Economics Unit 1-7

renewable resource

Any natural resource (as wood or solar energy) that can be replenished naturally with the passage of time

Flows between households, businesses, and government which are money flows?

Investment spending by businesses in Resource Market Government Spending in the Product Market & Resource Market Consumer Spending by HHs in the Product Market Factor Payments(income) rec'd by HHs in the Resource Market Business revenue (income) rec'd by Firms in Product Market Taxes(income)rec'd by the Gov't from Businesses and HHs Transfers/Subsidies from Gov't to HHs and Businesses

Shortage

Is a temporary condition unlike scarcity caused by a low price. the quantity demanded is greater at that price that the quantity supplied.Until the price is going upward and will eliminate the shortage.

Economics is the study of

choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them.

choices respond to...

incentives

Payments for labor services flow from firms

from businesses to households or from government to households through the resource market

Purchase of new national defense equipment

from government to business through the product market

Benefit is what you...

gain when you get something and is measured by what you are willing to give up to get it.

market economy

goods and services that can be produced at a continuing PROFIT will be produced. Who decides - The CONSUMERS are in command.

capital goods

goods that are used in producing other goods, rather than being bought by consumers. Thee would typically be durable goods. ex. tools, forklifts, furniture, restaurant grills goods purchased by businesses often to produce consumer goods.

Building the circular flow model

we start with two parties: Households-individuals or groups living together Businesses(firms)- the institutions that organize the production of goods and services.

Economists measure the benefit by....

what a person is willing to give up to get it. Often it is in terms of dollars. very often it is in terms of something else-job,relationship,family,time etc.

When Productive resource are scarce.....

-Goods and Services are scarce as well.

Productive Resources are scarce when...

-They are not freely available -this forces you to choose from among many wants. -Whenever you choose you must go without satisfying some other wants.

Marginal cost(MC) is greater than Marginal Benefit(MB)

... When marginal cost exceeds marginal benefit (MC>MB), then it costs us more to produce the last unit than the benefits we derive from that last unit.

law of increasing opportunity cost

1- The amount of other products that have to be given up to obtain more of any given product is called opportunity cost. 2-Because resources are not completely adaptable to alternative uses,the opportunity cost increases as society wants increasing amounts of a particular product. 3- The "law" explains why the production possibilities curve is concave (bowed out) to origin rather than a straight line

economic growth contributors are..

1-Increase or improvements in resources(increase in land,capital, and labor, investment in human capital,increases in labor productivity). 2- Advances technology ("know how") allows society to produce more goods with available resources.

cause and effect

A relationship in which change in one variable causes change in another

scientific Method used in economics

A series of steps followed to solve problems including collecting data, formulating a hypothesis, testing the hypothesis, and stating conclusions. IT will help economic behavior.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Services

Actions or activities that one person performs for another. ex.tutoring, mechanics, plumber, insurance, real estate. The us economy is a service economy.

Households and businesses are brought together thru markets

Any arrangements that brings a buyer and seller together and enables them to get information and do business with each other.

Marginal Cost(MC) is less than Marginal Benefit(MB)

As long as marginal benefit exceeds marginal cost, an extra unit of output will increase benefits more than it increases cost. So with marginal benefits > marginal cost, net benefits keep increasing as you increase output, up to the point when MB = MC

durable consumer goods

Consumer goods that have a life span of more than three years when used on a regular basis. ex. cars, phones, appliances,furniture

The slope of a production possibilities frontier curve..

Becomes steeper demonstrating increasing opportunity costs. This makes the curve appear bowed out (concave)

The location of the budget line depends on a consumer's....

Budget(income), and the prices of the two products under analysis

A change in marginal cost or marginal benefit....

Changes the incentives that we face and leads us to change our actions.

Non-durable consumer goods

Consumer goods that are used up within three years when used on a regular basis. ex. food, toiletries, household products,clothing

Rational Choices Questions

Does it always prove to be the best choice - NO Does it always prove to be the most profitable choice - NO Does it always prove to bear the least amount of costs - NO They why do we call it making a rational choice? Because we assume that the choice was made by comparing COSTS and BENEFITS.

flow charts and diagrams

Example

Flows between households, businesses, and government which are real flows?

Goods and Services from Gov't to HH Goods and Services from Gov't to businesses Factors of production from HHs to Businesses thru Resource market Factors of Production from HHS to Goc't thru Resource Market Goods and Services from Businesses to HHS thru Product Market Goods and Services from Businesses to Gov't thru Product Market

Governments in the Circular Flow

Governments buy goods and services from firms. In the circular flow model, this expenditure is the flow running from governments through the goods market to firms.

What do you think economics is...what does it study?

How we deal with the problems of scarcity.

labor

Human effort and time that people devote toward producing goods and services. ex. physical and mental efforts of people working.

What will change the slope of the budget line?

If either of the goods prices change, the slope will change

Marginal Cost Marginal benefit examples

Imagine you are buying pizza by the slice at a local shop. You are starving when you enter the shop and decide to purchase that first slice. The first slice tastes great and really fills you up (high marginal benefit), and since it is your first purchase you are barely dipping into your wallet (low marginal/opportunity cost). So here, MB>MC. Since you are still hungry you purchase more and more slices, and each slice doesn't fill you up as much as the last and you are already feeling stuffed (declining marginal benefit). At some point, you have ordered so much pizza that you feel like you are going to vomit (very low marginal benefit) and you spent your rent money in order to acquire it. At this point MC>MB and you've gone too far.

quantity of labor

Increases as the adult population increases

factors of production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

A rational choice is made on the...

Margin. This is often referred to as "thinking at the margin"

What are some things that limit you from having what you may want?

Money - not enough income for the prices of certain things Time - only so many hours in a day, years in a life.

Real Flows

Movement of actual goods, services and factors of production between the households and the firms.

Cost is what you must give up to get something

Opportunity Cost is the highest valued alternative that must be given to get something else

goods

Physical objects that someone produces that is economically useful or satisfies an economic want.such as clothes or shoes

Core Economic Ideas

Rational Choice, Cost, Benefit, Margin, Incentives

What prevents society from satisfying all its wants?

Scarcity - there are only so many productive resources in the world to produce all the things you want, and only a limited of knowledge at any given time.

Example of a budget line

Suppose you have 120 to spend at the team store. you need to buy sweatshirts and/or t-shirts. Sweatshirts cos 20 and t-shirts cost 10. You can determine how many of each you can buy by indicating the amount on a chart like this:

A good or service is scarce if...

The amount people desire exceeds the amount available at a zero price. if it is scarce then we have to CHOSE and if we have to CHOSE,it bears a COST.

Unemployment occurs when

The economy is producing at less than full emplyment of inside the curve.

entrepreneurial ability

The human resource that combines resources to produce a product, makes non routine economic decisions, innovates for a new product, and bears risks of time,effort, and funds..

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics. These statements depend on values and cannot be tested. you may agree or disagree with these statements but you cant test them. Normative analysis is use instead of positive analysis in debates. you are entitled to your own opinion but not your own facts.

Marginal Cost(MC is equal to Marginal Benefit(MB)

The reason we want marginal benefit to be equal to marginal cost is because of the observed fact that marginal costs and benefits don't stay constant as more of a good is produced or consumed.

Macroeconomics

The study of the economy as a whole effects on the national economy and the global economy of the choices that individuals, business, and governments make. Analogy:The study of THE FORSET not the TREES. You may also study things like how the economy is performing GDP, employment, price levels and international trade.

TNSTAAFL

There's no such thing as a free lunch. this expression reminds us that all goods and services bear a cost to someone.

The three basic economic questions are:

What to produce? How to produce? For whom to produce? What- this typically depends on the values of the society deciding.For example, an economy must decide whether they should produce kitchen appliances or weapons, build and fix roads or buy textbooks for schools. How-will goods and services be produced?For example, should we use copper or plastic to make pipes? Should machines be used to make clothing or should workers make it by hand? Should the power plant be built close to the ocean or inland? Which fertilizer is best for growing strawberries? There are millions of decisions that need to be made to figure out how to produce goods and services. Whom-will consume the goods and services?Once the goods and services are produced, who will get to consume them? Will people consume them on a first-come, first-served basis? Should goods be allocated or given out by height, weight, religion, age, gender race, looks, strength, health or wealth? How should the goods and services be distributed among the people

Optimal or Best Product-Mix

Will be some point on the curve. Which will depend on society;this is a normative decision.("Where should society be on the curve?"

margin

a border or edge; a limit in condition or ability; an amount or degree of difference. You can think of a choice on the margin as one that adjusts the borders or edges of a plan to determine the best course of action. So making a choice on the margin means comparing all the relevant alternatives systemically and incrementally.

rational choice

a choice that uses the available resources to best achieve the objective of the person making the choice. Worth it to that person! It is a purposeful choice.

sunk cost

a cost that has already been committed and cannot be recovered. Decisions should never be made around these types of costs because they are irrelevant since they've already been incurred and cannot be reversed.

Production Possibility Schedule

a device to illustrate the economic problem. 1. Assumptions: Full employment all available resources should be employed. 2. Available supply resources is fixed in quantity and quality at this point in time. 3. Technology is fixed during analysis. 4. Economy produces only 2 types of products.

production possibilities frontier

a graph that represents choices, or alternative ways and economy can use its resources. 1- It has nothing to do with maximizing satisfaction or demand. 2- It is a model of macro economy used to analyze the production decisions in the economy and the problem of scarcity.

production possibilities curve

a graph that shows alternative ways to use an economy's productive resources

resource market

a market in which households sell and firms buy resources or the services of resources

circular flow diagram

a model of the economy that shows the circular flow of expenditures and incomes that result from decision makers choices and the way those choices interact to determine what, how, and to whom goods and services are produced.

Entrepreneur

a person who decides how to combine resources to create a good or service to make a PROFIT(self-interest) They also bear the risk of losing money, wasting time, threatening their reputation. ex. Mark Zukenberg, Walt Disney, Henry Ford.

incentives

a positive or negative environmental stimulus that motivates behavior

Economic Theory (Model)

a simplification of economic reality used to make predictions about the real world

Economic Rationale

a. economic resources are not completely adaptable to alternative uses b. to get increasing amounts of pizza resources that are not particularly well suited for that purpose must be used. (ex. workers accustomed to assembly line work on robots may not adapt well to a kitchen producing pizza.

The budget line shows:

a. points on or inside the budget represent points that are attainable given the relevant income and prices point on the outside(up and to the right) the budget line are unattainable. b. Trade-offs and opportunity cost the negative slope of the budget line represents that consumers must make trade offs in their consumption decisions; the value of the slope measures precisely the opportunity cost of one more unit of a good under the analysis. c. Limited income and positive prices force people to chose. Note that the budget line does NOT indicate what a consumer will chose,only what they can chose. d. Income changes will shift the budget line.Greater income will shift the line out and to the right, allowing consumers to purchase more of both goods. Increasing income lessens scarcity, but does not eliminate it.

land

all natural resources(gifts of nature) used to produce goods and services. ex. water, timber, plants, oil, fish, animals, gems.

People make rational choices by comparing...

benefits and costs

capital goods

buildings, machinery, tools, and other goods that have been produced and that businesses now use to produce goods and services(man-made resources) Capital goods increase labor's productivity.

quality of labor

depends on how skilled people are.

cost-benefit analysis

economic model that compares the marginal costs and marginal benefits of a decision

productive resources/factors of production

ingredients that go into production of goods and services (Human(land),natural(labor),capital,entrepreneur)-leads to goods and or services

consumer goods

intended for the final use by individuals goods purchased by consumers

budget line/constraint

line that shows the different consumption bundles a consumer can purchase with a specific money income

statistical investigation

looks for correlation- a tendency for the values of two variables to move together in a predictable and related way. Ex. Cigarette smoking and lung cancer are correlated. Sometimes a correlation shows a casual influence of one variable on the other.

financial capital

money, stocks, and bonds they are NOT productive resources-they are not used to produce goods and services they are NOT capital

natural experiment

occurs when a natural event acts as an experimental treatment in an ecosystem. Its when a situation arises in the ordinary economic life in which the one factor of interest is different and the other things are equal. Ex. Canada has a higher unemployment benefits than the US but the two peoples are similar-might study the effects of the benefits on the unemployment rate by comparing the two nations.

carrot and stick approach

policy of offering a combination of rewards and punishment to induce behavior. We respond positively to carrots so the carrots are marginal benefits. We respond negatively to sticks so the sticks are marginal costs.

laboratory experiment

puts people in a decision making situation and varies the influence of one factor at a time to discover how they respond. ex. Could run a mini-economy in the class or resource scarcity game in class

Non-renewable resources

resources that cannot be replaced or renew itself so it is available in limited supply.

growing economy the production possibilities curve..

shifts upward

slope of budget line

slope = price of the goods on horizontal axis/price of the goods on the vertical axis

positive statement

statement which describes the world as it is These statements can be right or wrong, but we can test them by checking them against the facts.

Ceteris Paribus Assumption

the assumption that factors other than those being considered are held constant. Latin for other things being equal.

consumption expenditure

the expenditure by households to businesses on consumption goods and services thru the product market

Money Flows

the flows of payments made between the households and Firms in exchange for the services of factors of production and of expenditures on goods and services

productive resources/factors of production

the inputs, or factors of production, used to produce the goods and services that people want.

product market

the market in which households purchase the goods and services that firms produce

opportunity cost

the most desirable alternative given up as the result of a decision. It does not include all the expenditures that you make-just the best alternative that you forgo. And it doesn't include past expenditures that cannot be reversed. EX. Tuition has an OC -whatever you could have gotten with that money. Meal Plan doesn't have OC you will be paying for food anyway.

goods and services

the objects (goods) and the actions (services) that people value and produce to satisfy human wants and needs

consumer sovereignty

the power of consumers to decide what gets produced. Consumers spend their income on the goods they are most willing and able to buy. Governments, theoretically, spend their income on the goods and services most desired by the taxpayers.

human capital

the skills and knowledge gained by a worker through education and experience

Microeconomics

the study of how households and firms make decisions and how they interact and are influenced by governments. Anology the study of the TREES not THE FOREST. You may also study things like: Supply and demand and Market faliures.

behavioral economics

the study of situations in which people make choices that do not appear to be economically rational

Wants

things that add comfort and pleasure to your life. Soda, a mansion, filet Mignon, clean air

Needs

things that are required in order to live. Water, food, shelter, and air

scarce resources

things that people want, where the quantity that people want exceeds the quantity that is available