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Chapter 2
The Economic Problem: Scarcity and Choice
19
Economics
Undergraduate 1
01/20/2012

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Term
Capital
Definition
Things that are produced and then used in the production of other goods and services
Term
Factors of Production (or factors)
Definition
The inputs into the process of production. Another term for resources.
Term
Production
Definition
The process that transforms scarce resources into useful goods and services.
Term
Inputs or resources
Definition
Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.
Term
Outputs
Definition
Goods and services of value to households
Term
Opportunity cost
Definition
The best alternative that we give up, or forgo, when we make a choice or decision.
Term
Theory of Comparative Advantage
Definition
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.
Term
Absolute Advantage
Definition
A 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.
Term
Comparative Advantage
Definition
A 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 lower opportunity cost.
Term
Consumer Goods
Definition
Goods produced for present consumption.
Term
Investment
Definition
The process of using resources to produce new capital.
Term
Production Possibility Frontier (ppf)
Definition
A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.
Term
Marginal Rate of Transformation
Definition
The slope of the production possibility frontier (ppf).
Term
Economic Growth
Definition
An increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources.
Term
Command Economy
Definition
An economy in which a central government either directly or indirectly sets output targets, income, and prices.
Term
Laissez-Faire Economy
Definition
Literally from the French: "allow [them] to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.
Term
Market
Definition
The institution through which buyers and sellers interact and engage in exchange.
Term
Consumer Sovereignty
Definition
The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
Term
Free Enterprise
Definition
The freedom of individuals to start and operate private businesses in search of profits.
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