ECONOMICS UNIT 1

What is Economics?

The study of how people satisfy their needs and wants.

What is the difference between goods and services?

Goods are physical objects, and services are actions that a person performs for another person

What is the difference between wants and needs?

Wants: things you would like, but don’t need to survive (ex. Car, phone, airpods)

Needs: the things that a person has to have to survive (ex. Food, water, shelter)

What is scarcity

a limited amount of resources to meet unlimited wants and needs

Why do we have scarcity

We have unlimited wants and needs but limited resources

What are the 3 causes of scarcity

personal perspective, poor distribution of resources, rapid increase in demand

What are the three solutions to scarcity

doing without something, creating more resources, making better use of your resources

what is a traditional economy?

economic questions are answered by habits and customs; fear change

What is a command economy?

The government answers the basic economic question

What is a market economy?

Economic questions are answered by individual buyers and sellers; people act out of self-interest

What is a mixed economy?

No economy is pure market, pure command, or pure traditional

What kind of economy is the United States?

Mixed (free market)

Give an example of the U.S. as a market economy

Capitalism

Give an example of the US as a command economy

minimum wage

How is competition beneficial to consumers?

makes better products

What are trade offs?

The different options
(what you could have gotten instead)

What are opportunity costs?

The value of the #1 alternative; what you’re giving up (time, goods, services)

List a trade off and opportunity cost you have dealt with recently

Going to college; trade off= gap year, opportunity cost= tuition

What are human resources?

a person’s knowledge, skills, attitudes and abilities determine that individual’s value as a human resource. The more rare the skill, knowledge, etc., the more valuable and higher pay (ex. NFL players)

What are natural resources?

Raw materials from which goods and services are made (Ex. Oil, timber)

what are capital resources?

Money and property used to produce goods and services (Ex. Tools, cars, roads)

2 parts of the law of demand

Part 1: As price increases, demand decreases

Part 2: As price decreases, demand increases

2 parts of the law of supply

As price increases, supply increases

As price decreases, supply decreases

elasticity

How sensitive one variable is to a change in another variable

if an item has elastic demand, when price changes a little, the demand changes…

a lot (ex. pizza)

If an item has inelastic demand, when price changes a lot, the demand changes…

a little (ex. apples)

What determines the elasticity of an item?

1)      Availability of substitutes

2)      Relative importance

3)      Necessities vs luxuries

4)      Change over time

profit

The difference between the cost to produce a good or service and the amount it is sold for

equilibrium price

When the laws of supply and demand collide

in a free market economy, prices always tend to move toward…

equilibrium

substitute effect

If there is a substitute product, demand for an item may be influenced by the price of the substitute (ex. If the price of butter goes up, people will use more margarine)

complementary effect

The demand for an item will increase or decrease if the price of a complimentary product (something that goes with it) increases or decreases

income effect

As people earn more money, the demand for luxury goods will increase

3 non-price factors that impact supply

Change in costs of production, price of resources change (human, natural, capital), maximize product (if a producer makes more profit selling one product instead of another, the supply for both products changes

what is a surplus? what happens to prices during a surplus

Extra supply; prices decrease

what is a shortage? what happens to prices during a shortage?

Not enough supply; prices increase

What is a Price Floor? Give an example of a price floor.

A minimum price set by the government that must be paid for a good or service (ex minimum wage)

What is a Price ceiling? Give an example of a price ceiling.

A maximum price that can legally be charged for a good (ex. Rent control)

3 reasons for change in equilibrium

Change in supply, changes in demand, change in price

4 advantages of having prices

Prices as an incentive, prices as signals, flexibility of prices, price system in “free”

How does scarcity affect demand?

increases

how does scarcity affect supply?

decreases

how does scarcity affect equilibrium price?

increases

how does boycott affect demand

little

how do boycotts affect supply

increase

how do boycotts affect equilibrium price?

lower

how does a war affect demand?

increase

how does a war affect supply?

increase

how does a war affect equilibrium price?

increase