Alexandrea's Econ (Topic 2)
Goods and services
are outputs of a process called production
Production
the process by which inputs (i.e., factors of production) are transformed into an output (i.e., a good or service).
Factors of Production
inputs in the production process, broadly categorized as land, labor, and capital.
HOUSEHOLDS
The decision-making entities whose primary economic objective is to obtain benefits from consuming goods and services.
FIRMS
The decision-making entities whose primary role is to produce goods and services for consumption by households.
Three fundamental Economic questions
1.What to produce?
2.How to produce it?
3.For whom to produce it?
Production Possibilities Frontier
a curve summarizing the limits of production that a society faces…
production decision
what mix of goods and services should be created?
resource use decision
what resources should be used to produce which goods and services?
distributional decision
who gets to consume which goods and services?
production possiblities frontier is negatively sloped it
reflects tradeoff in production that results from scarcity of resources
Abolute Advantage
one person has an absolute advantage over another in the production of a good if she can produce more of the good with the same amount of inputs.
Opportunity Cost
the Opportunity Cost (OC) of an activity is the value of the next best alternative that must be forgone in order to undertake the activity.
Comparative Advantage
– one person has a comparative advantage over another in the production of a good if her opportunity cost of producing the good is lower.
Law of Comparative Advantage
when increasing the production of a good, a society should do so by using the available productive resource with the lowest opportunity cost (i.e., the resource which possesses the comparative advantage at producing the good).