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Chapter 2

ACTG 2010 Chapter Notes - Chapter 2: Absolute Advantage, Capital Accumulation, Marginal Utility

Course Code
ACTG 2010
Douglas Kong

of 2
Ch. 2: The Economic Problem
Production possibilities frontier (PPF): boundary between combinations of goods and services
that can and cannot be produced.
outward bowed-out shape reflects increasing opportunity cost
not all resources are equally productive in all activities
ocannot attain points outside of frontier (scarcity)
opoints inside frontier are inefficient
resources are unused or misallocated
production efficiency: if goods and services produced at lowest possible cost
allocative efficiency: goods and services are produced at the lowest possible coast and in the
quantities that provide the greatest possible benefit
ointersection of marginal cost and marginal benefit
preferences: description of a person's likes and dislikes
oillustrated on marginal benefit curve
Economic growth: expansion of production, PPF shifts right. Opportunity cost of economic
growth is less current consumption
otechnological change: development of new goods and of better ways of producing
ocapital accumulation: growth of capital resources, including human capital
comparative advantage: a person can perform the activity at a lower opportunity cost than
anyone else
Absolute advantage: a person who is more productive than others. Production per hour
ogain from trade if specialization at comparative advantage
dynamic comparative advantage: gaining comparative advantage from learning-by-doing
oLearning-by-doing: specialize and by repeatedly producing a particular good or service
become more productive in that activity and lower the opportunity cost of producing
that good over time.
Economic coordination: decentralized economic planning
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oFirms: economic unit that hired factors of production to produce and sell goods and
oMarkets: arrangement that enables buyers and sellers to get information and to do
business with each other
facilitates trade
oProperty rights: social arrangement that govern ownership, use, and disposal of
anything people value
Real property: land, buildings, equipment, etc.
Financial property: stocks, bods, money, etc.
Intellectual property: intangible product of creative effort: books, music, etc.
oMoney: any commodity or token that is generally acceptable as a means of payment
Circular flow through markets
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