Understanding Economics Chapter 1: What is Economics?

scarcity

The wants and desires of people outweigh the resources available to fulfill them

free enterprise economy

one in which consumers and privately owned businesses have freedom to operate for a profit; these make the decisions, not the government

consumer good

products and services that are intended to be used directly by individuals; clothing and automobiles

standard of living

quality of life based on ownership of things (luxuries and necessities) that make life easier; one's level of economic prosperity

need

something like air, food, or shelter that is necessary for survival

want

something that people desire but that is not necessary for survival

economic growth

the ability of the economy to increase a nation's production of goods and services over time

labor

the effort that people devote to a task for which they are paid; not including entrepreneurs

human capital

the knowledge, skills and motivation that workers acquire from education, training, and experience

utility

the purpose that a good or service satisfies from a consumer perspective

economics

the study of how people seek to satisfy their needs and wants by making choices with scarce resources

Gross Domestic Product (GDP)

the total output of all economic activity in a nation, including goods and services over a 12 month period

division of labor

the type of arrangement in which each worker specializes in a particular task or job

wealth

the value of tangible goods owned that are transferable from person to person; does not include services

capital

tools equipment, machinery, and factories used to production goods and services; the result of production

production possibilities curve

a curve showing the different combinations of two goods or services that an economy can produce in a full-employment, full-production economy

consumerism

a movement advocating greater protection of the interests of consumers which began in the 1960's; includes the right to safety, right to be informed, right to choose, right to be heard, and right to redress

good

a physical item that is produced and can be weighed or measured or transferred to others; used to satisfy wants and needs

service

a product that is work performed by someone else; concert, movie, home repair

entrepreneur

a risk-taker who organizes and operates a business for profit with new or existing resources; bring new products to market

economic model

a theory or simplified representation that helps explain and predict economic behavior in the real world; graph, figure, equation, or diagram

trade-offs

alternative choices consumers make when one item is given up because another is chosen; buy a computer vs. go on a trip

economic interdependence

because of productivity and division of labor, events in one part of the world are dependent on another

opportunity cost

cost of the next best alternative use of money, time, or resources when one choice is made rather than another; like a tradeoff

paradox of value

explained by Adam Smith; contradiction between the high monetary value of a nonessential item and the low value of an essential item. Example: value of water vs. diamonds.

productivity

goods and services produced with a prescribed amount of resources; usually applies to labor ex: 5,000 pencils per hour increased to 5,100 pencils per hour with same resources

durable good

goods not for immediate consumption and able to be kept for at least three years; tractors and automobiles

capital goods

goods that are used in producing other goods, rather than being bought by consumers such as tools, equipment, buildings, and machinery

nondurable goods

goods that last less than three years or until it is used up; food, light bulbs, clothing, etc.

market

key part of the circular flow of economic activity; how buyers and sellers come together to exchange products and services locally, regionally, nationally, or globally

factors of production

land, labor, entrepreneurship, and capital; the resources that are used to make goods and services

value

market determination of the value of a good or service

factor markets

markets where productive resources are bought and sold; where entrepreneurs hire labor, acquire land, and borrow money to run their business. Where individuals earn income.

cost-benefit analysis

method of comparing the benefits of an action to expected costs; single action or two alternative comparisons such as buying video game A vs. video game B

land

natural resource which is used to make goods and services which is not created by people; considered a "gift of nature"

specialization

when each worker is assigned to perform the specific task (from division of labor) that they do best

product markets

where individuals use money made from factor markets to buy goods and services; income made in factor markets is returned to business in product markets