Questions and Answers
What are the factors of production?
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:
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Describe a curve to show the effect that improved fertilizer would have on cotton and soybeans via the initial PPF.
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With the PPF, any point below the PPF line means:
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With the PPF, any point on the PPF line means:
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With the PPF, any point above the PPF line means:
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What causes economic growth, leading to a shift in the PPF?
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What is absolute advantage?
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What is comparative advantage?
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What is the basis for trade?
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How can a country gain from specialization and trade?
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What is the circular flow diagram and what does it illustrate?
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What is a free market?
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In what way does a free market differ from a centrally planned market?
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The primary difference between product markets and factor markets is that:
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What happens in a product market when George is buying a Tesla Model S?
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What happens in a factor market when Tesla increases at its Fremont Plant?
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What happens in a factor market when George works 20 hours per week at McDonald's?
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What happens in a factor market when George sells land he owns to McDonald's?
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According to Adam Smith, what is necessary for the proper functioning of a market system?
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According to Adam Smith, what is the instrument the invisible hand uses to direct the economy?
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Why does an increase in marginal opportunity cost occur?
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The idea of increasing marginal opportunity cost illustrates what important economic concept?
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Define Economic Growth.
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Define Trade.
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Define Market.
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Give examples of product markets.
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Define Labor.
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Define Capital.
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Define Natural Resources.
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Define Entrepreneur.
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What did the market mechanism state and who was it stated by?
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Define Property Rights.
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Define Intellectual Property Rights.
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What protects intellectual property rights?
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What does a household do in the circular-flow diagram?
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What does a firm do in a circular-flow diagram?
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Why are enforcement of contracts and property rights important?
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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.