FBS Economics Ch 1 & 2 Review for Test

Economics

study of how and why people, businesses, and government make the choices they do

reasons why economics is a science

-Science always begins with observations.

-Scientists use their observation as a basis to predict future cause and effect relationships.

-Many scientists go one step farther by attempting to control future events by altering important variables

insatiability

unlimited wants

scarcity

everything is finite or limited in quantity

Greek etymology of the word Economics

"oikos" house + "nomos" management of

economic cost

the value people place on a good or service

goods

tangible things with measurable life spans

services

intangible products

economic goods and services

things that bear positive economic costs (a price tag higher than zero)

nuisance goods

items that bear negative economic costs

recycling

turning nuisance goods into economic goods

free goods and services

goods and services with price tags of zero

Diamond-Water Paradox

intrinsically explains why water, which is essential to life, is inexpensive while diamonds, which do not sustain life, are expensive; the value of water is subjective to the consumer's situation

Carl Menger

the founder of the Austrian school of economics - Diamond/ Water Paradox

subjective value

the worth of a good or service as determined by its usefulness to the buyer

utility

usefulness

opportunity benefit

the satisfaction a person receives from a choice

opportunity cost

regret one feels for not choosing another option

util

economically, an imaginary unit of satisfaction

microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses

macroeconomics

large scale economic choices and issues

positive economics

observing economic choices and predicting economics events

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

budget

an estimate of income and expenditure for a set period of time.

benefits of budgeting

requires managers to plan, coordinate and communicate; provides benchmark for evaluating actual performance; budgeting begins months before beginning of period

impulse buying

buying decision made by customers on the spot when they see the merchandise

financial plan

set of goals for spending, saving, and investing the money you receive.

fixed expenses

costs that do not change each month

variable expenses

expenses that change from month to month

Tabular Model / Schedule

a model that shows simple relationships between pairs of variables - provides information limited to only a few observations

schedule

a table or chart explaining the relationships between pairs of variables; also called a tabular model

line graph

a graph formed by the plotting of data involving two variables and the connecting of the resulting points to form a line of infinite information from the data

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

circular flow model

a simplified representation of how the economy's transactions work together; a model depicting the flow of economic goods and services between households, business firms, the government and financial markets.

consumption expenditure

spending by households on goods and services such as food, clothing, and entertainment

factors of production

land, labor, capital, entrepreneurship

land

all natural resources used to produce goods and services

labor

Human effort directed toward producing goods and services

real capital

the tools business firms use to produce goods and services

Entrepreneurship

the process of bringing together the three factors of production - natural resources, labor and capital - the person who does this is an entrepreneur.

factor costs

the payments business firms make in exchange for the four factors of production; rent, wages, interest, profit

rent

payment to resource owners for the use of their natural resources

wages

factor costs involving all payments for labor used to produce goods or services

interest

A sum paid or charged for the use of money or for borrowing money

profit

factor costs involving the rewards the entrepreneurs receive for successful risk taking

transfer payments

payments by the government to households for which the government does not receive a new good or service in return

budget deficit

the difference between tax revenue and government spending when government spending exceeds tax revenue

budget surplus

the difference between tax revenue and government spending when tax revenue exceeds government spending

financial markets

the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing. financial institutions through which savers can directly provide funds to borrowers

Dissaving

occurs when people withdraw funds from their previously accumulated savings

crowding out

The situation that occurs when government borrowing reduces the financial capital available to business firms

The four major entities in the circular flow model

Households, business firms, the government, and the financial market