Economics- Chapter 1 & 2 Study Guide

Adam Smith

-"wealth of nations": criticized Mercantilism (stifling government and unfair privileges) -self interest: "invisible hand": self regulating market -competition: believed in health competition -Laissez Fair: Government should not interfere with economy; government has its own natural laws; government should be able to operate freely

Gary Becker

-1st book Economic Analysis of Racial Discrimination - Economist

Services

-Actions or activities that one person performs for another Ex) haircut, dental care etc.

Safety net

-Government programs that protect people experiencing unfavorable economic conditions

Socialism

-Is a social and political philosophy based on the belief that democratic means should be used to distribute wealth throughout a society

Factors of Production

-Land: refers to all natural resources and capital used to produce goods and services -Labor: is an effort that a person devotes to a task for which that person is paid -Capital: is any human made resource that is used to produce other goods and services --> physical capital: human made objects used to create other goods and services ex) buildings and tools human capital: is knowledge and skills a worker gains through education and experience ex) doctor and stethoscopes -Entrepreneurs: a person who puts land, labor and capital together to create new goods and services

Circular flow

-Movement of money between consumers, businesses and governments

Profit

-The financial gain made in a transaction -total revenue - total cost

Economic system

-The method used by a society to produce and distribute goods and services

Transition

-a period of change in which an economy moves away from centrally planned towards market-based system

Externalities

-an economic side effect of a good or service that generates benefits or cost to someone other than the person deciding how much to produce or consume

Goods

-are physical objects Ex) shoes or shirts

Advantages of a free market

-economic freedom -growth- profit motive -variety-consumer sovereignty

Economic goals

-efficiency -freedom -security and predictability -Equity (fair) -growth and innovation

Problems of a command economy

-government dominated -performance frequently falls short of goals -workers have little incentive to produce -decision making takes long -no input from consumers

Scarcity

-implies limited quantities of resources to meet unlimited wants -is permanent

Karl Marx

-introduced their socialist philosophy -Wrote "Communist Manifesto"

Government involvement in a mixed economy

-limited role -Government enforced contracts -regulates economy -provide services not provided by private sectors - Government in entacts labor laws

Disadvantages of a free market

-not all required goods and services -not everyone is going to be successful -experience of expansion and contraction -harmful externalities are produced and impact whole society

Shortages

-occur when producers will or cannot offer goods or services at the current price -Shortages can be temporary or long term

Privatize

-or sold to individuals and then allowed to compete with each other

Specialization

-the concentration of the productive efforts of individuals and firms on a limited number of activities

Laissez Faire

-the doctrine that government generally should not intervene in the market place

Opportunity Cost

-the most desirable alternative given up as the result of a decision

Consumer Sovereignty

-the power of consumers to decide what gets produced

Economics

-the study of scarcity and choice

Lenin

-took over the Soviet Union during the Bolshevik Revolution

Fundamental Questions

1) what goods and services should be produced 2) how should these goods and services be produced 3) who consumes these goods and services being produced