Economic Terms & Factors of Production

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Technologysociety's understanding of the the best ways to produce goods and servicesTradeoffsaccepting less of one thing to get more of anotherProduction Possibilities Frontierdifferent combinations of output of 2 goods- usually shown in a graphOpportunity Costwhatever must be given up to obtain some other item- the true cost of a scarce resourceLow Opportunity Costlow riskComparative AdvantageTrade will benefit both parties as long as we each specialize in doing the task that has a lower opportunity cost for usAbsolute Advantagethe ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resourcesRationality AssumptionThe assumption that people do not intentionally make decisions that would leave them worse off.Incentivesactions or rewards that motivate people to act a certain way; incentives may change your decisionSpecializationConcentrating on the production of a few goods & doing it well; specialization leads to greater productivityTrade Barrierslimit free tradeQuotaslimitations on the amount of specific products that may be imported from certain countries during a given time periodTariffsTaxes on imported goodsVoluntary Export Restraint (VER)Limits on trade to avoid a cost/tariffEmbargoA ban on trade- usually for political reasonsInformal Trade BarriersRestrictions to trade based on culture, traditions, and religionProtectionismIs used to: protect new industries, keep jobs, national securityMarket EconomiesIndividuals make their own decisions about what to produce, how to produce it, and for whom to produce it. (ex. USA)Command Economieseconomic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow (ex. Communism)Traditional Economyeconomic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services (ex. Your family traditions or garden)