8/13/2019 Econlrt Chapter 2

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Source: Principle of Economics, 10th

ed. (Case & Fair) v2.0 Prepared by: Acidera, Jaypaul O

YECONLRTCHAPTER 2

3 BASIC QUESTIONS TO UNDERSTAND THE FUNCTIONING OF

THE ECONOMIC SYSTEMS

1. What gets produced? Concerned with the resources

2. How is it produced? Concerned with the producers

3. Who gets what is produced? Concerned with the households

Capitalthings that are produced and then used in the

production of other goods and services

Factorsthe inputs into the process of production, another

term for resources

Productionthe process that transforms scarce resources

into useful goods and services

Inputs (resources)anything provided by nature or previous

generations that can be used directly or indirectly to satisfy

human wants

Outputsgoods and services of value to households

SPECIALIZATION, EXCHANGE, AND COMPARATIVE

ADVANTAGE

Theory of comparative advantageDavid Ricardos theory

that specialization and free trade will benefit all trading

parties, even those that may be absolutely more efficient

producers

Absolute advantagea producer has an absolute

advantage over another in the production of a good or

service if he or she can produce that product using fewer

resources

Comparative advantagea producer has a comparative

advantage over another in the production of a good or

service if he or she can produce that product at a loweropportunity cost

CAPITAL GOODS AND CONSUMER GOODS

Capital goodsthings that are produced and then used in

the production of other goods and services

Consumer goodsgoods produced for present

consumption

Investmentthe process of using resource to produce new

capital

THE PRODUCTION POSSIBILITY FRONTIER

Production possibility frontier (PPF)a graph that shows

all the combinations of goods and services that can be

produced of all of societys resources are used efficiently

Y-axismeasures the quantity of capital goodsproduced

X-axismeasures the quantity of consumersgoods

Production efficiencyis a state in which a given mix of

outputs is produced at the least cost

Marginal rate of transformation (MRT)the slope of the

production possibility frontier

ECONOMIC SYSTEMS

Command economyan economy in which a central

government either directly or indirectly sets output targets,

incomes, and prices

Laissez-faire economy allow [them] to doan economy

in which individual people and firms pursue their own self-

interest without any central direction or regulation

Consumer sovereigntythe idea that consumersultimately dictate what will be produced (or not to

produced) by choosing what to purchase (and

what not to purchase)

Free enterprisethe freedom of individuals tostart and operate private businesses in search for

profit

Mixed systemsindividual enterprise exists and

independent choice is exercised even in economies in

which the government plays a major role; all economies are

mixed

Marketthe institution through which buyers and sellers

interact and engage in exchange

Incomeis the amount that a household earns each year

Wealthis the amount that households have accumulated

out of past income through saving or inheritance

Priceis the amount that a product sells for per unit, and it

reflects what society is willing to pay