneurs integrate various production factors to initiate and sustain successful ventures.

Property Rights

Grant individuals/firms exclusive use of their property, covering both tangible and intangible rights.

Intellectual Property Rights

Protect creative works such as books, films, and software, ensuring creators' rights.

Protection Mechanisms

Asserts that patents and copyrights safeguard intellectual property rights.

Households in Circular Flow

Receive wages and payments from factor markets, then use income to acquire goods/services in product markets.

Firms in Circular Flow

Acquire factors of production from markets, sell products to households, engaging in economic exchanges.

Importance of Contracts and Property Rights

Enforcement ensures production efficiency and nearness to PPF, facilitating economic activity and resource use.

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Test your knowledge on key concepts of production factors and scarcity with these flashcards from Economics Chapter 2. Understand crucial terms like production possibilities frontier and the impact of trade-offs in economics.