The Central Idea - Economics

Economics

the study of how people deal with scarcity and how natural resources are efficiently managed

Scarcity

the situation in which the quantity of resources are limited to different regions

Economic Interactions

exchange of goods and services between people

Market

an arrangement by which economic exchanges between people take place

What to Consume, What to Produce

What are the 2 Fundamental Individual Choices?

Budget Constraint

a scarce amount of funds that limits an individual’s spending

Opportunity Cost (Of a Choice)

the value of the best alternative that was not chosen because something else was chosen

Trade-off (Compromise)

when a person attempts to acquire 2 or more desired outcomes

Gains from Trade

improvements in income, production, or satisfaction owing to the exchange of goods and services

Specialization

the concentration of production effort into a single specific task

Division of Labor

the division of production effort into a single specific task

Comparative Advantage

a situation in which a person or group can produce one good at a lower opportunity cost than another group

China’s use of cheap labor to mass-produce simple consumer goods at a lower opportunity cost

What is an example of Comparative Advantage?

International Trade

the exchange of goods and services between people and firms in different countries

Production Possibilities

alternatives combinations of production of various goods that are possible, given the economy’s resources

Increasing Opportunity Costs

a situation in which producing more of one good requires giving up an increasing amount of production of another good ; can also increase because some resources are more suited in producing one good than another

Production Possibilities Curve

a curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources and technology

Division of Labor

the breaking up of complex production tasks into smaller several/many subtasks; ultimately allows for greater specialization

Market Economy

an economy where most decisions of how, what, and for whom to produce are made by a select group of individuals and firms that control the government. In this economy production and prices are determined by the government

Command Economy

an economy where most decisions of how, what, and for whom to produce are made by a select group of individuals and firms that control the government. In this economy production and prices are determined by the government

Freely Determined Price

a price that is determined by the interaction of individuals and firms in the market

Property Rights

rights over the use, sale, and proceeds from a good or a resource

Incentive

a device that motivates people to take action, usually so as to increase econimic efficiency

Market failure

any situation in which the market does not lead to an efficient economic outcome

Government failure

a situation in which the government makes things worse than the market, even though there may be market failure

Signals

In the Price System of a Market Economy: the price of a good sends a signal to producers to increase or decrease production

Incentives

In the Price System of a Market Economy: higher (lower) prices of goods will increase (decrease) the incentives for firms to produce those goods

Distribution

In the Price System of a Market Economy: higher or lower worker income results from a higher or lower price of the goods or the services they make will affect the distribution of goods and service in the economy

Any data points along the line/curve

What is considered efficient on a PPC?

Any points outside of the line/curve

What is considered impossible on a PPC?

Any points inside of the line/curve

What is considered inefficient on a PPC?

The decreasing of resources

What does it mean when the PPC moves to the left?

A natural disaster, decreasing resource availability

What is something that would cause the PPC to move left?

The increasing of resources

What does it mean when the PPC moves to the right?

Increased productivity

What is something that would cause the PPC to move right?

the availability of resources such as labor, capital, and technological resources

What are some reasons why a PPC might shift?

What is to be produced? How are these goods to be produced? For Whom are the goods to be produced?

What are the Three Fundamental Questions of a Market Economy