Economics 12 (Module 1-2)

Econom

Economics

Study of the allocation of our scarce resources to satisfy our unlimited wants + needs

Resources

all inputs used to produce goods + services

Factors of Production

Land, Capital, Labour, Entrepreneurship

Land

natural, non man made resources available to us that can be used for goods and services

Labour

all mental/physical effort expended by ppl in the production of goods/services

Capital

All knowledge, equipment, structure and money used to produce goods/services

Entrepenurship

someone or group who has idea or innovation and brings all other Factor of Production to produce

Basic economic problem

because of scarce resources, we can’t satisfy all human wants and needs - force us to make choices

Scarcity

All resources are limited

Opportunity Cost

the value of the next-highest-valued alternative use of that resource.

Macroeconomics

deal w/ aggregate or total economy; big picture

Microeconomics

individual viewpoint (individual household/company)

Why we study econ? (4)

• Resources are scarce → choices must be made

• Maximize benefits for all humans

• Use resources without destroying the Earth

• Maximize long-term usability

Ceteris Paribus

All other things remaining constant

Fallacy of Composition

Assuming that what is true for one individual (or part) is true for the whole group.

Economic Theory

• Statement used to explain/predict behaviour

• exclude minor details

Hypothesis

• testable proposition abt how ppl behave/react to a change in econ circumstances

• If consistent w/ real world observations, accpeted as econ theory

Correlation

events that occur tgt

Causation

one event causes another to occur

Positive Analysis

what is (facts)

Normative analysis

what should be (opinions/values)

Marginal Thinking

Making decisions based on the extra (one more) cost and benefit

Marginal choices

A decision about whether to do one more unit of an action by comparing marginal benefit and marginal cost.

Rule of Rational Choice

if expected marginal benefit is greater than expected marginal cost

• E(MB)>E(MC)

Incentives

encourage consumption or production

Discentive

Discourage consumption or production

Specialization

concentrating on prodution of one or few goods

comparative advantage

produce good/service at lower opportunity cost than other producers

Advantage of Specialization

• greater skill thru repetition

• avoid wasting time in shifting from task to task

• Work best suited

• use of specialized tools, equipment, etc

Trade

trade with others who have comparative advantage

Basic Econ Problem: the big three

1. What to produce

2. How to produce

3. For whom we should produce

Consumer Sovereignty

The idea that consumers’ choices and preferences determine what goods and services are produced in a market economy.

Command/Planned economy

How to Produce (2)

• Least cost method

• Each nation use relatively abundant resource

Two types of Production

1. Labour Intensive

   1. Scarce capital

2. Capital Intensive

   1. Labour is scarce

For whom we should prouduce

• In Mixed market

  • amt of goods person is thru income

• In command econ

  • Gov decides who gets what

Allocative Mechanism

how an economy decides who gets what

Free goods

large amt, no rationing needed

Consumer Goods

final item used by consumer

Allocating Vouchers

Using vouchers to allow individuals to choose how a good or service is allocated, rather than the government providing it directly.

Shortage

temporary condition where good/service (man made) is in short supply

Man cannot create matter

Humans cannot create matter from nothing, they can only transform, combine, or use existing resources.

Capital Goods

used to produce other consumer good/service

Fixed Capital

machinery, equipment, tech, factories

Working capital

The short-term funds a business uses to run its daily operations

Physical capital

man-made goods used to produce other goods and services

Mental Capital

The skills, knowledge, education, and experience that workers bring to the production process.

Household

buyer

Firms

seller

Factor Market

Where households sell factors of production and firms buy them.

Product Market.

Where households buy goods and services and firms sell them

PPC Frontier

A graph showing the maximum combinations of two goods an economy can produce using fixed resources and technology.

PPC Curve

• Downward sloping: producing more of one good means less of another

• Bowed outward: opportunity cost increases

• Points on the curve: efficient use of resources

• Points inside: inefficient / unemployment

• Points outside: unattainable (for now)

Economic Growth

• Increase in output

OR

• Increase in what economy can produce while using all scarce resource

PPC Inward Shift

Economy suffer loss of some scarce resources

Real Investment

allocate scarce funds to capital goods

Asymmetrical Growth

Economic growth that increases production of one good more than another, causing the PPC to shift outward more on one axis.

Factor Mobility

ability to move resources from 1 industry to another