Scarcity and Choice
What is Scarcity?
The condition that resources limited while wants are unlimited.
Define opportunity cost.
The value of the next best alternative that is given up when a decision is made.
What does a PPC show?
Maximum output combinations of two goods given resources and technology.
Define absolute vs. comparative advantage.
Absolute advantage: can produce more
Comparative advantage: has lower opportunity cost
Name the 3 main economic systems.
Command economy
Market economy
Mixed economy
What's the difference between wants and needs?
Needs are essential for survival, wants are not.
If you give up 3 burgers for 1 pizza, what is the opportunity cost of 1 pizza?
3 burgers.
What does a point inside the PPC represent?
Inefficiency or unemployment.
Who benefits from trade?
Both parties if each specializes in their comparative advantage.
What is a mixed economy?
Combines government and market decision-making.
What is marginal analysis?
Comparing additional benefits and additional costs of a decision.
Why is opportunity cost important?
It helps make efficient decisions.
What shifts the PPC outward?
Calculate opportunity cost in output problems.
OC of A = (B produced) / (A produced)
How do command economies decide production?
The government decides what, how, and for whom to produce.
What does "no free lunch" mean?
Everything has an opportunity cost.
What is the opportunity costs of idle resources?
The production that could have been achieved using them.
Explain the law of increasing opportunity cost.
As more of one good is produced, the opportunity cost of producing more rises.
How to find comparative advantage from a table?
Calculate and compare the opportunity costs for each good.
Which system relies most on private property?
Market economy.
What is the economic problem all societies face?
Allocating scarce resources among competing uses.
How does opportunity cost relate to trade-offs?
Every trade-off involves an opportunity cost.
How can the PPC illustrate economic growth.
Outward shift shows growth, inward shift shows contraction.
What are terms of trade?
The rate at which goods are exchanged, must lie between both opportunity costs.
What is the invisible hand?
Market forces of supply and demand that guide self-interest to efficiency.