micro unit 1

What is the definition of Economics?

Economics is the social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants.

What does scarcity mean in economics?

Scarcity refers to the situation where unlimited wants exceed limited resources, necessitating choices.

What is the difference between microeconomics and macroeconomics?

Microeconomics studies small economic units like individuals and firms, while macroeconomics studies the economy as a whole, including aggregates like inflation and unemployment.

What are positive statements in economics?

Positive statements are based on facts and avoid value judgments, describing what is.

What are normative statements in economics?

Normative statements include value judgments and describe what ought to be.

What is marginal analysis?

Marginal analysis involves making decisions based on the additional benefits and costs of a choice.

What is the opportunity cost?

Opportunity cost is the most desirable alternative that is given up when making a choice.

What are trade-offs in economics?

Trade-offs are all the alternatives that we give up when making a choice.

What are the five key economic assumptions?

1. Society has unlimited wants and limited resources. 2. Choices must be made due to scarcity. 3. Everyone aims to maximize satisfaction. 4. Decisions are made by comparing marginal costs and benefits. 5. Real-life situations can be analyzed through simplified models.

What is utility in economics?

Utility refers to the satisfaction or benefit derived from consuming goods and services.

What is the difference between price and cost?

Price is the amount a buyer pays for a good, while cost is the amount a seller incurs to produce it.

What are the four factors of production?

1. Land - natural resources. 2. Labor - human effort. 3. Capital - human-made resources. 4. Entrepreneurship - individuals who combine the other factors to create goods.

What is productivity?

Productivity is a measure of efficiency, showing the number of outputs produced per unit of input.

What is investment in economic terms?

Investment refers to the money spent by businesses to improve their production capabilities.

What does the term 'marginal' mean in economics?

Marginal refers to the additional or incremental change resulting from a decision.

What is the role of entrepreneurs in economics?

Entrepreneurs take initiative, innovate, and bear risks to combine resources and create goods and services.

What does it mean to allocate resources?

To allocate resources means to distribute them among various uses or consumers.

What is the significance of the 'guns and butter' concept?

The 'guns and butter' concept illustrates the trade-off between military spending and consumer goods, highlighting opportunity costs in resource allocation.

What is the relationship between productivity and income?

Generally, higher productivity leads to higher income, as more efficient production can yield greater output and profits.

What is theoretical economics?

Theoretical economics involves developing theories based on generalizations and abstractions to understand economic behavior.

What is policy economics?

Policy economics applies economic theories to address specific problems or achieve economic goals.

What is an example of marginal analysis in everyday decision-making?

Deciding whether to buy an additional item based on the extra benefit it provides compared to its cost.

How do economists use the scientific method?

Economists use the scientific method to make generalizations and develop theories about economic behavior.

What is the purpose of economic models?

Economic models simplify real-life situations to analyze and explain economic behavior and outcomes.

Economics

The study of how society allocates its scarce resources.

Scarcity

The condition where there are not enough resources for everyone.

Microeconomics

The branch of economics that studies individual units, such as households and firms.

Macroeconomics

The branch of economics that studies the economy as a whole, including inflation, unemployment, and economic growth.

Positive Statement

A statement that can be tested and validated, such as 'The unemployment rate is 5%.'

Normative Statement

A statement that reflects opinions or values, such as 'The unemployment rate should be lower.'

Price

The amount of money required to purchase a good or service.

Cost

The value of what is given up to obtain a good or service.

Factors of Production

Resources used to produce goods and services, including land, labor, capital, and entrepreneurship.

Centrally-Planned Economy

An economic system where the government owns all resources and answers the three economic questions.

Free Market Economy

An economic system characterized by little government involvement and private ownership of resources.

Mixed Economy

An economic system that combines elements of both free market and centrally-planned economies.

Communism

A type of centrally-planned economy where the government controls all aspects of production and distribution.

Advantages of Communism

Low unemployment, great job security, and less income inequality.

Disadvantages of Communism

No incentive to work harder, innovate, or compete; leads to poor quality goods and corruption.

Laissez Faire

An economic philosophy of minimal government intervention in the economy.

Economic System

The method used by a society to produce and distribute goods and services.

Three Economic Questions

What goods and services should be produced? How should these goods and services be produced? Who consumes these goods and services?

Resource Allocation in Communism

Resources are allocated by the government based on central planning.

Resource Allocation in Capitalism

Resources are allocated through the price mechanism in a free market.

Role of Prices in Capitalism

Prices signal to producers what to supply and to consumers what to demand.

Profit

The opportunity to make PROFIT gives people INCENTIVE to produce quality items efficiently.

Incentive

An encouragement for businesses to produce goods, driven by the potential for profit.

Competition

The rivalry among businesses that leads to lower prices, better quality, and more product variety.

Self-Interest

The motivation of individuals to act in ways that benefit themselves, which helps regulate the economy.

Free Market

A system where the prices of goods and services are determined by unrestricted competition between privately owned businesses.

Central Planners

Individuals or groups that make economic decisions for a society, often leading to inefficiencies.

Farmer's Market Example

A scenario where producers set prices based on consumer demand, adjusting to maximize sales.

Invisible Hand

The concept that individuals seeking their own self-interest can lead to societal benefits.

Mixed Economies

A system that incorporates both free markets and government intervention.

Productivity Creates Wealth

Countries with free markets and property rights tend to experience greater economic growth.

North Korea's GDP

$13 Billion

South Korea's GDP

$1.6 Trillion

Economic Freedom

The degree to which individuals have the ability to control their own economic resources.

Consumer Demand

The desire of consumers for goods and services, which drives production and pricing.

Quality Production

The ability to produce goods that meet consumer expectations and standards.

Government Intervention

Actions taken by the government to influence the economy, which can sometimes hinder competition.

Resource Allocation

The distribution of resources among competing groups or uses, often influenced by profit motives.

Economic Growth

An increase in the production of goods and services in an economy over time.

Third World Countries

Countries that are less economically developed and often face challenges in productivity and growth.

Developed Countries

Nations with advanced economies and high standards of living, typically characterized by high productivity.

What is the relationship between scarcity and choices?

Scarcity forces individuals and societies to make choices about how to allocate limited resources.

How do positive and normative economics differ?

Positive economics deals with what is, while normative economics deals with what ought to be.

What is the difference between price and cost?

Price is what consumers pay for a good, while cost refers to the expenses incurred in producing that good.

Differentiate between consumer goods and capital goods.

Consumer goods are products intended for final consumption, while capital goods are used to produce other goods.

What are command economies?

Command economies are systems where the government makes all economic decisions, unlike free market economies where decisions are made by individuals.

What are the four factors of production?

The four factors are land, labor, capital, and entrepreneurship.

Define human capital.

Human capital refers to the skills, knowledge, and experience possessed by individuals that contribute to economic productivity.

What are tradeoffs?

Tradeoffs are the alternatives that must be given up when making a decision.

What is opportunity cost?

Opportunity cost is the value of the next best alternative that is forgone when making a choice.

What does the Production Possibilities Curve (PPC) represent?

The PPC illustrates the maximum possible output combinations of two goods that can be produced with available resources.

What are the four key assumptions of the PPC?

1. Only two goods can be produced. 2. Full employment of resources. 3. Fixed resources. 4. Fixed technology.

What does a point on the PPC indicate?

A point on the PPC indicates productive efficiency, where resources are fully utilized.

What does a point inside the PPC indicate?

A point inside the PPC indicates inefficiency or unemployment of resources.

What does a point outside the PPC indicate?

A point outside the PPC is unattainable given current resources.

What is productive efficiency?

Productive efficiency occurs when goods are produced at the lowest possible cost.

What is allocative efficiency?

Allocative efficiency occurs when the mix of goods produced represents the preferences of society.

What is the law of increasing opportunity cost?

The law states that as production of one good increases, the opportunity cost of producing additional units of that good also increases.

What shifts the PPC outward?

An increase in resource quantity or quality, technological advancements, or changes in trade can shift the PPC outward.

What happens to the PPC with a technological improvement?

A technological improvement can increase production efficiency, shifting the PPC outward.

What is the impact of producing more capital goods?

Producing more capital goods can lead to greater economic growth in the future.

What is the opportunity cost of moving from point A to point B on the PPC?

The opportunity cost is the number of units of the other good that must be given up to increase production of the first good.

What is the main reason people trade?

People trade to access goods and services they do not produce themselves.

What would happen if trade were limited?

Limiting trade would reduce choices and lower the standard of living.

What is absolute advantage?

The ability of a producer to produce the most output or require the least amount of inputs.

What is comparative advantage?

The ability of a producer to produce a good at a lower opportunity cost than another producer.

How do you calculate per unit opportunity cost?

Per Unit Opportunity Cost = Opportunity Cost / Units Gained.

What is Ronald's opportunity cost for one pizza in terms of burgers?

1 pizza costs 10 burgers.

What is Papa John's opportunity cost for one pizza in terms of burgers?

1 pizza costs 2 burgers.

Which producer has a comparative advantage in burgers?

Ronald McDonald has a comparative advantage in burgers.

Which producer has a comparative advantage in pizza?

Papa John has a comparative advantage in pizza.

What are the benefits of specialization and trade?

Specialization and trade increase efficiency and allow countries to consume beyond their production possibilities.

What do terms of trade refer to?

Terms of trade are the agreed upon conditions that benefit both countries in a trade agreement.

What is the opportunity cost of one radio for India?

1 radio costs 1 pineapple.

What is the per unit opportunity cost for 1 pineapple for Kenya?

1 pineapple costs 1/3 radio.

What should Kenya do if the terms of trade for 1 radio is greater than 3 pineapples?

Kenya should produce radios on their own.