1. Economic Systems and Economic Tools Chapter 2
Economic Questions and Economic Systems 2.1
Production Possibilities Frontier 2.2
Comparative Advantage 2.3

2. Economic Questions and Economic Systems
Economic Systems- The set of mechanisms and institutions that resolve the what, how, and for whom questions for an economy.
EX- What will be produced? How will it be produced? For whom will it be produced?
What- A car. How-Factory assembly line. For whom-People.

3. Pure Market Economy
Pure Market Economy- An economic system with no government involvement so that private firms account for all production. It is a company that is out to make a profit.
EX- Black Market- Black market is not regulated by anyone and things can be sold for whatever price they want them to be sold for.

4. Pure Centrally Planned Economy
Pure Centrally Planned Economy- An economic system in which all resources are government-owned and production is coordinated by the central plans of government.
EX-Communism- North Korea- The government controls everything and tells the factories what to make, how many to make and when to make it.

5. Mixed Economy
Mixed Economy- An economic system that mixes central planning with competitive markets.
EX-United States- Although some business are regulated by the government, they are not controlled by the government. You have to have the inspectors inspect food if you are going to sell it.

6. Market Economy
Market Economy- Describes the US economic system, where markets play a large role.
EX- Different sectors of the government control certain aspects of private items.
Local government zones land for residential or commercial.
Also, what kind of house and what size to put on the land. But they don’t tell you who to buy from or what to put in your house.

7. Transitional Economy
An economic system in the process of shifting from central planning to competitive markets.
EX-China- China use to be central(government controlled) economy, but because of capitalism, China is now moving toward a free market economy.

8. Traditional Economy
Traditional Economy- An economic system shaped largely by custom or religion.
EX-Men usually work in construction. Women usually work as cashiers. Also in India’s caste system, people are put in certain professions because of the “pecking order” of the caste system that they are in.

9. Section 2.2 Production Possibilities Frontier
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.
Efficiency- Producing the maximum possible output from available resources.
EX- Getting the most out of something with minimal cost.

10. The Shape of the PPF
Law of Increasing Opportunity Cost- Each additional increment of one good requires the economy to give up successively larger increments of the other good.
EX-When a greater opportunity costs comes into play, a company may switch from capital goods (desks for students) to making desks for homes. The market is better for the desk factory to make more for homes than for schools.

11. Shifts of the PPF
Economic Growth- An expansion in the economy’s production possibilities or ability to produce.
EX-A company expands. Most companies start off with one store, then to 2, then 3. This is economic growth. The company doing well was allowed to grow because of economic growth.

12. Section 2.3 Comparative Advantage
Absolute Advantage- To be able to make something using fewer resources than producers require.
EX-Seeing if there is an advantage of joining forces with someone else to complete a job. If you take 5 minutes to wash a car and your friend takes 25 minutes to wash a car, would it be wise for you to ask him to help you?

13. Law of Comparative Advantage
Law of Comparative Advantage- The worker, the firm, region or country with the lowest opportunity cost of producing an output should specialize in the output.
EX-If Little Bobby is the best at cutting grass in the neighborhood and he charges the least, then you want Little Bobby to cut your grass

14. Specialization
Occurs when individual workers focus on a single task, enabling each one to be more efficient and productive.
EX- A vet focuses on animals. A doctor focuses on people. A computer tech works on computers. Each has a specific job to do.

15. Exchange
Barter- A system of exchange in which products are traded directly for other products.
EX- I need my Deer stuffed, you need you car fixed. You trade me stuffing my dear in exchange for me fixing your car. No money is exchanged, but services are exchanged.

16. Specialization
Division of Labor- An action that sorts the production process into separate tasks carried out by separate workers.
EX- Car assembly line. Cars are made by many people. Each person or group works on one specific part of the car.