Unit 1: Basic Economic Concepts

Marginal Analysis

(thinking on the margin) making decisions based on increments

Shifters of the PPC

- Change in resource quantity or quality - Change in technology - Change in Trade

trade off

- Choices must be made. every choice has a cost - All alternatives that we give up when we make a choice

Why do people trade?

- Everyone specializes in the production of some goods and services and trade for others - More access to trade means more choices and a higher standard of living

Free Market System (capitalism)

- Little government involvement in the economy (laissez-faire) - Individuals own resources and answer the three economic questions - The opportunity to make profit gives people incentive to produce quality items efficiently - Wide variety of goods available to consumers - Competition and self-interest work together to regulate the economy (keep prices down and quality up)

Key Assumptions of PPC

- Only two goods can be produced - Full employment of resources - Fixed Resources (Ceteris Paribus) - Fixed Technology

Command (centrally-planned) economies

- owns all the resources - answers the three economic questions (communism)

Production Possibilities Curve (frontier)

A model that shows alternative ways that an economy can use its scarce resources (scarcity, trade-offs, opportunity costs, and efficiency)

Mixed Economies

A system with free markets but also some government intervention

Law of Diminishing Marginal Utility

As you consume anything, the additional satisfaction that you will receive will eventually start to decrease - continue until MB = MC

Law of Increasing Opportunity Cost

As you produce more of any good, the opportunity cost will increase

Positive Statements

Based on facts. avoids value judgments (what is)

Subsidies

Government payments to businesses

Normative Statements

Includes value judgments (what ought to be)

IOU

Input: Other goes Under

Utility Maximizing Rule

MUx/Px = MUy/Py

Opportunity Cost

Most desirable alternative given up when you make a choice Includes explicit and implicit costs

OOO

Output: Other goes Over

Public Sector

Part of the economy that is controlled by the government

Private Sector

Part of the economy that is run by individuals and businesses

Factor Payments

Payment for the factors of production, namely: rent, wages, interest, and profit

Constant Opportunity Cost

Resources are easily adaptable for producing either good

Economics (txtbk def)

Social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants

The Product Market

The "place" where goods and services produced by business are sold to households

The Resource (Factor) Market

The "place" where resources (land, labor, capital, and entrepreneurship) are sold to businesses

Terms of Trade

The agreed upon conditions that would benefit both countries

The Invisible Hand

The concept that society's goals will be met as individuals seek their own self-interest

Comparative Advantage

The producer with the lowest opportunity cost

Economics

The science of scarcity; the study of choices

Economic question 1

What goods and services should be produced?

theoretical economics

When economists use the scientific method to make generalizations and abstractions to develop theories

Transfer Payments

When the government redistributes income

Economic question 3

Who consumes these goods and services?

productivity

a measure of efficiency that shows the number of outputs per unit of input

Land

all natural resources that are used to produce goods and services

entrepreneurship

ambitious leaders that combine the other factors of production to create goods and services

labor

any effort a person devotes to a task for which that person is paid

physical capital

any human-made resource that is used to create other goods and services

human capital

any skills or knowledge gained by a worker through education and experience

Consumer goods

created for direct consumption

capital goods

created for indirect consumption

Economic question 2

how should these goods and services be produced?

Per Unit Opportunity Cost

opportunity cost / units gained

profit

revenue - costs

Microeconomics

study of small economic units such as individuals, firms, and markets

Macroeconomics

study of the large economy as a whole or economic aggregates

economic system

the method used by a society to produce and distribute goods and services

investment

the money spent by businesses to improve their production

Implicit Costs

the opportunity costs of making a decision

Absolute Advantage

the producer that can produce the most output or requires the least amount of inputs (resources)

Explicit Costs

the traditional out of pocket costs associated with making a decision

Scarcity

we have unlimited wants but limited resources

policy economics

when theories are applied to fix problems or meet economic goals