Economics Chapter 1 and 2

List the seven economic and social goals.

1) Economic Freedom 2) Economic Efficiency 3) Economic Equity 4) Economic Security 5) Full Employment 6) price Stability 7) Economic Growth

What are the five characteristics of free enterprise capitalism?

1) Economic freedom 2) Private property rights 3) Profit motive 4) Voluntary exchange 5) Competition

What is a command economy? Advantages and disadvantages?

A central authority makes the major economic decisions. They can be headed by a king, president, dictator, etc. Generally, the government makes the major economic decisions. They severely limit private property nights. Individual freedom is also limited and the officials tend to favor themselves when making decisions. Advantage: It can change direction drastically. Also, many health and public services are available to everyone at little to no cost. Disadvantage: They ignore basic wants and needs of consumers. The system gives people the incentive to fill their quotas instead of producing a good product. They also require a large decision-making bureaucracy. The planning bureaucracy also lacks the flexibility to deal with minor day-to-day problems.

Difference between a regular and capital good?

A regular good is a useful tangible item, such as a book, car of compact disc player that satisfies a want. When manufactured goods are used to produce other goods and services, they are called capital goods. An example of a capital good is a robot welder in a factory.

Explain the "WHAT to Produce" concept.

A society cannot have everything its people want, so it must decide on what to produce. It can depend on what is most crucial to society at the current time; deciding between allocating resources to production of military equipment or to supplies for housing and food.

What are the advantages and disadvantages of a mixed economy?

Advantages: Provides assistance for some people who might otherwise be left out, [if society has democracy] voters can use their electoral power to affect what, how, and for whom decisions Disadvantages: the costs for services and benefits can mean higher costs for citizens overall, the availability of services Amy also be limited or the quality may deteriorate. Also, socialism and communication proved to be less efficient than capitalism.

Explain the "explanation" element of economics.

After economists analyze a problem and understand why and how thinks work, they need to communicate this knowledge to others.

Why is building economic models an important decision-making strategy?

An economic model is a simplified equation, graph, or figure showing how something works. Than can reduce complex situations to their most basic elements. Examples are the PPDC and circular flow of economics diagram.

What is a traditional economy? Advantages and disadvantages?

An economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom. Advantage: Everyone knows which role to play. Little uncertainty exists over WHAT and HOW to produce because you follow parent's footsteps. FOR WHOM to produce, that is determined by the customs and traditions of the society. Disadvantage: It tends to discourage new ideas and new ways of doing things. The lack of progress leads to economic stagnation and a lower standard of living in comparison to other economic systems.

What is a free enterprise economy?

An economy in which consumers and privately owned businesses, rather than the government, make the majority of the WHAT, HOW, and FOR WHOM decisions.

Why is the production possibilities curve sometimes referred to as the "frontier"?

Because it indicates the maximum combinations of goods and services that can be produced.

What are two strategies used by economics to help people make the best choices in society?

Building simple models and preparing a cost-benefit analysis.

How can the government, businesses, and individuals invest in human capital?

By providing education and health care. Businesses can also invest in training and other programs that improve the skills of their workers. individuals can invest in their own education by completing high school, going to technical school or college.

How is the wealth that an economy generates made possible?

By the circular flow of economic activity.

Explain "capital" as a part of the factors of production.

Capital goods refers to the tools, equipment, machinery, and factories used in the production of goods and services. It is unique because it is the RESULT of production.

What is a major contribution to productivity?

Comes from investments in human capital, the sum of people's skills, abilities, health, knowledge, and motivation.

The spectrum of mixed economies include communism, socialism, and capitalism. What is the difference in terms of allocation of resources?

Communism: Centralized planning directs all resources Socialism: Government plans ways to allocate resources in key industries Capitalism: Capital for production is obtained through the lure of profits in the market

The spectrum of mixed economies include communism, socialism, and capitalism. What's the difference regarding the role of government?

Communism: Government makes all decisions Socialism: Government directs the completion of its economic plans in key industries Capitalism: Government may promote competition and provide public goods

The spectrum of mixed economies include communism, socialism, and capitalism. What is the difference between these three in terms of ownership of resources?

Communism: all productive resources are government owned and operated. Socialism: basic productive resources are government owned and operated; the rest are privately owned and operated Capitalism: productive resources are privately owned and operated

Consumer v. Durable v. Nondurable good?

Consumer goods: Good intended for final use by consumers rather than businesses. Durable good: A good that lasts for at least three years when used regularly Nondurable good: A good that wears out of lasts for fewer than three years when used regularly

Most economic decisions can be evaluated with cost-benefit analysis. Explain.

Cost-benefit analysis is a way of comparing the costs of an action to the benefits received.

There are four key elements to the study of economics. List them.

Description, analysis, explanation, and prediction.

How can division of labor and specialization improve productivity?

Division of labor is a way of organizing work so that each individual worker completes a separate part of the work. Specialization takes place when factors of production perform only tasks they can do better or more efficiently than others. An example of how this can improve productivity is Ford's assembly line in automobile manufacturing.

What is a market economy? Advantages and disadvantages?

Economic system in which supply, demand, and the price system help people make economic decisions and allocate resources. People make decisions in their own best interest. This system is characterized by a lot of freedom. They also feature the private ownership of resources (capitalism, where private citizens own the factors of production). Advantage: the high degree of individual freedom, it adjusts gradually to change over time, there is relatively small degree of government interference , decision making is decentralized, there are various goods and services alongside high degree of consumer satisfaction Disadvantage: Does not provide for everyone, does not provide enough of some basic goods and services, and has a high degree of uncertainty as a result of competition and change, rewards only productive resources

Explain the "analysis" element of economics.

Economics analyzes the economic activity that it describes. This part answers the "why" of the many questions people have of one's economic system. It helps discover why things work and how things happen.

Explain the "prediction" element of economics.

Economics is the study of both what's happening and what tends to happen, therefore, it can help predict what may happen in the future.

Explain "entrepreneurs" as a part of the factors of production.

Entrepreneurs are the innovators responsible for much of the change in our economy. They are risk-takers in search of profits who does something new with existing resources. They are the driving force in an economy because they start new businesses and/or bring new products to market.

What is the differences between factor and product markets?

Factor markets: individuals earn their incomes here where the factors of production are bought and sold. This is where entrepreneurs hire labor for wages and salaries, acquire land in return for rent, and borrow money. (You participate in this when you work and sell labor to an employee) Product markets: Where producers sell their goods and services, thus, the wages and salaries that individuals receive from businesses in the factor markets returns to businesses in here. Businesses then use this money to produce more goods and services, and the cycle of economic activity repeats itself.

Are goods and services counted as wealth? Why or why not?

Goods are counted as wealth, but services are not, because they are intangible.

Who is Adam Smith? What idea did he introduce?

He introduced the idea that the division of labor led to the great prosperity of Britain. He also defined the wealth of a nation as the sum of the goods produced by its people.

Price stability is one of the seven economic and social goals. Explain how inflation and fixed income comes into play.

If inflation--a rise in the general level of prices--occur, workers need more money to pay for food, clothing, and shelter. People who live on fixed income--an income that doesn't increase even though prices go up--find that bills are harder to pay and planning for the future is more difficult.

What are the effects of high rates of inflation on goods and services alongside interest rates and business activity?

It can discourage business activity. During times of inflation, interest rates on loans tend to increase along with the prices of goods and services. If these rates go too high, they can discourage both borrowing and spending by businesses.

When does productivity increase?

It goes up whenever more can be produced with the same amount of recourses. It is often discussed in terms of labor, but it applies to all factors of production.

What is the production possibilities curve and what is its purpose?

It helps illustrate opportunity costs and it is a diagram representing various combinations of goods and services an economy can produce when all its resources are in use.

Define free enterprise.

It is a capitalistic economy in which competition is allowed to flourish with a minimum of government interference and resources are privately owned.

Define wealth in an economic sense.

It is accumulation of products that are tangible, scarce, useful, and transferable from one person to another. A nation's wealth is comprised of all tangible items including natural resources, factories, stores, houses, motels, etc., and they can be exchanged.

Economics is defined as a study of human efforts to satisfy their wants through scarce, competing resources. What can it also be defined as/related to?

It is also a social science because it deals with the behavior of people as they deal with this basic issue.

Aside from having utility, what must an item also have or be in order to have monetary value according to the economists?

It must also be scarce. This is the solution to the paradox of value. An example are diamonds and how they are scarce, but also has utility.

Explain gross domestic product.

It refers to the dollar value of final goods, products, and services produced within a country's borders during a one-year period. It is a comprehensive measure of a country's total output and a key measure of a nation's economic health.

Define "factors of production" and list the factors.

It refers to the resources required to produce things we would like to have. They consist of land, capital, labor, and entrepreneurs.

Explain "land" as a part of the factors of production.

Land refers to the gifts of nature, or natural resources that are not created by people. It includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, and the climate necessary to grow crops. Economics see land in limited supply.

Explain the "description" element of economics.

One part of economics describes economic activity. An example is GDP. Economics also describes jobs, prices, trade, taxes, and government spending. It allows us to know what the world looks like.

Explain opportunity cost and its relation to tradeoffs.

Opportunity cost refers to the cost of the next-best alternative that you gave up. Trade-offs are all of the other alternatives that you could have chosen.

What is the most important factor contributing to economic growth?

Productivity, a measure of the amount of goods and services produced with a given amount of resources in a specific period of time.

The government has become a protector, provider, regulator, and consumer. Explain how.

Protector: They enforce laws such as those against false advertising, unsafe food and drugs, environmental hazards, etc. Also, enforces laws against abuses of individual freedoms. Provider: All levels of government provide goods and services for citizens. The national government supplies a system of justice and national defense. Provides subsidies to parts of the economy and gives funding to state and local governments for programs. Regulator: Charged with preserving competition in the marketplace, as it oversees communications, interstate commerce, and entire industries. Consumer: They consume scarce resources to fulfill their role.

Explain "labor" as a part of the factors of production.

Refers to people with all their efforts, abilities, and skills. This category includes all people except entrepreneurs. Factors such as birthrates, immigration, famine, war, and disease have had a dramatic impact on the quantity and quality of labor.

Explain the TINSTAAFL concept and its relation to scarcity and economics.

Resources are limited and everything we do, eat, get involved in, has a cost, even if it seems as if we are getting something "for free." Someone, even if it's not you, has to pay for producing them in the first place. TINSTAAFL refers to: There Is No Such Thing As A Free Lunch.

Explain the "FOR WHOM to Produce" concept.

Society must decide who will receive the things produced after deciding WHAT and HOW to produce. Should they target low-income or middle-income people when it comes to building houses, for example?

What is the paradox of value?

The apparent contradiction between the thigh monetary value of a nonessential item and the low value of an essential item.

What is the key feature for the circular flow of economic activity?

The market, a location or other mechanism that allows buyers and sellers to exchange a specific product. they can be local, national, or global.

Define economic interdependence.

The mutual dependency of one person's, firm's, or region's economic activities on another's.

What are some things that can help the production possibilities frontier to expand?

The population may grow, the stock of capital may expand, technology may improve, or productivity may increase.

Define consumer sovereignty.

The role of consumer as ruler of the market when determining the types of goods and services produced. "The customer is always right."

Define economics.

The study of how people try to satisfy seemingly unlimited and competing wants through the careful use of relatively scarce resources.

Are economic models based on truth/facts or assumptions?

They are based on assumptions-things we THINK are true.

Unlimited wants and limited resources leads to what fundamental economic problem? What does this problem eventually lead to in regards to the three questions a society should ask themselves?

Unlimited wants and limited resources lead to SCARCITY, as this leads to choices through the three questions we must ask ourselves: WHAT to produce, HOW to produce, and FOR WHOM to produce.

For something to have value, what must it have?

Utility, or the capacity to be useful and provide satisfaction. The utility of a good or service may vary among people. It is similar to the paradox of value.

Explain the "HOW to Produce" concept.

What kind of mechanisms or tools should society use to produce the products the people want? It's a decision about whether or not they should use more machines than physical labor, or vice versa. Using workers might be better if a community has a lot of unemployed people. Automatic can often cost lower in production if a country has widely available machinery.

When does economic growth occur?

When a nation's total output of goods and services increases over time and the circular flow becomes larger with more factors of production, goods, and services flowing in one direction and more payments in the opposite direction.