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B. Chapter Two
Economic Tools and Economic Systems
18
Economics
Undergraduate 1
08/03/2011

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Term
opportunity cost
Definition
The value of the best alternative forgone when an item or activity is chosen.
Term
Sunk Cost
Definition
A cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions.
Term
law of comparative advantage
Definition
the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good.
Term
absolute advantage
Definition
The ability to make something using fewer resources than other producers use.
Term
comparative advantage
Definition
The ability to make something at a lower opportunity cost than other producers face.
Term
barter
Definition
The direct exchange of one good for another without using money.
Term
division of labor
Definition
Breaking down the production of a good into separate tasks.
Term
specialization of labor
Definition
Focusing work effort on a particular product or a single task.
Term
production possibilities frontier (PPF)
Definition
A curve showing alternative combinations of goods that can be produced when available resources are used efficiently; a boundary line between inefficient and unattainable combinations.
Term
efficiency
Definition
the condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another, getting the most from available resources.
Term
law of increasing opportunity cost
Definition
to produce more of one good, a successively larger amount of of the other good must be sacrificed.
Term
economic growth
Definition
an increase in the economic's ability to produce goods and services; reflected by an outward shift of the economy's production possibilities frontier.
Term
rules of the game
Definition
the formal and informal institutions that support the economy- laws, customs, manners, conventions and other institutional underpinnings that encourage people to pursue productive activity.
Term
economic system
Definition
the set of mechanisms and institutions that resolve the what, how and for whom questions.
Term
pure capitalism
Definition
an economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets.
Term
private property rights
Definition
an owner's right to use, rent or sell resources or property .
Term
pure command system
Definition
an economic system characterized by the public ownership of resources and centralized planning.
Term
mixed system
Definition
an economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are regulated by government.
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