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Chapter 2 Key Terms
Vocabulary for Chapter 2 of CASE & FAIR
27
Economics
Undergraduate 1
01/24/2007

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Term
capital
Definition
things that are themselves produced and that are then used in the production of OTHER goods and services.
Term
factors of production (or factors)
Definition
the inputs into the process of production, aka 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 / indirectly to satisfy human wants
Term
outputs
Definition
usable products
Term
opportunity cost
Definition
the best alternative that we give up 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 it 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 it 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 (MRT)
Definition
the slope of the production possibility frontier (ppf)
Term
economic growth
Definition
an increease 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, incomes, and prices
Term
laissez-faire economy
Definition
"allow them to do"; an economy in which individual people and firms pursue their own self-interests 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 (or will not) be 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
Term
resources
Definition
products of nature, or things like buildings or equipment, or human workforce with people's talents, skills, and knowledge
Term
capital
Definition
anything that has already been produced that will be used to produce other valuable goods
Term
law of increasing oppportunity cost
Definition
when over time, the opportunity cost to produce certain outputs increases
Term
innovation
Definition
the discovery and application of new, more efficient production techniques
Term
income
Definition
the amount that a household earns each year
Term
wealth
Definition
amount that households have accumulated out of past income through saving or inheritance
Term
wage rates
Definition
prices of various kinds of labor
Term
price theory
Definition
another name for microeconomic theory
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