Economics and Market Systems: Key Concepts and Principles

Economics

Study of how people use scare resources to satisfy unlimited wants and needs

Law of Diminishing Return

As more resources are allocated, the gains are reduced - we have to give up an increasing amount to get a small return.

Increasing opportunity cost ; more given up, less gained

Relationship btw inputs and resulting outputs

Market Economy

Theoretical concept

Where supply and demand answer the basic economic questions; innovation is incentivized

No government interference; decisions based on self-interest; profit

Mixed Economy

Government intervention and competition provides for public goods and supply and demand play a role and encourage profit

Factors of Production

Items necessary to make goods and provide services

LLCE

Capital

Human-made items used in the production of goods and services

Economic Assumptions

Consumers try to maximize satisfaction; businesses try to maximize profits

Relationship between 2 variables: independent and dependant

LLCE

Land - Natural Resources
Labour - human effort/hands on
Capital - anything made or processed by man that contributes to the making of X
Entrepreneurship - brings LLC together

Payment for LLCE

Land (T) - Rent
Labour (L) - Wages
Capital (K) - dividends/interest
Entrepreneurship (E) - Profits

Positive Concepts

Statements based on fact without judgement and backed up with reasnable and measurable proof (often stats/data)

Ceteris Paribus

ALL THINGS BEING EQUAL

Basic premise of economic models to determine the cause and effect realtionship holding all other variables constant

Economic Models

used to compare 2 variables, simplifying a cause-and-effect relationship to demonstrate and predict a response

Basic Economic Questions

What to produce
For whom to produce
How to produce

Economic system helps
answer these questions

Basis for allocation resources

Traditional Economy

Based on providing necessities, close to being self-sufficient

Entrepreneurship is critical to drive innovation or provide for the necessities of life

Public Sector

Companies run by governments at all levels

Provide public goods that are necessary for functioning of society, which are very expensive but do not provide profit

Private Sector

Run relatively free of government interference; decide what is produced

The legal concept of private property is crucial to the operation of this economy

Innovative and efficient in the use of resources- profit

Total Utility

Overall benifit/satisfavtion/value gained from consumption of good/service

Public Good

Meant for the good of all in society; ideally equally accessibile/ available

Capital Resources

Human-made or transfromed/converted items used to make a finished good/service

Can include pre-finished items

Utility

Benifit/satisfaction/value derived from the purchasing one unit a good or service

Economic Goods

Any item that has an opportunity cost to which a dollar value can be attached

Where inputs into production have alternative uses

Everything, as all things are scarce, including air and water

Consumer Sovereignty

Input that a consumer has on what is produced in the marketplace

What influence consumers have on the output or price of an item

Free Good

Do not incur opportunity costs

Resources used do not have any alternative use, and resources are unlimited

Theoretical concept

Consumer Good

Goods produced for consumption purposes

Once consumed the resources are used up

Wage Scarring

When failing to secure a job post-training or becoming unemployed the time delay negatively impacts future potential income earned

Macroeconomics

Focuses on the aggregate of the whole economy - all industries forming and contributing to the economy

Provincial, national and international

Externalities

Sometimes called spillover effects

Impact on any party not involved in the economic transaction - both/either positive or negative

Typically not included in the cost of producing the item

Microeconomics

Focuses on interaction between an individual person(household) and an individual firm(industry)

1 market of consumers and 1 industry

Wants

Anything that goes beyond needs

Desire for things that are not essential for life

Needs

Necessities for life

Water, food, clothes & shelter

Opportunity cost

What you or society must give up when making a choice due to the scarcity of resources

What you give up by taking one course of action over another; study over party

Scarcity

Limited and non-renewable resources

Once resources are used they are gone

Requiring us to make choices on how we use resources

Resources

Items necessary to make goods or provide a service

Limited in quantity

Resource allocation

Those items in high demand attract producers(suppliers/businesses) to the market - ideally providing for efficient use/distribution of resources

Law of increasing opportunity cost

As more resources are allocated the gains are reduced - we have to give up an increasing amount to get a smaller return

Diminishing returns; less gained for the inputs allocated

Command economy

Government is pivotal in making all decisions about what and how items are produced and for whom

Inefficient use of resources, overproduction due to being unaware of what consumers want

Normative Concepts

Statments of opinion, often biassed by upbringing, community and political beliefs

PPC

Production Possibility curve/frontier

Shows outer limits of economic production; the amount of goods/services an economy can produce

Marginal Utility

Benifit/satisfaction/value gained from having one more/additional/extra unit of good/service

Determines repeat purchases

Normative concept - specific to the person

Markets

Where buyers and sellers come together

Consumers and businesses

Demand and supply

Incentives

Choices based on consideration of benefits and costs in a predictable manner determining the use of scarce resources

Capital Good - PPC

Goods that form the basis of other goods/evices not simply for consumption

Factories, technology, machinery, education