Unit 2: Basic Economic Concepts

Trade-offs

- All alternatives that we give up when we choose one course of action over others (EX: trade-off of going to college is the wages given up to go to college rather than making money at a job)

Production Possibilities Curve

- a graph that shows alternative ways that an economy can use its resources - graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency

LAND

- all the natural resources that are used to produce goods & services. -Anything that comes from "mother nature" (water, sun, plants,oil,trees,stone, animals,etc)

Economists

- look at the explicit and implicit costs - implicit costs are the opportunity costs such as forgone time and forgone income

Law of increasing opportunity cost

-As you produce more of any good, the opportunity cost (forgone production of another good) will increase - resources are not easily adaptable for producing both goods

Inferior Goods

-as income increases, demand falls - as income falls, demand increases (EX: top ramen, used cars, used clothes )

Normal Goods

-as income increases, demand increases -as income falls, demand falls (EX: luxury cars, seafood,jewelry, homes)

Invisible hand

-concept that society's goals will be met as individual seek their own self-interest -government does not get involved -competition & self-interest act as an invisible hand that regulates the market

Accounts

-look at only explicit costs - explicit costs- the traditional "out of pocket costs" of decision making EX: going to disneyland

Productive efficiency

-products are being produced in the least costly way (ANY point on the PPC) (B, C, D)

Allocative efficiency

-products being produced are the most desired by society (B, C)

Scarcity vs Shortages

-scarcity occurs at all times for all goods - SHORTAGES: occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary

Scarcity and Choices

-the condition in which our wants are greater than our limited resources - Since we are unable to have everything we desire, we must make CHOICES on how we will use our resources - In economics, we study the CHOICES of individuals, firms, and governments (EX: you must CHOOSE between buying jeans or buying shoes- Businesses must CHOOSE how many people to hire - Governments must CHOOSE how much to spend on welfare)

Economic systems

1. Centrally- planned (command economy) 2. Free market economy 3. Mixed economy

THE FOUR FACTORS OF PRODUCTION

1. LAND 2. LABOR 3. CAPITAL 4. ENTREPRENUERSHIP

Free Market

1. Little government involvement in the economy (laissez faire=let it be) 2. Individuals OWN resources & answer the 3 economic questions 3. The opportunity to make profit gives people an incentive to produce quality items efficiently 4. Wide variety of goals available to consumers 5. Competition and self-interest work together to regulate the economy (keep prices down and quality up) (EX: if consumers want computers and only one company is making them - other businesses have incentive to start making computers to each profit)

CAPITAL

1. Physical Capital - any human made resource that is used to create other goods and services (tools, tractors, machinery, buildings,factories,etc.) 2. Human Capital- any skills or knowledge gained by a worker through education and experience (College degrees, vocational training)

5 Key Economic Assumptions

1. Society's wants are unlimited , but ALL resources are limited (Scarcity) 2. Due to scarcity, choices must be made. Every choice has a cost (trade-off) 3. Everyone's goal is to make choices that give us the most satisfaction. (Everyone acts in their own "self interest") 4. Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice 5. Real-life situations can be explained and analyzed through simplified models & graphs

3 economic questions

1. What goods and services should one produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services? - the way these questions are answered determines the economic system

4 Key Assumptions

1. only 2 goods can be produced 2. Full employment of resources 3. Fixed resources 4. Fixed technologies

Shifting the PPC

1.change in resource quantity or quality 2. Change in technology 3.traded with another country

Entreprenuership

Ambitious leaders that combine the other factors of production to create goods and services (EX: Henry Ford, Bill Gates, inventors, store owners, etc.)

Cost

Amount seller pays to produce a good

LABOR

Any effort a person devotes to a task for which that person is paid (manual laborers, lawyers, doctors, teachers, waiters, etc)

Positive Statements

Based on facts- Avoids value judgements (WHAT IS)

Theoretical Economics

Economists use scientific method to make generalizations and abstractions to develop theories `

Normative Statements

Includes Value judgements (Ought to be)

Marginal Analysis

MARGINAL= Additional -"Thinking on the Margin" involves making decisions based on the additional benefit vs the additional cost -(EX: you have been shopping at the mall for 1/2 an hour an out weigh the additional cost of staying longer ) (opportunity cost) - You will continue to do something until the marginal cost outweighs the marginal benefit

SCARCITY

Means there is not enough for everyone -gov must step into allocate (distribute)

Why do centrally planned economies face problems of poor quality, shortage of goods, and unhappy citizens?

No profit= no incentive

Centrally planned Economies (aka communism)

The gov... 1. Owns all resources 2. Decides what to produce , how much to produce, and who will receive it (EX: Cuba, North Korea, former Soviet Union , and China)

Opportunity Costs

The most desirable alternative given up as a result of a decision

Comparative advantage

The produce with the lowest per unit opportunity cost

Absolute advantage

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

Policy Economics

These theories are then applied to fix problems or meet economic goals

Services

actions or activities that one person performs for another (teaching, cleaning, cooking)

Price

amount buyer (or consumer) pays

Consumer Goods

created for direct consumption ( EX: Pizza, Iphone)

Capital Goods

created for indirect consumption ( EX: oven,blenders, knives)

marginal unit costs

marginal costs = opportunity cost/ units gained

Constant Opportunity Cost

resources are easily adaptable for producing either good

Economics

social science concerned with the efficient use of limited resources to achieve maximum satisfaction of economic wants (study of how individuals in society deal w/ scarcity)

Microeconomics

study of small economic units such as individuals, firms, and industries (competitive markets, labor markets, personal decision making, etc.)

MACROeconomics

study of the large economy as a whole or in its basic subdivisions (National economic growth, unemployment, government spending)

Investment

the money spent by Businesses to improve their production (EX: 1,000 new computers , $1 million new factory)