ECON-STUDY GUIDE

ECON-STUDY GUIDE - Chapter 2 LO1 Describe the impact of...

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Chapter 2 LO1: Describe the impact of choice on opportunity Resources are scarce; human wants unlimited Must choose because cannot satisfy all wants Opportunity cost: value of the best alternative given up o Opportunity cost of producing more of a particular good rises as output increases Marginal cost of production increases as output increases o Cost of giving something up in order to do something else LO2: Explain how comparative advantage, specialization, and exchange affect economic outcomes(output) o Comparative advantage vs. absolute advantage Absolute: making something using fewer resources Comparative: specializing in task for which you have lower opportunity cost Better to specialize even if you have absolute advantage in both tasks o Specialization increases efficiency by: Taking advantage of individual preferences and natural abilities Allowing each worker to develop expertise and experience at a particular task Reducing the need to shift between different tasks Allowing introduction of laborsaving machinery o Exchange: each individual specializes, then exchanges the product for money, which in turn is exchanged for goods and services LO3: Outline how economics function as production systems o Production possibilities frontier: identifies possible combinations of the two types of goods that can be produced when all available resources are employed efficiently Points inside PPF: inefficient Points outside PPF: unattainable Shape reflects law of increasing opportunity cost—each additional increment of one good requires the economy to
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sacrifice successively larger and larger increments of the other good Bowed out shape As economy moves down the curve, curve becomes steeper and reflects the higher opportunity cost of capital goods in terms of lost consumer goods Shift: Changes in resource availability o Increase in size or skills of labor force and availability of other resources shifts PPF outward Increases in the capital stock o More capital an economy produces during one period, more output can be produced next period(shifts PPF outward he next period) Technological change o Technological advance shifts curve outward Improvements of rules of the game(formal and informal institutions that support economy) o Greater political stability=shifts PPF outward What we learn from PPF Efficiency Scarcity Need for choice Describe different economic systems and the decision-making rules that define them o Three Questions Every Economic System Must Answer: What, How, For Whom goods and services are to be produced o Pure capitalism-directed by market forces o Pure command system-directed by central plans of gov’t
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o Mixed system-directed by a mix of two in most cases Chapter 3: LO1: Explain the role of the household in an economic system o Maximize utility(satisfaction from consumption) o In market economy, supply resources and demand goods and services
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ECON-STUDY GUIDE - Chapter 2 LO1 Describe the impact of...

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