Unit 1 Review

20 mc and 1 written

Economics

the study of how societies allocate limited resources to fulfill unlimited wants and needs

• choose to maximize utility, given constraints

Scarcity

a condition facing all societies because there are not enough productive resources to satisfy people’s unlimited wants

Productive Resources

Natural Resources: renewable resources or exhaustible resources (land, trees)

Human Resources: Labor (physical and mental effort used to produce goods and services)

Capital Goods: all human creations used to produce goods and services (oven, machines)

Entrepreneur

mix together resources in unique way, developing society with inventions

Goods vs Services

goods are physical items that can be owned, while services are intangible activities that cannot be owned

No Free Lunch* (explain meaning and give an example)

Milton Friedman

• there is a cost for everything (opportunity cost in what is not taken)

• example: coming to school=less working time / free shipping is from minimum prices when online shopping

Economic Theory

a simplification of economic reality used to make predictions about the real world

• goal:

  • to make things easier to understand, manage, and predict

    • prediction that people will spend more when they have more

  • rational self-interest

    • assumption that consumers will act to benefit themselves

Rational Self-Interest*

economists assume that consumers will act in ways that benefit themselves

• not always selfish (ex. volunteering)

Marginal Analysis

thinking in units of ones, the cost or benefit of one

• how much better will I feel if I sleep one more hour or work out one more set

Micro vs Marco economics

Micro: focuses on individual actors like households, firms, and industries

• examines their behavior, production, consumption, and market interactions

• ex. household budgets, personal loans, and small markets pricings

Macro: studies the entire economy’s performance, including aspects life inflation, unemployment, GDP, and government policies

• ex. federal tax policy, federal budget

Markets

means by which buyers and sellers carry out an exchange

Circular Flow Model*

the role of the household is to purchase goods and provide labor

• product and resource market is outer

• money flow is inner circle

Opportunity Cost

the value of the next best alternative foregone when a decision is made

• connected to no free lunch

  • where could you be instead of class today? what’s the next best option?

3 Economics Questions*

1. What goods and services will be produced?

2. How will they be produced?

3. For whom will they be produced?

Economics Systems

the set of mechanisms and institutions that resolves the what, how, and for whom questions

• types of systems: pure market economy, pure command economy, mixed economy, and traditional market

Pure Market Economy

private firms account for all production

• no government

• private ownership of all resources and the coordination of economic activity based on competitive market prices

• no government so that private firms account for all production

pros: voluntary choices at all levels, breeds competition amongst businesses

cons: no safety net, monopolies can emerge, no public goods, no role for entrepreneurs/innovation

Mixed Market Economy

economies with mixed central planning and competitive markets

• mix central planning with competitive markets

Traditional Market Economy

shaped largely by custom or religion

• shaped largely by custom or religion

• these economies are very rare now

• bartering, less currency exchange

• better for small towns

Production Possibility Curve

a production possibilities graph shows alternative ways that an economy can use its resources

• the production possibilities frontier is the line that shows the maximum possible output for that economy

Production Possibility Frontier

shows the possible combinations of two types of goods that can be produced when available resources are employed efficiently

Efficiency

producing the maximum possible output from available resources, meaning the economy cannot produce more of one good without producing less of the other good

• using resources in such a way to maximize the production of goods and services

• an economy producing output levels on the production possibilities frontier is operating efficiently

Law of Increasing Cost

each additional increment of one good requires the economy to give up successively larger increments of the other goods

Comparative Advantage

the worker, firm, region, or country with the lowest opportunity cost of producing an output should specialize in that output

Absolute Advantage

the ability to make something using fewer resources than other producers require

• US has advantage for a lot of things, make high quality and quickly

Specialization

occurs when individual workers focus on single tasks, enabling each worker to become more efficient and productive

Barter

a system of exchange in which products are traded directly for other products

Division of Labor

organizes the production process so that each worker specializes in a separate task

• Takes advantage of individual preferences and natural abilities 

• Allows workers to gain experience at a particular task 

• Reduces the need to shift between different tasks 

• Permits the introduction of labor-saving machinery 

Household

a house and its occupants regarded as a unit

Firm

business organization that produces goods and services for profit

Private Property Rights

legal rights that give individuals the ability control and use their property

Utility

A household’s level of satisfaction, happiness, or sense of well-being

In command economy, the role of the government is to

make major economic decisions