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Module 1 Scarcity, Trade-Offs, and Opportunity Costs
Unit 2: Introduction to Economics
Terms in this set (37)
Limited quantities of resources to meet unlimited wants
The study of the economy as a whole with concern with the aggregate (total) effect across many markets. It is calculated by adding the output of these markets so that we have a total (summation). Macroeconomics studies the behavior of variables that describe the whole economy, such as the value of the total output the economy produces in a given time period (which is called gross domestic product, or GDP). Macroeconomics also examines the aggregate price level and aggregate unemployment in an economy..
Focuses on the consumption, production, and use of scare resources by individuals and groups. Economics is based on scarcity.
Denotes the full (highest) value of the next best alternative that is not selected when making a decision to produce or consume something. It includes time cost (the earnings or satisfaction you could have produced for yourself in some other activity) and other sacrifices you might have made.
A graph that shows the various combinations of choices an individual an make with the resources available. An individual can make choices that fall inside or on the choice curve, but not outside the choice curve.
Production Possibilities Curve (PPC)
Society's choice curve showing the output combinations of two goods or groups of goods that can be produced in an economy with the available resources. Assumes all of the economy's productive resources are fully employed; there are only two goods (or types of goods) in the economy; the resources used in production are interchangeable (people, machine, land); short run of time in which both the quantity and quality of resources are fixed, and the technology does not change.
Production Possibilities Frontier (PPF)
A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. The PPF illustrates the efficiency of scarcity and its consequences.
These are the available factors of production - land, labor, capital, and entrepreneurship. When one or more of these change, the PPF will look different (change).
Give up something to get more of another.
Illustrates increasing opportunity cost / trade off (slope along the curve increases as we produce a good).
Illustrates constant opportunity cost / trade-off
Give up nothing to get more of another.
Curved Production Possibilities Curve (PPC)
Implies that some resources are better suited to the production of one item while other resources are more suited to the production of the second item.
Straight Line Production Possibilities Curve
Assumption that all resources are alike for production purposes.
Efficient Production Point
The maximum combination of outputs, given resources, and technology.
Outward Shift of the Production Possibilities Curve
By improving technology in production, the production possibilities curve (PCC) will shift outward. Improving technology allows for the economy to produce more and produce those goods more efficiently. An outward shift of a production possibilities curve is that it increases the economy's capacity to respond to human wants.
Contributions to Shifts in Production Possibilities Curve (PPC)
Added resources, usually labor or capital, are sources of economic growth. New technology can also shift a PPC outward and account for economic growth. Invention, innovation, discovery resources, and improvements in productivity all contribute to economic growth and allow us to produce and consume beyond attainable region.
A Latin phrase that means "all else being equal"; experiments that economists use by testing hypotheses by looking at actual experiences in markets to change one variable in a theoretical model.
Ceteris Paribus Assumption
The assumption that nothing changes except the factor or factors being studied.
Increasing Opportunity Costs
Explains how the production of larger amounts of one good leads to an increase in the sacrifice of the alternative good. Everything has an opportunity cost.
The point inside the Production Possibilities Curve because some workers, factories, land, and machines are unemployed. Unemployed resources are wasteful. They represent extra production that could be attained simply by putting them to work. It is important not just for the individual who needs work in order to earn income, but also for the aggregate economy.
If technology can improve of the quantity of resources can increase, then output can grow beyond the limits of the production possibilities curve. Better technology or more resources means a change in the fourth assumption of PPC, that both resources and technology are fixed. As labor becomes more skilled and productive, and as producers acquire new machines and plants embodying the latest technology, the production possibilities curve shifts outward.
Consists of people trying to get the most of something they want (to maximize some goal) out of available resources. For consumers, self-interested behavior means maximizing their satisfaction. For owners of productive resources, self-interest is expressed by seeking to maximize income. For business firms, self-interest traditionally means maximizing profits. In the production possibilities model, self-interested behavior will direct the decision as to which combination to produce out of all possible combinations. That combination is the one that maximizes the welfare or satisfaction of consumers.
Assumption that people being rational means the will do the action with the greatest benefits at the lowest cost.
Production Possibility Frontier
the boundary between attainable and unattainable levels of production. PPF model.
Movement of the PPC
The market is efficient; there are trade-offs, and there are opportunity costs.
Shift to the right of the PPC
Illustrates an increase in the economy's capacity to respond to human wants.
A point outside of the production possibilities curve
comparisons of marginal benefits and marginal costs, usually for decision making
Extra cost of producing one additional unit of production. What you give up to get one additional unit of something.
Marginal Benefit (MB)
What you gain when you get one additional unit of something.
Describe how economics is related to scarcity, trade-offs, and opportunity costs
Scarcity, or the inability to satisfy everyone's wants, is a fundamental economic problem in a world with limited resources. People have t make decisions that involve trade-offs, which results in opportunity costs to produce or consume something else.
How does scarcity influence choices?
You must decide on the opportunity cost of the next best alternative, how to use limited resources most efficiently, and trade offs.
Define opportunity cost
The second best alternative that must be given up to get something
How does the possibilities production curve (PPC) illustrate the concept of trade-off?
You must give up something to produce or consume more of something else
How do we describe points (1) on the PPC (2) Inside the PPC, and (3) Beyond the PPC in terms of production efficiency
(1) Points on the PPC most efficient & attainable; (2) Points inside the PPC are attainable but inefficient; (3) Points outside are unattainable therefore inefficient
If a country produces cars and trucks and if the technology for producing cards improves, how does this change affect production possibility curve? How can we demonstrate overall economic growth for a country using the PPC?
The PPC would bow/shift outward, demonstrating economic growth. This reflects in an increase in production and productivity.
THIS SET IS OFTEN IN FOLDERS WITH...
Module 2 The Organization of Economic Activity
Module 4 Unemployment
Module 5 Economic Output
Module 6 Aggregate Supply and Aggregate Demand
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