Chapter 1 - Welcome to Economics!

economics

study of how humans make decisions in the face of scarcity

scarcity

want/need for goods, services and resources exceeds what is available

due to scarcity, subjects must:

• make choices about how to use resources in the best way possible

  • obtain most goods/services possible, maximizing resources

if we produce some of what is consumed and trade for the rest,

we do not have to each produce everything we consume anymore because of division and specialization of labor

division of labor

• production of goods/services is divided into number of tasks that different workers perform, instead of one person being responsible for all the steps, helping against scarcity

• leads to greater quantity of output

specialization

• workers focus on specific job in the process where they have an advantage based on different skills, talents, and interests

• workers specializing in certain tasks work quicker with higher quality

• allows businesses to take advantage of economies of scale: as level of production increases, average production cost per unit decreases

trade and markets

• market allows you to learn a specialized skillet and pay for the rest from other specialized workers

microeconomics

actions of individual agents within the economy like households, workers, and businesses

microeconomics examples

• household/individual budgets

• deciding to work

• saving vs. spending

• what/how many products businesses sell

• prices charged

• means of production

• number of workers

• business finances

• expanding/downsizing

• theory of consumer behavior, theory of the firm

• how marketes for labor and other resources work

• how markets sometimes fail to do work properly

macroeconomics

study of economy as a whole; broader issues

macroeconomics examples

• growth of economy

• number of employed/unemployed

• inflation

• government deficits

• level of imports/exports

• monetary/fiscal policy

• standard of living

• what determines number of goods/services a nation produces (GDP)

monetary policy

• conducted by central bank

• policies affecting bank lending, interest rates, financial capital markets, availability of credit

fiscal policy

determined by legislative body; involves government spending and taxes

circular flow diagram

model that pictures economy as two groups (households and firms) that interact in two markets (goods/services market and labor market

goods/services market

households sell labor to business firms/employees for wages, salaries and benefits

inputs

labor/resources used by businesses to make goods/services

traditional economy

• oldest economic system

• organized based on tradition with occupation passed down in family

• everything produced is for consumption, so there is little economic progress nor development

command economy

• centralized in government

• government decides means of production and sets wages

• government decides what goods/services will be produced and what it will be sold for

market economy

• decentralized and based on private enterprises

• supply of goods/services is based on demand

• income based on ability to convert resources into something society values

mixed economy

combines command and market economies on a spectrum: level of government regulation and private operation

private enterprises

private individuals/groups own and operate resources and businesses instead of the government

market

institution that brings together buyers and sellers

index of economic freedom

• score based on extent of economic freedom in each category

• overall trend in recent decades has been shifting towards higher economic freedom

regulations

government rules for the economy

market-oriented economies have less regulations, just enough to maintain even playing-field; at minimum, regulations:

• safeguard private property against theft

• protect people from violence

• enforce legal contracts

• prevent fraud and collect taxes

in command economies, government heavily regulates decisions of production and pricing in the market, but they often have:

underground economies, black markets, where buyers and sellers make transactions without government approval

globalization

expanding cultural, political, and economic connections between people around the world

GDP

• gross domestic product

• measures size of total production in an economy

ratio of exports to GDP measures:

share of a country’s total economic production that is sold to other countries

smaller economies need:

international trade to take full advantage of division of labor, specialization, and economies of scale

Regardless of whether you are looking through the microeconomics microscope or the macroeconomics telescope, the fundamental subject material of the interconnected __________ doesn't change.

economy

Which of the following is generally accepted as a valid criticism of the production of useful goods and services?

environmental pollution