Chapter 3
exchange and markets
Markets exist to facilitate exchange between people. The alternative to exchange is to be self-sufficient, with each of us producing everything we need for ourselves. Rather than going it alone, most of us specialize by producing one or two products for others and exchanging the money we earned for the products we want to consume.
Comparative advantage -- the ability of one person or nation to produce a good at a lower opportunity cost another person or nation
consumption possibilities curve -- a curve showing the combinations of two goods that can be consumed when a nation specializes in the production of one good and trades with another nation
absolute advantage -- the ability of one person or nation to produce a good at a lower absolute cost that another person or nation
market economy -- an economy in which people exchange things, trading what they have for what they want
centrally planned economy -- an economy in which a government bureaucracy decide how much of each good to produce, how to produce the goods, and who gets them
It is sensible for person to produce the product for which he or she has a comparative advantage, that is, a lower opportunity cost than another person.
Specialization increases productivity through the division of labor, a result of the benefits of repetition, continuity, and innovation.
A system of international specialization and trade is sensible because nations have different opportunity costs of producing goods, giving rise to comparative advantages.
Under a market system, self interested people, guided by prices, make the decisions about what products to produce, how to produce them, and who gets them.
Government roles in a market economy include establishing the rules for exchange, reducing economic uncertainty, and responding to market failures.
Business administration and marketing class notes - these notes are taken using voice recognition software and may have grammar errors.
