Econlrt Chapter 2
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Transcript of Econlrt Chapter 2
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8/13/2019 Econlrt Chapter 2
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Source: Principle of Economics, 10th
ed. (Case & Fair) v2.0 Prepared by: Acidera, Jaypaul O
YECONLRTCHAPTER 2
3 BASIC QUESTIONS TO UNDERSTAND THE FUNCTIONING OF
THE ECONOMIC SYSTEMS
1. What gets produced? Concerned with the resources
2. How is it produced? Concerned with the producers
3. Who gets what is produced? Concerned with the households
Capitalthings that are produced and then used in the
production of other goods and services
Factorsthe inputs into the process of production, another
term for resources
Productionthe process that transforms scarce resources
into useful goods and services
Inputs (resources)anything provided by nature or previous
generations that can be used directly or indirectly to satisfy
human wants
Outputsgoods and services of value to households
SPECIALIZATION, EXCHANGE, AND COMPARATIVE
ADVANTAGE
Theory of comparative advantageDavid Ricardos theory
that specialization and free trade will benefit all trading
parties, even those that may be absolutely more efficient
producers
Absolute advantagea producer has an absolute
advantage over another in the production of a good or
service if he or she can produce that product using fewer
resources
Comparative advantagea producer has a comparative
advantage over another in the production of a good or
service if he or she can produce that product at a loweropportunity cost
CAPITAL GOODS AND CONSUMER GOODS
Capital goodsthings that are produced and then used in
the production of other goods and services
Consumer goodsgoods produced for present
consumption
Investmentthe process of using resource to produce new
capital
THE PRODUCTION POSSIBILITY FRONTIER
Production possibility frontier (PPF)a graph that shows
all the combinations of goods and services that can be
produced of all of societys resources are used efficiently
Y-axismeasures the quantity of capital goodsproduced
X-axismeasures the quantity of consumersgoods
Production efficiencyis a state in which a given mix of
outputs is produced at the least cost
Marginal rate of transformation (MRT)the slope of the
production possibility frontier
ECONOMIC SYSTEMS
Command economyan economy in which a central
government either directly or indirectly sets output targets,
incomes, and prices
Laissez-faire economy allow [them] to doan economy
in which individual people and firms pursue their own self-
interest without any central direction or regulation
Consumer sovereigntythe idea that consumersultimately dictate what will be produced (or not to
produced) by choosing what to purchase (and
what not to purchase)
Free enterprisethe freedom of individuals tostart and operate private businesses in search for
profit
Mixed systemsindividual enterprise exists and
independent choice is exercised even in economies in
which the government plays a major role; all economies are
mixed
Marketthe institution through which buyers and sellers
interact and engage in exchange
Incomeis the amount that a household earns each year
Wealthis the amount that households have accumulated
out of past income through saving or inheritance
Priceis the amount that a product sells for per unit, and it
reflects what society is willing to pay