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Economics 201 Ch 2

Principles of Economics Ch 2

QuestionAnswer
Self-sufficiency You use the limited resources that you possess to produce the goods and services that you want to consume. You can consume only what you yourself are able to produce.
The advantages of Self-sufficiency are: You don't have to worry about unemployment, since you are working for yourself. You have no need for money, since you are not engaged in trading with others. Inflation is of no concern to you.
The disadvantages of Self-sufficiency are: It yields a very low standard of living. A lone person will have very limited resources and will be compelled to use those resources in production processes that the resources are not well suited for.
A person has a comparative advantage when: He or she can produce a good or a service at a lower opportunity cost than other producers.
Producing according to comparative advantage leads to: A more productive use of resources and a higher standard of living.
Consumer's Surplus The difference between the highest price a buyer is willing to pay and the price actually paid.
Producer's Surplus The difference between the lowest price a seller is willing to accept and the price actually received.
The net benefit to both the buyer and the seller in a trade is: The sum of the consumer's surplus and the producer's surplus received by the buyer and the seller.
The net benefit to society of having a market available for trading is: The sum of the consumer's surplus and the producer's surplus received by all the buyers and the sellers in the market.
Externality A benefit or a cost of an activity that affects third parties.
Production Possibilities Frontier (PPF) Represents the maximum combinations of two goods that an economy can produce.
The PPF is _____________ sloping, indicating an inverse relationship. Downward
The PPF is bowed outward (concave) indicating that: The opportunity cost of producing each good increases as more units of the good are produced.
Law of Increasing Opportunity Cost As production of a good increases, the opportunity cost of producing that good increases.
The opportunity cost of producing a good increases because: Resources are not identical.
An economy is operating efficiently when: It is producing the maximum output with the available resources and technology.
An efficient economy can produce more of one good only by: Producing less of another.
Economic Growth An increase in the productive capacity of an economy.
If economic growth occurs, the PPF shifts: Outward
There are many possible specific causes of economic growth, including: Increase in the size of the labor force, increase in human capital, improvements in physical capital, improved production techniques, etc.
What are the sources of economic growth? An increase in the quantity of resources and an advance in technology.
Technological Advance The ability to produce more output per resource.
Economic Systems The way in which a society answers economic questions.
What are the two primary economic systems? Capitalism and socialism.
The Capitalist Vision includes: Private property is economically and politically desirable, market prices contribute to economic efficiency, and government is inherently inefficient and should be limited.
The Socialist Vision includes: Private property is economically and politically harmful, market prices are often manipulated by powerful businesses, government promotes the best interests of the general public.
What are the economic questions? What to produce, how to produce, and for whom to produce.
The advantages of the economic question of "whom to produce?" are: Resource owners have the incentive to develop their resources to that they will produce maximum consumer satisfaction and that resource owners have the incentive to direct their resources to their most valuable use.
The disadvantage of the economic question of "whom to produce?" is: The distribution of income may prove to be very unequal.
Created by: dengler
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