Economics Notes

Division of Labor

Assigning specific tasks to different workers

Comparative Advantage

Ability to produce a good or service at a lower opportunity cost

Absolute Advantage

Ability to produce more of a good or service than others

Role of Government in Command Economy

Central planning, regulation, and control of resources

Traditional Economy

Economic system based on customs and traditions

Market Economy

Economic system based on supply and demand

Command Economy

Economic system where the government controls production and distribution

Communism

Economic system with common ownership and no private property

Mixed Economy

Economic system with elements of both command and market economies

Free Enterprise

Economic system with private ownership and competition

Capitalism

Economic system with private ownership and free markets

Socialism

Economic system with public ownership and centralized planning

Resources

Factors of production: land, labor, capital, entrepreneurship

Circular Flow Model

Flow of goods, services, and money in an economy

Specialization

Focusing on producing a limited range of goods or services

Capital Goods

Goods used to produce other goods and services

Production Possibilities Frontier (PPF)

Graph showing the maximum possible production of two goods

Scarcity

Limited resources, unlimited wants

Capital (Financial)

Money or assets used in investment

Private Property

Ownership of resources by individuals or businesses

Capital (Real)

Physical assets used in production

6 Characteristics of a Free Market Economy

Private property, voluntary exchange, competition, profit motive, consumer sovereignty, limited government intervention

Consumer Goods

Products purchased for personal use

Role of Government in Market Economy

Protection of property rights, enforcement of contracts, and provision of public goods

Incentives

Rewards or penalties that influence behavior

Competition

Rivalry among sellers to attract customers

Opportunity Cost

The value of the next best alternative foregone

Voluntary Exchange

Trade that is mutually beneficial and agreed upon by both parties

Privatization

Transfer of government-owned assets to private ownership

3 Basic Economic Decisions

What to produce, how to produce, and for whom to produce