econ test 1

Mr. Maj

economic problem

although your wants are unlimited, the resources you want are scarce

scarcity

not enough resources to satisfy people's unlimited wants

capital goods

human creations (machines) used to produce goods and services

productive resources

inputs that produce the goods and services people want

economics

how people use their scarce recourse to satisfy their unlimited wants

human resources

\-all human effort/work

\-physical labor or mental ideas

profit

revenue from sales minus cost of production

entrepreneur

someone who takes a risk to earn a profit (develop a product or create a new way to produce something more efficiently)

natural resources

raw materials supplied by nature

renewable resource

can be used indefinitely if used wisely and allowed sufficient time to recover

exhaustible resource

once used, they're used up (not renewable)

goods

something you can feel and touch (tangible)

services

not physical, uses scarce resources to satisfy human want (intangible)

“no free lunch”

nothing is ever "free" because every good and service requires scarce resources (everything costs someone something)

economic theory

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

rational self-interest

customers maximize expected benefit given the cost, or minimize cost for benefit

normative

someone's opinion (can't be shown to be true/false based on reference to facts)

positive statement

factual statements (ability to find out if true/false by referring to facts)

marginal cost

cost to consumer or producer for each additional unit

marginal benefit

revenue or enjoyment of each additional unit

microeconomics

focuses on your economic behavior and the economic behavior of individuals and firms

macroeconomics

performance of the economy as a whole

choice

decision makers will continue to acquire information as long as the marginal benefit from information exceeds marginal cost of gathering it

markets

where buyers and sellers carry out exchange where they buy and sell things

circular flow chart

types of market participants

\-households

\-firms

\-governments

\-rest of world

opportunity cost

value of the best alternative you must pass up

sunk cost

cost you already paid but can never recover no matter what you do

economic system

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

pure market economy

\-private firms own ALL means of production

\-no gov involvement

\-private groups own ALL resources

\-prices generated in free and competitive markets

invisible hand

no gov or institution is coordinating the market

monopolize

producers work to drive out competition and work with competitors to raise prices (higher prices\=more profit)

"no public goods"

public goods benefit everyone but individual firms don't want them because they can't sell them/earn a profit or keep people from use of it

externalities

costs that aren't considered when an item is produced

economic fluctuations

\-when markets both expand and contract (consumers and producers feel the pain of recession)

\-no safeguard because of no gov

rules of the game

laws when there is no gov involved (i.e. don't steal, don't murder, etc.)

pure command economy

economy controlled by the gov (i.e. communist russia, north korea)

visible hand of central planners

\-gov setting prices

\-resources are allocated

\-told what to produce

problems with command economies

\-no competition market

\-directing production through state run industries

\-prices set by central planners

\-goods and services may be rationed

little freedom of choice

less freedom with decisions; might tell people where to work

central planning can be inefficient

\-central planners choose what to grow (can lead to inefficiency)

\-no incentive to make a profit (resources can be wasted)

environmental damage

\-gov not concerned about environment

\-since no one owns it, we will use it all up

no role for entrepreneurs

since gov owns ALL resources, there is no goal for anyone seeking a profit

mixed economy

a little bit of central planning and competitive markets (ie the US)

market economy

competitive markets play majority role in setting prices (some gov control: health regulations, zoning, consumer regulations)

transitional economy

shifting from command economies to market economies (or vice versa) (ie China)

privatization

converting gov enterprises into private enterprises

traditional economy

economies shaped by custom or religion (i.e. caste system in india)

2 types of goods in PPF

1) consumer
2) capital

production possibilities frontier (PPF)

shows possible combination of 2 types of goods that can be produced when resources are employed efficiently

simplifying assumptions

\-single snapshot in time

\-no new innovation

\-rules of game/legal system are fixed

efficiency

\-maximum possible output from available resources (no more than 1 type of good can be produced without reducing amount of alternative product)

\-measure through comparative advantage, specialization)

law of increasing opportunity cost

with each additional increment of a good produced requires economy to give up successfully larger increments of another good

constant cost curve

cost of producing an additional good is the same regardless of where you are along the curve

improvements in "rules of the game"

\-formal and informal institutions that support the economy (laws, law enforcement, etc.)

\-encourage people to be productive

comparative advantage

ability to produce a good/service for a lower opportunity cost than a competitor

absolute advantage

ability to produce more of a good/service than a competitor

law of comparative advantage

the worker with lower opp. cost of producing a particular output should specialize in that output

specialization

allows the workers to become more efficient

bartering

a system of exchange where products are exchanged directly for other products

division of labor

organizing the production process so each worker specializes in a separate task so the group can produce more

households

everyone that lives together under one roof (single economic decision maker)

utility

level of satisfaction of happiness

firms

an economic unit formed by a profit seeking entrepreneur who combines resources to produce goods and services and accepts the risk of profit and loss

transaction costs

cost of time and information required for exchange

property rights

a legal claim that guarantees an owner the right to use a resource or charge others for its use

intellectual property rights

protect creators of new ideas and inventions

patent

laws to protect inventors and new devices or processes

copyright

assigns property rights to written (original) expression

trademarks

property rights to unique commercial symbols and marks

measurements and safety

\-ensure that weights and measures are standardized

\-agencies that protect consumers and firms: i.e. FDA and CPSA

market competition

\-when they are a monopoly, they are able to charge higher prices

\-businesses work to acquire smaller businesses to make more profit

anti-trust laws

\-laws that work to reduce anti-competitive behavior and promote competitive markets

\-ways to prevent monopolies

regulating natural monopolies

where one firm can serve an entire market at a lower per unit cost then 2 or more firms can

fiscal policy

\-a fed gov's use of taxing and public spending to influence the macroeconomy

\-affects our interest rates (makes more expensive to take out loans)

\-ie. medicare, medicaid, and national defense

monetary policy

\-controlled in US by federal reserve

\-federal reserve attempts to control the money supply to influence the macroeconomy

private goods

\-rival in consumption

\-exclusive: nonpayers can be excluded

\-once consumed by ONE person, it can't be used by someone else

public goods

\-non-rivalrous

\-non-exclusive: hard to exclude non payers

\-once produced they are available to all (i.e. police force, public roads)

natural monopoly goods

\-non-rivalrous

\-exclusive

\-multiple people can consume it at once (i.e. cell service, tv subscriptions)

externalities

things that appear as a result of interaction in the company

negative externalities

\-byproducts of production or consumption that impose costs on third party (i.e. pollution)

positive externalities

\-byproducts that benefit producers and consumers (i.e. education)

\-when they are positive externalities, gov will try to increase levels of production that will be chosen privately

open access good

\-rival in consumption

\-non-exclusive bc difficult to regulate (i.e. natural resources like water)

median income

\-middle income when a group of incomes is ranked lowest to highest

\-in a market economy, workers will have different incomes based on the job they have

programs for the poor

programs designed to help people who lose income due to retirement, temporary unemployment, or inability to work due to injury or disability

we live in ___, but most of the world lives in ___

relative poverty, abject poverty