Chapter 1: What is Economics?
value
A customer's subjective assessment of benefits relative to costs in determining the worth of a product
production possibilities frontier
A diagram representing various combinations of goods and services an economy can produce when all its resources are in use.
product market
A market where producers offer goods and services for sale
factor market
A market where productive resources are bought and sold
Entrepreneur
A person who organizes, manages, and takes on the risks of a business.
Invisible Hand
A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.
Good
A tangible product used to satisfy human wants
Want
A way of expressing a need
cost-benefit analysis
A way of thinking about a problem that compares the costs of an action to the benefits received.
production
process of creating goods and services
Capital
the tools, equipment, machinery, and factories used in the production of goods and services; also known as Capital Goods
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Adam Smith about material possessions
Country can live without material possessions, country cannot live without it's people.
economic interdependence
Economic activities in one part of the country or world affect what happens elsewhere
free enterprise economy
One in which consumers and privately owned businesses, rather than the govt, make the majority of the What, How, and For Whom decisions
What is the most important factor contributing to economic growth?
Productivity
standard of living
Quality of life based on ownership of necessities and luxuries that make life easier.
What is the fundamental economic problem facing all societies?
Scarcity
HOW to produce-------->
Should we use machines vs. real people Poor country use people, rich country use machines
human capital
Sum of peoples' skills, abilities, health, and motivation
What is required to produce the things we would like to have?
The 4 factors of production
Gross Domestic Product
The dollar amount of all final goods and services produced within a country's borders in a year; also known as GDP. It is the most comprehensive measure of a countries total output and a key measure or a nation's economic health
What is one way to analyze an economic problem?
Use a decision-making grid
Scarcity forces every society to ask which three questions?
WHAT, HOW and FOR WHOM will they produce.
Economic PREDICTION
Want to know what our incomes will be in the future
When does productivity go up?
When more is produced with the same amount of resources
FOR WHOM to produce---->
Who gets it? Rich, poor, etc.
Economic ANALYSIS
Why are prices of some items higher? Why do some people earn more than others? Helps us discover why things work and how things happen
market
a location or other mechanism that allows buyers and sellers to exchange a certain economic product
All economic models are based upon:
assumption
Durable goods include both:
capital goods and consumer goods
Wealth is possible because of the
circular flow of economic activity
utility
Ability or capacity of a good or service to be useful and give satisfaction to someone.
wealth
Accumulation of products that are tangible, scarce, useful, and transferable.
capital good
Buildings, machines, technology, and tools needed to produce goods and services.
Economic Product
good or service that is useful, relatively scarce, and transferable to others
service
intangible things of value (haircuts, maid service, laundry, education, etc.)
Adam Smith
"wealth of nations" advocated the idea of laissez faire; or government not involving themselves in the economy. Scottish social philosopher
productivity
(economics) the ratio of the quantity and quality of units produced to the labor per unit of time
trade-off
An alternative that we sacrifice when we make a decision
Need
Basic requirement for survival.
What are the keys elements to the study of Economics?
Description Analysis Explanation Prediction
division of labor
Division of work into a number of separate tasks to be performed by different workers
consumer good
Finished products that are consumed by an individual.
What does the economic activity in markets connect?
Individuals and businesses
Why is economics a social science?
It deals with the behavior of people as they deal with the basic issues of economics
Something has monetary value if:
It has SCARCITY and UTILITY
Examples of LAND
deserts, fields,livestock, sunshine, climate needed to grow crops
What things affect productivity?
division of labor, investing in human capital, and economic interdependence
Services, examples:
haircuts, home repairs, entertainment, doctors, lawyers, teachers
Economics
study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
Water vs. diamonds
water is necessary and cheap diamonds are unnecessary but expensive
specialization
when factors of production performs tasks that they can do relatively more efficiently than others
capital goods
when manufactured goods are used to produce other goods and services. Ex. robot welder, oven
T/F: Societies do not have enough productive resources to satisfy everyone's wants and needs.
True
economic growth
An increase in the total output of an economy.
Land
Any natural resource provided by nature and used in the production process
Economics and politics
Economics are debated in politics and most political problems deal with economics
Who is responsible for much of the change in our economy?
Entrepreneurs
Economic EXPLANATION
Explain why the GDP is the way it is, or should be
Where do entrepreneurs hire labor for wages and salaries, acquire land in return for rent, and borrow money?
Factor markets
T/F: Services are counted as wealth
False. all Tangible items
scarcity
Fundamental economic problem facing all societies that results from a combination of scarce resources and people's virtually unlimited wants.
Economic DESCRIPTION
GDP: describes jobs, prices, trades, taxes, government spending
What are economic products?
Goods or services that are useful, relatively scarce, and transferable.
WHAT to produce------>
Houses for high income or low income people Military equipment or food, housing, clothing
What does economics analyze?
How societies satisfy wants through careful use of relatively scarce resources.
labor
Human effort directed toward producing goods and services
Laissez-faire
Idea that government should not interfere in the economy.
What can cause a country not to produce to its potential?
Idle resources
The study of economics helps us how?
In our roles as: Individuals Community Members Global Citizens
Examples of LABOR
Includes all but entrepreneurs!! birthrates, immigration, famine, war, disease affect quantity and quality of labor
Investing in human capital does what to productivity?
Increases it.
Utility is not fixed because:
It varies from one person to the next. People like different things
The value of a good or service depends on what?
It's scarcity and utility.
Factors of Production
Land, Labor, Capital, Entrepreneurship
What are the four factors of production?
Land, capital, labor, entrepreneurs
Financial Capital
Money used to buy the tools and equipment used in production.
Paradox of Value
The situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value.
Why is land a limited supply?
There is a finite amount of natural resources
TINSTAAFL
There is no such thing as a free lunch. We have to pay for everything, nothing is free.
T/F: Scarcity affects every decision we make.
True
Examples of CAPITAL
bulldozer, computers, etc.