Microeconomics Chapter 2 Flashcards

Questions and Answers

What does scarcity refer to?

Resources are abundant

Unlimited wants exceed limited resources (correct)

The absence of trade-offs

Wants can be satisfied without limits

What is opportunity cost?

The highest valued alternative that must be given up to engage in an activity.

What does the production possibilities frontier indicate?

It shows the maximum attainable combinations of two products produced with current technology and resources.

What does point X on the production possibilities frontier curve represent?

Inefficient production Signup and view all the answers

What does it mean when opportunity cost is constant?

The PPF is a straight line. Signup and view all the answers

What are increasing marginal opportunity costs?

The smaller the payoff to devoting additional resources to an activity. Signup and view all the answers

What does economic growth refer to?

The ability of an economy to increase production of goods and services. Signup and view all the answers

How can technological change impact industry?

It can increase the number of both products by using fewer resources. Signup and view all the answers

What is trade based on?

Comparative advantage. Signup and view all the answers

What does specializing mean in economics?

Concentrating in the production of one or a few goods. Signup and view all the answers

What is absolute advantage?

The ability to produce more of a good or service using the same amount of resources. Signup and view all the answers

What is comparative advantage?

The ability to produce a good or service at a lower opportunity cost than competitors. Signup and view all the answers

What are factors of production?

Inputs used to make goods and services: labor, capital, natural resources, entrepreneurial ability. Signup and view all the answers

What does labor refer to in economics?

All types of work. Signup and view all the answers

What is capital in terms of factors of production?

Physical equipment used to produce other goods. Signup and view all the answers

What do natural resources include?

Land, water, oil, ore, raw materials. Signup and view all the answers

What is entrepreneurial ability?

The ability to bring together factors of production, often at one's own risk. Signup and view all the answers

What is a market?

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

What are product markets?

Markets for goods and services, what firms supply to. Signup and view all the answers

What are factor markets?

Markets for factors of production including labor, capital, natural resources, and entrepreneurial ability. Signup and view all the answers

What are the two key groups in markets?

Households and firms. Signup and view all the answers

What is a circular-flow diagram?

A simplified economic model linking market participants without government, banks, or foreigners. Signup and view all the answers

What characterizes a free market?

Few government restrictions on how a good or service can be produced or sold. Signup and view all the answers

Who is Adam Smith?

The father of modern economics who argued for free markets in his 1776 book. Signup and view all the answers

What is the invisible hand in economics?

The concept that individual responses collectively reach firms to indicate what consumers want. Signup and view all the answers

What does an entrepreneur do?

Operates a business, bringing together factors of production to produce goods or services. Signup and view all the answers

What is the legal market environment?

Government involvement to allow markets to operate efficiently. Signup and view all the answers

What is the protection of private property?

Assurance that profits or capital are not seized by military, governments, or criminals. Signup and view all the answers

What are property rights?

Rights to the exclusive use of their property, such as buying or selling it. Signup and view all the answers

Why is enforcement of contracts important?

It is vital for transactions or agreements over time. Signup and view all the answers

Study Notes

Scarcity and Trade-offs

Scarcity occurs when unlimited wants surpass the limited resources available, necessitating trade-offs in resource allocation.

Opportunity Cost

Opportunity cost refers to the highest valued alternative forgone when choosing to engage in a specific activity.

Production Possibilities Frontier (PPF)

PPF represents the maximum combinations of two products that can be produced with current technology and resources.

PPF Curve Points

X-points indicate inefficiency, where not all resources are utilized.
Y-points denote unattainability due to insufficient resources.
B-points reflect efficiency in producing both goods.

Straight Points on PPF

In a linear PPF, the opportunity cost remains constant, typically at a 1:2 ratio between two goods.

Increasing Marginal Opportunity Costs

As more resources are allocated to an activity, the incremental benefit diminishes. Some resources are better suited for specific tasks than others.

Economic Growth

Economic growth signifies the economy's capacity to increase the production of goods and services.

Technological Change

Technological advancements can enhance production efficiency, allowing increased output of both products with fewer resources.

Trade and Comparative Advantage

Trade involves buying and selling, underpinned by the concept of comparative advantage, which allows for mutual benefits from specialization.

Specialization

Specialization focuses on the production of a limited range of goods, enhancing efficiency and output.

Absolute Advantage

Absolute advantage is the capability to produce more of a good using the same resources, though trade can still yield benefits.

Comparative Advantage

Comparative advantage refers to the ability to produce a good at a lower opportunity cost than competitors.

Factors of Production

Factors of production include labor, capital, natural resources, and entrepreneurial ability, all essential for creating goods and services.

Labor

Labor encompasses all types of work involved in production processes.

Capital

Capital consists of physical equipment, machinery, and tools used to produce other goods.

Natural Resources

Natural resources include land, water, oil, ore, and raw materials utilized in production.

Entrepreneurial Ability

Entrepreneurial ability is the skill to combine the factors of production innovatively and often at personal risk.

Market Structure

A market consists of buyers and sellers of goods and services, with various mechanisms for their interaction.

Product Markets

Product markets are markets where goods and services are exchanged, supplied by firms.

Factor Markets

Factor markets involve the exchange of factors of production, such as labor and capital.

Key Market Participants

Households and firms represent the two primary groups in economic markets.

Circular-Flow Diagram

The circular-flow diagram is a simplified model demonstrating the interactions among market participants, excluding government, banks, and foreign entities. A slowdown indicates recession; rapid growth signals inflation.

Free Market System

A free market entails minimal governmental restrictions on production and sale mechanisms, contributing to higher living standards.

Adam Smith

Adam Smith, known as the father of modern economics, advocated for free markets in his 1776 work, asserting that prices coordinate economic activities without guild interference.

Invisible Hand

The "invisible hand" theory suggests that individual actions collectively guide firms to understand consumer demands; price flexibility is essential for this process.

Entrepreneurial Role

Entrepreneurs operate businesses by integrating factors of production, often employing innovative technologies to fulfill customer needs.

Legal Market Environment

A legal market environment ensures efficient market operation through government intervention, protecting private property rights and enforcing contracts.

Protection of Private Property

Safeguarding private property ensures businesses are assured that their profits or assets will remain secure from seizure by external entities.

Property Rights

Property rights grant individuals exclusive control over their property, allowing for buying, selling, and protection of intellectual property through patents and copyrights.

Enforcement of Contracts

Enforcing contracts and property rights is crucial for maintaining the integrity of transactions and agreements over time, typically handled by the court system.

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Description

Dive into the fundamental concepts of microeconomics with these flashcards from Chapter 2. Learn about key terms such as scarcity, opportunity cost, and the production possibilities frontier. Strengthen your understanding and prepare for your studies in economic theory.