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Macro Chapter 2

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Terms in this set (20)

  • What is scarcity in economics?

    Scarcity occurs when resources are insufficient to satisfy all wants at a zero price. It means we never have enough of everything, including time, to satisfy every desire.

  • How is scarcity different from a shortage?

    Scarcity is a permanent condition of limited resources, while a shortage is a temporary situation where demand exceeds supply at a given price.

  • What are the four main factors of production?

    Land (natural resources), Labor (human resources), Physical capital (manufactured resources), and Human capital (education and training).

  • Define opportunity cost.

    Opportunity cost is the highest-valued next-best alternative that must be sacrificed to obtain something.

  • What does the production possibilities curve (PPC) represent?

    The PPC shows all possible combinations of maximum outputs that can be produced with fixed resources and technology.

  • What causes the bowed shape of the PPC?

    The law of increasing additional cost causes the PPC to bow outward because resources are specialized and not perfectly adaptable.

  • What is the trade-off illustrated by the PPC?

    The trade-off between producing more of one good versus less of another, reflecting opportunity costs.

  • What is productive efficiency?

    Producing the maximum output with given technology and resources or producing a given output at minimum cost.

  • What is an inefficient point on the PPC?

    A point inside the PPC where resources are not fully or efficiently used, resulting in less than maximum possible output.

  • How does economic growth affect the PPC?

    Economic growth shifts the PPC outward, allowing more production of all goods over time.

  • What is the trade-off between consumption goods and capital goods?

    Producing more capital goods today means fewer consumption goods now but leads to greater production possibilities and consumption in the future.

  • Define comparative advantage.

    Comparative advantage is the ability to produce a good at a lower opportunity cost than others.

  • Define absolute advantage.

    Absolute advantage is the ability to produce more units of a good with the same resources or the same units with fewer resources.

  • Why do rational individuals specialize according to comparative advantage?

    Specializing in goods with the lowest opportunity cost increases overall productivity and gains from trade.

  • What is the division of labor?

    The segregation of resources into specific tasks to increase efficiency, such as different workers performing different steps in production.

  • How does specialization affect trade?

    Specialization leads to trade between individuals, groups, or nations, improving worldwide economic efficiency and output.

  • What is the opportunity cost of attending an economics class?

    The highest-valued alternative use of that time, such as studying another subject, working, or leisure.

  • What assumptions underlie the PPC model?

    Resources are fully employed, fixed in quantity and quality, production occurs over a specific time, and technology is constant.

  • What happens to the PPC if more time is spent studying economics instead of mathematics?

    The PPC point moves along the curve, showing a trade-off with higher expected grades in economics and lower in mathematics.

  • Why does the law of increasing additional cost matter in production decisions?

    Because producing more of one good requires giving up increasing amounts of other goods, influencing resource allocation.