econ fortner basic concepts

Absolute Advantage

one nation can produce more output with the same resources as the other

Capital

any human-made resource that is used to produce other goods and services.

ex: factories (plants), equipment, machinery, etc.

Capitalism

governments role would be limited to protecting private property and establishing an environment appropriate to the operation of the market system

Circular Flow Model/Diagram

HOUSEHOLDS... -sell factors of production to FIRMS -buy goods/services from FIRMS

FIRMS... -sell goods and services to HOUSEHOLDS -buy factors of production from HOUSEHOLDS

Command System

government owns most property resources; decision making occurs through central economic plan

capable of dramatic change in short time; does not meet wants/needs, lacks incentives for people to work, large bureaucracy (uses resources), little flexibility for small day-to-day changes

Comparative Advantage

one nation can produce a good at a lower opportunity cost than the other

ex: lawyer hires a secretary, doctor hires a nurse

Entrepreneur

individuals who use the other factors of production to produce a product, are innovative, and risk-takers.

Factor Market

HOUSEHOLDS sell factors of production to FIRMS

FIRMS buy factors of production from HOUSEHOLDS

Thus, factors of production are bought and sold in this market

Factors of Production

-Land -Labor -Capital -Entrepreneurship

Labor

all the human time, effort, and talent used to produce goods and services.

ex: workers and their skills

Land

all natural resources used to produce goods and services.

ex: oil, minerals, land, trees, etc.

Market System

characterized by private ownership of resources, use of markets and prices to coordinate and direct economic activity, acting in one's own self-interest

adjust to change, freedom, lack of gov interference, variety of goods/services, consumer satisfaction; rewards only productive resources, must guard against market failures

Mixed Economy

an economic system in which both the state and private sector direct the economy

Natural Resource

oil, minerals, land, trees, etc.

Normative Economics

involves a specific policy alternative, because it uses subjective, ethical, or moral judgments in addition to positive approach; "what ought to be"; cannot be tested b/c they are subjective positions or opinions

Opportunity Cost

the next best alternative given up when a choice is made.

Positive Economics

an unbiased, objective, scientific approach to issues

ex: if the money supply is increased by 10%, interest rates will increase by about 10%, inflation will increase by about 10%, and the dollar will depreciate by about 10% in the currency market.

Positive Incentive

an offer made to make someone act in a particular way; used to give someone what they want

ex: "rewards" like a bonus, candy, or gold star

Production Possibilities Curve

illustrates the economic concept of opportunity cost; shows alternative ways to use resources; limited to two choices.

ex: guns and butter; guns (military goods), butter (consumer goods)

What can move the curve outward?

trade, discovery of new resource, education, and technology

Why is the curve bowed outward from the origin?

law of increasing opportunity cost

Product Market

HOUSEHOLDS buy goods and services from FIRMS

FIRMS sell goods/services to HOUSEHOLDS

Thus, goods and services are brought and sold in this market

Scarcity

it is the basic economic problem; it is a situation that exists when there are not enough resources to meet human wants.

Specialization

a situation in which people concentrate their efforts in the activities that they do best

Trade-offs

all the alternatives that we give up whenever we choose one course of action over another.

Traditional System

traditions, beliefs, and customs determines the goods and products that are created; often used in rural and farm-based areas

sets forth economic roles for community; stable, predictable, and continuous life; discourages new ideas; stagnation, lack of progress

Utility

the measure of the satisfaction derived from the consumption of goods and services