Term
Law of Increasing Opportunity Cost
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Definition
| The shape of the production possibilities frontier reflects this. If the economy uses all resources efficiently, the law of increasing opportunity cost states that each additional increment of one good requires the economy to give up successively larger increments of the other good. For example, the chart on page 57 of our book mentions Joel and Jamal's making pies and icing cakes. Neither boy could successfully do both and make a fair amount of money, so each had to choose which to do more of. |
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Definition
| An outward shift of the PPF reflects economic growth, which is an expansion of the economy's production possibilities, or ability to produce. An example is the large growth in the U.S. economy during the introduction of the Internet and the technology that it brought to U.S. industry as a whole. The growth of an economy is thought of not only as an increase in productive capacity but also as an improvement in the quality of life to the people of that economy. |
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Term
Absolute Advantage
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Definition
| Having an absolute advantage means being able to produce something using fewer resources than other producers require. Entities with absolute advantages can produce something using a smaller number of inputs than another party producing the same product. An example of this is company A can produce 5 widgets per hour with 3 employees and company B can produce 10 widgets with only 3 employees. Company B has the absolute advantage because they can produce the same amount of widgets with less people so tey have less money to pay their employees. |
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Term
Comparative Advantage
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Definition
| The best guide for choosing what company should do what is comparative advantage. According to the law of Comparative Advantage , the worker with the lower opportunity cost of producing a particular output should specialize in that output. It is important to note that a comparative advantage is not the same as an absolute advantage. The latter implies that one is the best at something, while the former relates more to the costs of the particular task. |
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Definition
| Specialization occurs when individual workers focus on single tasks, enabling each worker to become more efficient and productive. For example if David takes an hour to wash a car and in the same time he could mow 1/3 of someones lawn. David should obviously specialize in washing cars since the opportunity cost is much lower in that senario. |
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Term
Division of Labor
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Definition
| The division of labor organizes the production process so that each worker specializes in a seperate task. This allows the company to produce much more because they are more efficient in spending their time and resources. The division of labor takes advantage of individual preferences and natural abilities, allows workers to gain experience at a particular task, reduces the need to shift between different tasks, and permits the introduction of labor-saving machinery, |
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Definition
| This is a system of exchange in which products are traded directly for other products. Barter works best in simple economies that have little specialization and few types of goods to trade. No money is involved, so David has his car washing service, and you mow lawns. So you mow David's lawn and he washes your car, this is a barter because you two are exchanging services without any money. |
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Definition
| For economies with greater specialization, money plays an important role in facilitating change. Money- coins, bills, and checking accounts- serves as a medium of exchange because it is the one thing that everyone is willing to accept in exchange for all goods and services. Our economy is much more effienct with money because now we do not have to be searching for someone who needs a material thing in return for our services. They can just pay us money for it rather than another good or service. |
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