econ chp. 1 and 3

outsourcing conclusions

1. loss of domestic jobs due to outsourcing is normal because tech and consumer preferences change over time 2. jobs lost to outsourcing are partly offset by jobs gained through insourcing 3. cost savings from outsourcing leads to lower prices for consumers and more output for firms; jobs gained from increased output offset jobs lost to

3 reasons for productivity to increase w/ specialization

1. repetition (more times worker performs task, better worker becomes at task) 2. continuity (worker doesn't spend time switching from one task to another; important if switching requires change in time/location) 3. innovation (specialized worker gains insights into task that lead to better production methods)

three key economic questions

1. what products do we produce? 2. how do we produce the products? 3. who consumes the products?

ceteris paribus

Latin meaning other variables are held fixed

ex. of specialized trade

Latvia: Ec has absolute advantage in grain and timber, but a comparative advantage in grain. Latvia has comparative advantage in timber, so both are better off if EC trades grain for timber from Latvia

comparative advantage

ability of one person or nation to produce a good at a lower OC than another

absolute advantage

ability of one person or nation to produce product at a lower resource cost than another person or nation

economic model

abstraction from reality that enables us to focus our attention on what really matters

opportunity cost

best alternative that is sacrificed for any given choice; production decisions (what are you going to produce with your time)

social inventions that support markets

contracts, insurance, patents, accounting

institutional changes to help markets work better

contracts, insurance, patents, accounting rules

outsourcing

domestic firm shifts part of production to different country

market economy

economy in which people specialize and exchange goods and services in markets; decisions are made based on consumers' desires, production tech, etc.

net export

export-import

centrally planned economy

government bureaucracy decides how much of each good to produce, how to produce it, etc.

scarcity

idea that resources are limited, while human wants are unlimited

patents

increase profitability of inventions, encouraging firms to develop new products and production processes

variable

measure of something that can take on different values

5 factors of production

natural resources, labor, physical capital, human capital, entrepreneurship

role of government in market failure

pollution, public goods, imperfect information, imperfect competition

positive analysis

predicts the consequences of alternative actions by answering the question "what is?" or "what will be?"

import

product produced in foreign country and purchased by residents of home country

export

product produced in home country and sold in foreign country

accounting rules

provide potential investors with reliable info about performance of a firm

insurance

reduces the risk entrepreneurs face

three reasons for specialization to increase productivity

repetition, continuity, innovation

adam smith

said self-interest is more powerful than kindness or altruism

marginal change

small, one-unit change in value

contracts

specify the terms of exchange, facilitating exchange between strangers

economics

studies the choices we make when there is scarcity

macroeconomics

study of the nation's economy as a whole

normative analysis

what ought to be?