Economics Topics 1 & 2

Scarcity

A situation that exists when there are not enough resources to meet human wants.

Factors of Production

Resources used to make all goods/services, including land, labor, capital, and entrepreneurship.

Land

All natural resources used to produce goods/services.

Labor

All human time, effort, and talent used to produce goods/services.

Capital

Any human-made resource that is used to produce other goods/services.

Entrepreneurs

Individuals who use the other factors of production to produce a product.

Trade-off

All the alternatives that we give up whenever we choose one course of action over another.

Opportunity Cost

The next best alternative given up when a choice is made.

TINSTAAFL

An acronym meaning "There is No Such Thing as a Free Lunch."

Traditional Economy

An economic system based on traditions, beliefs, and customs to determine the goods and products created.

Command Economy

An economic system where the government answers the three basic economic questions.

Market Economy

An arrangement where buyers and sellers determine prices of goods/services.

Capitalism

An economic system based on private citizens using their resources for private gain.

Laissez-faire

A type of capitalism where the government does not interfere with the economy.

Free Enterprise

An economic system characterized by private or corporate ownership of capital goods.

Mixed Economy

An economic system in which both the state and private sector direct the economy.

Production Possibilities Curve (PPC)

A graph that illustrates the economic concept of opportunity cost.

Efficient Use of Resources

Any point on the PPC where all resources are being fully utilized.

Inefficient Use of Resources

Any point inside the PPC representing underutilization of resources.

Unattainable Production Point

Any point beyond the PPC that cannot be achieved with current resources.

Consumer Sovereignty

The idea that consumers have ultimate control over what is produced.

Specialization

A situation in which people concentrate their efforts in the activities they do best.

Economics

the study of how people seek to
satisfy their needs and wants by making choices

The Three Economic Questions

1. What to produce?2. How to produce?3. For whom to produce?

Property Rights

Legal entitlements that determine how resources and property can be used, owned, and transferred. They establish the rights of individuals or entities to possess, control, and benefit from their assets, including land, personal belongings, and intellectual property. These rights are essential for economic stability and incentivize investment and development.

Private Ownership of Goods

A system where individuals or businesses have the legal right to possess, control, and transfer property or resources. It contrasts with collective or state ownership, emphasizing individual rights and responsibilities in the economy.

Centrally Planned Economy

An economic system where the government makes all decisions regarding the production and distribution of goods and services. Resources are allocated according to a central plan, aiming to achieve specific societal goals. This approach often seeks to eliminate inequalities but can lead to inefficiencies and lack of innovation.

Economic Competition

A rivalry between businesses or organizations striving to attract customers and increase market share. It drives innovation, improves quality, and can lead to lower prices.

Incentives

These are rewards or benefits that encourage certain actions. Their purpose is to influence decision-making and drive performance.

Adam Smith

He is often referred to as the "father of modern economics" and authored "The Wealth of Nations." His ideas emphasize the importance of self-interest and competition in promoting economic prosperity and efficiency.

The Invisible Hand Theory

This concept, introduced by Adam Smith, suggests that individuals pursuing their own self-interest inadvertently contribute to the overall economic well-being of society. It emphasizes the idea that free markets lead to the efficient allocation of resources without the need for central planning.

The Law of Increasing Opportunity Costs

This principle states that as you produce more of one good, the opportunity cost of producing additional units increases. This occurs because resources are not equally efficient in producing all goods, leading to less productive use of resources as they are shifted from one good to another.

A Bowed Out PPC

A graphical representation showing the maximum possible output combinations of two goods or services that an economy can produce, where the curve is concave to the origin. This shape indicates increasing opportunity costs as production shifts from one good to another, reflecting the principle that resources are not perfectly adaptable for all types of production.

Point on a PPC Line

A location on the production possibilities curve that indicates the maximum output of two goods, given current resources and technology. It represents efficient use of resources, meaning that increasing the production of one good will require a decrease in the production of the other.

Marginal Benefit

The additional satisfaction or utility gained from consuming one more unit of a good or service. It helps individuals and businesses make decisions by comparing the extra benefit to the extra cost associated with that additional unit.

Marginal Costs

The additional expense incurred when producing one more unit of a good or service. Understanding this concept helps businesses make decisions about production levels and pricing strategies.