Economics-Unit 1

Simple economics definition

The management of scarce resources in a world of unlimited wants

Microeconomics

Deals with specific economic units

Ceteris Paribus

“other things being equal”

Four Factors of Production

land, labor, capital

Land

the natural resources used in production, including raw materials and geographical space.

Labor

the human effort used in production, including physical and mental work.

Capital

all things used in production (material and equipment)

Entreprenual Ability

The ability to combine the factors of production into a good or service.

Trade-off

All the alternatives given up when making this choice

Opportunity Cost

The most desirable alternative given up when you make a choice

Market System/Capitalist System

Private Property

Freedom of choice and enterprise: Individuals must be able to sell goods and services

Role of Self Interest: All parties must be free to try to get the most out of the system

Competition: A large number of buyers must be free to enter and exit the market

Limited Government Interaction: The market must be self regulating

Money is used in exchanges

Strengths of Capitalism

Market can adjust over time

Producers can decide how and what they want to produce

Small degree of government interferance

Demand effects resource use

Large variety of goods

Weaknesses of Capitalism

The for whom part is weak

Monopolies

The young, old, and disabled suffer because they cannot produce goods

Command Economy

A central authority defines what is produced

Strengths of Command Economy

Can make a quick change in production if needed

Weaknesses of a Command Economy

Not designed for the people

no incentive to work hard

Bowed Graph

Example of increasing opportunity cost. For each product A produced, a higher amount of product B cannot be produced.

Absolute Advantage

One nation can produce more output with the same resources as the other nation or one nation uses a lesser amount of inputs to get the same output

Comparative Advantage

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