WGU - D089 - Principles of Economics

Economic systems

A system of the production, resource allocation, and distribution of goods and services within a society or a given geographic area

Budget Constraint

Represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

inelastic supply

When the elasticity of supply is less than one indicating a relatively low responsiveness of the quantity supplied to a change in price, in percentage terms.

Mergers

Combining two companies into a single larger company.

Opportunity cost

The next best alternative that is given up when a choice is made

Moral hazard

A situation in which a party will take risks because the costs that are incurred will not be felt by the party taking the risk

Impacts on Elasticity of Supply

- Number of producers - Availability of resources - Technology - Flexibility - Time

Economic indicators

A statistic about an economic activity

Equilibrium

A state where supply and demand are balanced and, in the absence of external influences, the price and quantity will not change.

Market failure

A situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss

Imperfect information

A situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer

Demand Schedule

A chart that shows the number of goods or services demanded at specific prices.

Factors that shift supply

-Technology -Expectations -Number of Suppliers Government Policies and regulations.

Five key characteristics of a Command Economy

1. All economic activity is planned and controlled by a centralized government power. 2. The government decides how to use and distribute the nation's natural, capital, and labor resources. 3. A nation's central power controls the priorities for how goods and services will be produced and distributed. 4. Domestic competition is overpowered as the government monopolizes businesses considered essential for economic goals such as utilities, finance, and automotive companies. 5. Businesses are required to follow specific hiring and production targets set by the government. This creates regulations and directives to enforce the centralized plan.

Homogeneous

A resource having one form or set of skills

Five key characteristics of a Traditional Economy

1. It is centered around families or tribes. 2. It exists in a hunter-gatherer and nomadic society. 3. Trade is heavily dependent on bartering rather than money. 4. It only produces what is needed, and a surplus is very rare. 5. It eventually changes from purely trade to the use of some type of currency.

Five key characteristics of a Market Economy

1. Privately-owned goods and services are standard, and people and businesses have the right to commercialize their property freely. 2. People can innovate, produce, sell, and purchase goods and services. 3. Prices, production, and job availability are driven by self-motivation and competition, according to the laws of supply and demand. 4. The economy relies on market efficiency where producers and consumers have access to the same information to make economic decisions. 5. Government interference is limited to regulating safety, fair access, environmental, and national defense issues.

Heterogeneous

A resource having two different forms or skills

Economic models

A simplified version of reality that allows people to observe, understand, and make predictions about economic behavior.

Macroeconomics

A branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole

Microeconomics

A branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms

The Law of Demand

A fall in the price of a good or service raises the quantity demanded and a rise in the price of a good or service lowers the quantity demanded.

Supply

A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers

Subsidy

A government incentive in the form of financial aid or support extended to an economic sector(or institution, business, or individual) generally with the aim of promoting economic and social policy

Production Possibilities Frontier

A graphical representation used by economists to show the alternative combinations of two goods or services that an economy can produce with the given resources and technology when the resources and technology when the resources and technology when the resources are fully and efficiently used at a given point in time.

Partnerships

A legal form of business operation between two or more individuals who share management and profits.

Price ceiling

A legal limit imposed by the government on how high the price of a product can be

Thin Market

A market with few buying or selling offers

Thick Market

A market with many buying or selling offers

Principles of Economics #8

A nation's standard of living depends on it's ability to produce.

Adverse Selection

A process in which markets deteriorate when buyers and sellers have access to different or imperfect information; also known as asymmetric information

Opportunity Set

All possible combinations of consumption that someone can afford given the price of goods and the individual's income.

Price Elasticity

An economic measure of the change in the quantity demanded or purchased of a product in relation to its price change

Circular flow model

An economic model that shows the flow of money and goods through the economy. The most common form of this model shows the circular flow of income between the household sector and the business sector.

Mixed Economy

An economic system in which both private enterprise and a degree of state monopoly (Usually in public services, defense, infrastructure, and basic industries) co-exist

Command Economy

An economic system in which production, investment, prices, and incomes are determined centrally by a government

Market Economy

An economic system in which the decisions regarding investments, production, and distribution are guided by the price signals created by the forces of supply and demand

Traditional Economy

An economic system that relies on customs, history, and time-honored beliefs. Tradition guides economic decisions such as production and distribution

Elasticity

An economics concept that measures responsiveness of one variable to changes in another variable

Excess demand (shortage)

At the existing price, the quantity demanded exceeds the quantity supplied.

Excess supply (surplus)

At the existing price, the quantity supplied exceeds the quantity demanded

Disadvantages of Market Economies

Competition drives market economies, and, in many cases, there are not enough mechanisms implemented to protect the underprivileged and disadvantaged. There is a tendency for labor resources to be under-optimized because access to education and skills improvement may not be affordable and accessible to everyone. There can be a sharp contrast between the economic power of the privileged versus the power of the underprivileged. Society must decide between self-interest and protecting the vulnerable in a climate where winners are overvalued.

Demand

Consumer's willingness and ability to consume a given good.

Principles of Economics #1

Everyone faces trade-offs

Analyze Change in Equilibrium - Step 2

Decide whether the economic change being analyzed affects demand or supply.

Analyze Change in Equilibrium - Step 3

Decide whether the effect on demand or supply causes the curve to shift to the right or to the left and sketch the new demand or supply curve on the diagram

Factors of Production

Describes the inputs used in the production of goods or services to make an economic profit.

Analyze Change in Equilibrium - Step 1

Draw a supply model before the economic change took place, identifying initial equilibrium values for price and quantity.

Advantages of Mixed Economy

Goods and services are distributed to where they are needed the most; therefore, prices are set by supply and demand. Competition incentivizes innovation and i,proves the quality of products and services. Goods and services are more available and accessible to those who are willing to pay. The role of the government is expanded to help ensure access for the underprivileged.

Advantages of a Market Economy

Goods and services are readily available because consumers and businesses have the freedom to negotiate prices. Production methods are efficient, which increases productivity and profitability. Innovation is rewarded and encouraged, benefiting the society. Individuals and organizations invest in successful ventures, which in turn drive innovation and quality improvement.

Consumer goods

Goods bought and used by consumers

Capital goods

Goods that are used in producing other goods rather than being bought by consumers

price controls

Government-mandated legal minimum or maximum prices set for specified goods; they are usually implemented as a means of direct economic intervention to manage the affordability of certain goods

Principles of Economics #7

Governments may be able to improve market outcomes

Analyze Change in Equilibrium - Step 4

Identify the new equilibrium and compare the original equilibrium price and quantity to the new equilibrium price and quantity.

Advantages of a Command Economy

In this type of system, goods, services, and resources are deployed without concern for environmental or other regulatory issues. The government can transform the entire society to fit the constraints of its national vision through nationalizing industry and deciding where workers will be placed.

Disadvantages to a Traditional Economy

It is exposed to environmental changes and weather patterns. It is vulnerable to market of command economies, which consume and deplete the resources or traditional economies.

Law of increasing opportunity costs

Once all factors of production (land, labor, and capital) are at maximum output and efficiency, producing more of one good requires giving up an increasing amount of the other good.

Principles of Economics #6

Markets are a sound method of organizing economic activity

Broadly defined markets

Markets that tend to be fairly inelastic and have no good substitutes

Narrowly defined markets

Markets that tend to have more elastic demand and substitutes

Financial Capital

Most commonly refers to assets needed by a company to provide goods or services, as measured in terms of money value.

Principles of Economics #4

People respond to incentives

What happens when demand is elastic (price elasticity greater than one)

Price and total revenue move in opposite directions

What happens when demand is inelastic (price elasticity less than one)

Price and total revenue move in the same direction

Principles of Economics #9

Printing too much money causes prices to rise

Allocative efficiency

Producing goods and services demanded by consumers at a price that reflect the marginal cost

Principles of Economics #3

Rational people think at the margin

Research and Development (R&D)

Term commonly used to describe the activities undertaken by firms and other entities such as individual entrepreneurs to create new or improved products and processes.

Price

The amount of money expected, required, or given in payment for something

Scarcity

The basic economic problem; the gap between limited, scarce , resources and theoretically limitless wants

Underutilizing

The condition in which economic resources are not being used to their full potential

Principles of Economics #2

The cost of something is determined by what you give up to get it

Externalities

The cost or benefit that affects a party who did not choose to incur that cost or benefit

Demand Elasticity

The extent to which a change in price causes a change in the quantity demanded- expressed as a percentage

Total Revenue (TR)

The income that a company receives from its normal business activities, usually from goods and services; defined as price times quantity

Marginal benefit

The incremental increase in the benefit to a consumer caused by the consumption of one additional unit of a good or service

Elastic Demand

When the elasticity of demand is greater than one, indicating a high responsiveness of the quantity demanded or to a change in price in percentage terms.

inelastic demand

When the elasticity of demand is less than one indicating a relatively low responsiveness of the quantity demanded to a change in price, in percentage terms.

Price floor

The lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low

The Law of Diminishing Returns

The point where the level of profits or benefits gained is less than the amount of money or energy invested.

Equilibrium Price

The price where the quantity demanded is equal to the quantity supplied

Quantity Supplied (QS)

The quantity of a commodity that producers are willing to sell at a particular price at a particular point in time

Equilibrium quantity

The quantity of a good or service bought at the equilibrium price. The equilibrium quantity is the quantity produced and bought where the supply and demand curves intersect.

price elasticity of demand

The responsiveness of the quantity demanded to a change in price, in percentage terms ; calculated by taking the percentage change in the quantity demanded divided by the percentage change in price.

price elasticity of supply

The responsiveness of the quantity supplied to a change in price, in percentage terms; calculated by taking the percentage change in the quantity supplied divided by the percentage change in price.

Unitary elasticities

When the elasticity of demand or supply is equal to one, indicating an equal response in the quantity demanded or supplied to a change in price, in percentage terms.

Elastic Supply

When the elasticity of supply is greater than one, indicating a relatively high responsiveness of the quantity supplied to a change in price in percentage terms

Positive economics

The study of economics concerned with what is and what will happen if a course of action is taken or not taken.

Normative economics

The study of economics concerned with what should or ought to be.

Inefficient

The underemployment of any of the four economic resources (Land, labor, capital, or entrepreneurial ability); inefficient combinations or production are represented using a PPC as points below the PPC

Disadvantages of a Mixed Economy

There could be too much or not enough freedom of choice for individuals and organizations. The government may take its expanded role too far and limit competition, this discouraging innovation and quality. Business may influence the government to provide taxpayer funds to help them when they take too much risk.

Principles of Economics #10

There is a short-run trade-off between inflation and unemployment

Advantages to a Traditional Economy

There is little competition or friction among members of the society. People's roles and contributions are well understood. It can be more sustainable than a technology-based economy.

Think at the margin

Thinking about what the next step or an additional action means for a person

Quantity Demanded (Qd)

Total number of units purchased at a specific price.

What happens when demand is unit elastic (price elasticity equal exactly one)

Total revenue remains constant when the price changes

Principles of Economics #5

Trade can benefit everyone

Disadvantages of a Command Economy

Underlying black market economies tend to develop as a response to difficult access to goods and services. Rationing commonly occurs due to poor planning and an inability to meet societal demands. People are discouraged from innovating and are required to follow orders and keep with the central plan.

Production Possibilities Frontier (PPF)

identifies all possible combinations of two goods or services that can be produced within the given resources and technology when the resources are fully and efficiently used per unit of time