Economics Chapter 2
* Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. * The outward-bowed shape of the PPF reflects increasing opportunity cost. The PPF is bowed outward because resources are not all equally productive in all activities. * When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit, we have achieved allocative efficiency.
To make decentralized coordination work, four complementary social institutions that have evolved over many centuries are needed. They are: -Firms
Production Possibilities Frontier (PPF): Is the boundary between those combinations of goods and services that can be produced and those that cannot.
Production Efficiency: If we produce goods and services at the lowest possible cost.
Preferences: Are a description of a person’s likes dislikes.
Marginal Benefit: From a good or service is the benefit received from consuming one more unit of it.
Marginal Benefit Curve: Which is a curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good.
Economic Growth: Increases our standard of living, but it doesn’t over-come scarcity and avoid opportunity cost.
Technological Change: The development of new goods and of better ways of producing goods and services.
Capital Accumulation: Is the growth of capital resources, including human capital.
Comparative Advantage: A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else.
Absolute Advantage: Involves comparing productivities – production per hour – whereas comparative advantage involves comparing opportunity costs.
Learning-by-Doing: Learning-by-Doing is the basis of dynamic comparative advantage.
Dynamic Comparative Advantage: Is a comparative advantage that a person (or country) has acquired by specializing in an activity and becoming the lowest-cost producer as a result of learning-by-doing.
Firm: Economic unit that hires factors of production and organizes those factors to produce and sell goods and services. Example, Roots, Canadian Tire.
Markets: A market is any arrangement that enables buyers and sellers to get information and to do business with each other. Example is when oil is bought and sold- the world oil market.
Property Rights: The social arrangements that govern the ownership, use, and disposal of anything that people value. Real property includes land and buildings. Financial property includes stocks and bonds and money in the bank.
Money: Any commodity or token that is generally acceptable as a means of payment.
Demand and Supply
Competitive Market: A market that has many buyers and many sellers, so no single buyer or seller can influence the price.
Money Price: The price of an object is the number of dollars that must be given up in exchange for it.
Relative Price: The ratio of one price to another. A relative price is an opportunity cost.
Quantity Demand: Is the amount that consumers plan to buy during a given time period at one particular price.
The Law of Demand States: Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower price of a good, the greater is the quantity demanded.
Substitutes: Other goods that can be used in its place.
Complement: Good that is used in conjunction with another good. Burger and fries are complements, and so are energy bars and exercise.
Demand Curve: Shows the relationship between he quantity demanded of a good and it’s price when all other influences on consumers’ planned purchases remain the same.
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