Chapter 1

Underground Economies

Heavily regulated economies have markets where the buyers and sellers make transactions without the government's approval.

Economics

How humans make decisions in the face of scarcity (individual , family , business, or societal decisions)

Scarcity

Human wants for goods, services, and resources exceed what is available

Command Economy

In a command economy, the government decides what goods and services will be produced and what prices will be charged for them. The government decides what methods of production will be used and how much workers will be paid. Many necessities like healthcare and education are provided for free. Currently, Cuba and North Korea have command economies. (In a command economy resources and businesses are owned by the government...opposite of Market economy)

Specialization

In a particular job allows workers to focus on the parts of the production process where they have an advantage. ( The division and specialization of labor has been a force against the problem of scarcity)

Private Enterprise

Market economies are based on private enterprise. The means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals. Businesses supply goods and services based on demand.

The circular flow diagram

The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.

Economies of Scale

Which means for many good, as the level of production increases, the average cost of producing each individual unit declines

Market Economy

decision- making is decentralized.

Model

instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is more applied or empirical representation. Models are used to test theories, but for this course we will use the terms interchangeably.

Theory

is a simplified representation of how two or more variables interact with each other.

Market

is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. The New York Stock Exchange, is a prime example of market in which buyers and sellers are brought together.

Macroeconomics

looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.

Fiscal Policy

which involves government spending and taxes, is determined by a nation's legislative body. For the United States, this is the Congress and the executive branch, which originates the federal budget.

Monetary Policy

which involves policies that affect bank lending, interest rates, and financial capital markets, is conducted by a nation's central bank. For the United States, this is the Federal Reserve.

Globalization

which is the expanding cultural, political, and economic connections between people around the world. One measure of this is the increased buying and selling of goods, services, and assets across national borders—in other words, international trade and financial capital flows.

Traditional Economy

which is the oldest economic system and can be found in parts of Asia, Africa, and South America. Traditional economies organize their economic affairs the way they have always done (i.e., tradition). Occupations stay in the family. Most families are farmers who grow the crops they have always grown using traditional methods. What you produce is what you get to consume. Because things are driven by tradition, there is little economic progress or development.