Chapter 2 Some Tools of the Economist opportunity the highest valued alternative sacrificed in order to choose an option different for each person subjective money doesn t reflect the total opportunity cost of an action o failure to consider opportunity cost leads to false conclusions and poor decision making TRADE MAKES BOTH PARTIES BETTER OFF trade is voluntary we only engage in mutually beneficial trades trade increases the total wealth in an economy and moves goods to people who value them most transaction cost the time effort and other resources needed to search out negotiate and complete an exchange transaction costs are a barrier to trade o middlemen a person who buys and sells goods or services or arranged trades makes trades more efficient and lower their overall cost reduce transaction costs private property rights involves three things 1 right to exclusive use 2 legal protection against invasion 3 right to transfer sell exchange or mortgage owners benefit from using property in ways that others appreciate owners have an incentive to care for their property property rights create an incentive to conserve for future use common property multiple people simultaneously claim a good or resource when everybody owns something nobody owns it tendency to overuse economic growth is hindered without property rights production possibilities curve PPC outlines all possible combinations of output that could be produced holding fixed resources and technology o o o o slope of PPC amount of one product that must be given up to obtain another points outside the curve are impossible points on the curve are inefficient an outward shift represents economic growth things that shift PPC outward o increase in economy s resources investment improvements that expand on economy s resources called capital formation required a decrease in current consumption creative destruction the replacement of old products and methods by new ones that are o advancement in technology superior o improvements in the rules trade are open o working harder and giving up leisure when contracts are enforced fairly property rights are stable international and domestic divisions of labor method that breaks down the production of a product into a series of specific tasks law of comparative advantage total output will be greatest when each good is produced by the individual with the lowest opportunity cost buyers benefit from lower cost seller benefit from higher output and incomes gains from mass production and innovation 1 mass production can reduce per unit cost 2 no one would produce on a large scale if they couldn t trade and 3 trade allows the economic pie to grow market organization private parties make their own decisions with the guidance of unregulated marked prices o buyers and sellers individually decide what to produce how to produce it and who to trade with collective decision making use of the political process to allocate resources o the government decides what to produce how to produce it and who will get it
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