Chapter 1 Welcome to Economics

Why division of labor increased Production?

1) specialization - people that are more advanced in certain parts of production could focus on their side of production thus perfecting their craft and focusing solely on their job. 2) workers who specialize in certain tasks often learn to produce more quickly and higher quality 3) specialization allows businesses to take advantage of "economics of scale" which allows producing more numbers items while the average cost of the item decreases.

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

Circular Flow Diagram explanation

Firms produce and sell goods and services to households in the market for goods and services (or product market). Arrow "A" indicates this. Households pay for goods and services, which becomes the revenues to firms. Arrow "B" indicates this. Arrows A and B represent the two sides of the product market. Where do households obtain the income to buy goods and services? They provide the labor and other resources (e.g. land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of production). Arrow "C" indicates this. In return, firms pay for the inputs (or resources) they use in the form of wages and other factor payments. Arrow "D" indicates this. Arrows "C" and "D" represent the two sides of the factor market.

FRED

St.Louis Federal Reserve Bank databse.

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

goods and services market

a market in which firms are sellers of what they produce and households are buyers

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand -It is up to the person to convert the resources that are available to them into something that society values.

command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources -Cuba and North Korea -

fiscal policy

economic policies that involve government spending and taxes - involves government spending and taxes -for the U.S. it is Congress and Executive Branches

market

interaction between potential buyers and sellers; a combination of demand and supply

gross domestic product (GDP)

measure of the size of total production in an economy

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing - done by the nations central bank -for the U.S. it is done by the Federal Reserve

imports

products (goods and services) made abroad and then sold domestically

exports

products (goods and services) made domestically and sold abroad

private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

labor market

the market in which households sell their labor as workers to business firms or other employers

economics

the study of how humans make choices under conditions of scarcity

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

division of labor

the way in which different workers divide required tasks to produce a good or service - Adam Smith introduced the concept in his book The Wealth of Nations in 1776

traditional economy

typically an agricultural economy where things are done the same as they have always been done -used in parts of Asia, Africa, and South America - Occupation stays in the family, what you produce is what you consume - Little economic development

scarcity

when human wants for goods and services exceed the available supply

economies of scale

when the average cost of producing each individual unit declines as total output increases

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process