1. Economics Review

2. All economics must answer what three questions?
1. What goods and services will be produced?
2. How will they be produced?
3. For whom will they be produced?

3. The question “For whom will goods and services be produced
The question “For whom will goods and services be produced?” often is referred to as the distribution question.

4. An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.

5. All economies must somehow decide what gets produced.

6. In a pure market economy, private firms account for all production.

7. All this voluntary buying and selling is coordinated by competitive markets that are free from any government regulations.

8. Adam Smith argued that although each individual pursues his or her self-interest, the “invisible hand” of market competition promotes the general welfare.

9. A pure market economy has its flaws because markets do not always work on their own. The most notable market failures include:
Difficulty enforcing property rights
Some People have few resources to sell.
Some firms try to monopolize markets
No public goods
Externalities (paper mills causing foul air)

10. Most economies now mix central planning with competitive markets called mixed economies.

11. Simplifying Assumptions
1. To reduce the analysis to manageable proportions, the model limits the output to two broad classes of products: 1. consumer goods, such as pizzas and haircuts, and 2. capital goods, such as pizza ovens and hair clippers.

12. Given the resources and the technology available in the economy, the production possibilities frontier (PPF) shows the possible combinations of the two types of goods that can be produced when available resources are employed fully and efficiently.

13. Efficiency means producing the maximum possible output from available resources.

14. Any movement along the PPF involves giving up some of one good to get more of the other.

15. 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 larger increments of the other good.

16. An outward shift of the PPF reflects economic growth, which is an expansion in the economy’s production possibilities or ability to produce.

17. The internet has increased the efficiency of resource markets by boosting each firm’s ability to identify resource suppliers.

18. Having an absolute advantage means being able to do something using fewer resources than other producers require.

19. According to the law of comparative advantage, the worker with the lower opportunity coast of producing a particular output should specialize in that output.

20. Specialization, then, occurs when individual workers focus on single tasks, enabling each one to be more efficient and productive.

21. comparative advantage focuses on what else those resources could have produced- that is, on the opportunity cost of those resources.
The law of comparative advantage indicates who should do what.

22. Barter- a system of exchange in which products are traded directly for other products.

23. Money- coins, bills, and checks- serves as a medium of exchange because it is the one things that everyone is willing to accept in exchange for all goods and services.

24. Division of Labor- sorts the production process into separate tasks to be carried out by separate workers.