Key Concepts in Economics and Economic Systems

Economics

The economic science of how and why people, businesses, and governments make the choices they do.

Scarcity

Scarcity means something is limited.

Economic cost of a good or service

The value people place on a good or service.

Difference between a good and a service

A good is any tangible thing that has a measurable, while a service is any intangible item.

Economic good

An item that bears a positive economic cost.

Nuisance good

A good that a consumer pays to have removed.

Microeconomics

Deals with the choices made by individual units, such as individual people, households, or businesses.

Macroeconomics

Observes large scale economic choices and issues.

PPC curve

An economic model that shows the maximum amount of two commodities that can be produced.

Circular flow model

Two basic elements are business firms and households.

Factors of production

Land, Labor, Capital, Entrepreneurship.

Most important factor of production

Entrepreneurship.

Factor costs

Rent, Wages, Interest, Profit.

Transfer payment

Payments of money or goods to persons for which the government expects no specific economic repayment.

Dissaving

The action of withdrawing money from an account or borrowing money.

Public sector in circular flow model

Refers to government.

Principle of diminishing marginal utility

People tend to receive less and less additional satisfaction from any good or service as they obtain more and more of it during a specific period of time.

Functions of prices

Transmits information, Provides incentives, Redistributes income.

Demand

The willingness to purchase and the actual act of purchasing a good.

Rightward shift of a demand curve

Indicates an increase in demand.

Leftward shift of a demand curve

Indicates a decrease in demand.

Common reasons for a change in demand

Change in income, change in the price of a related good, change in tastes and preferences, and change in expectations.

Normal good

A good that experiences an increase in demand when income rises.

Inferior good

Goods that experience a decline in popularity as buyers' incomes increase.

Effect of job loss on demand for normal goods

Shifts to the left.

Substitute good

A good that households may use in place of another good.

Complementary good

Goods that are used together with another good.

Complementary goods

Goods that a household uses in place of another good.

Fad item

An item that was trending then not a trending item.

Typical description of a fad item's demand curve

It shifts right then shifts left.

Supply

The amount of a product a company is willing to provide at various prices.

Rightward shift in a supply curve

Indicates an increase in supply.

Leftward shift in a supply curve

Indicates a decrease in supply.

Reasons for a change in supply

Change in technology, change in production cost, change in the price of related goods.

Market equilibrium price

The price at which the meeting of the minds occurs.

Price floors

Result when the government forces homes to be rented below market equilibrium price.

Surplus

An excess of unsold products.

Best solution for a surplus (supplier's standpoint)

Allow the price to fall or rise respectively to the market equilibrium point.

Demand solution to a surplus

Drive competitors out of business, persuade the government to buy the surplus, or advertise to increase consumer preferences for the product.

Result of government selling above market equilibrium price

A surplus.

Demand solution to a shortage

Discourage demand.

Primary economic concern of society

How best to accomplish its economic goals.

Four economic concerns of society

Low level of unemployment, a stable price level, a healthy rate of economic growth, a fair distribution of income.

Consumer good

Goods that individuals purchase for personal use, such as books, clothing, coffee, or school supplies.

Capital good

Goods that firms use to produce consumer goods.

Capital good/consumer good trade-off

There is a balance between consumer and capital goods produced within a nation.

Three economic questions

What will the nations produce, how will the nations produce the goods, and who will receive what the nation produces.

Market/command solution to the input question

An elitist group chooses the labor/capital ratio.

Market/command solution to the output question

Each individual decides the consumer goods/capital goods tradeoff.

Market/command solution to the distribution question

It depends on the individual's worldview.

Egalitarian fairness

Each person in a nation has a right to a part of that nation's wealth simply because he is a part of the human race.

Libertarian fairness

The only economic right to which a nation should entitle its citizens is the right to own and use property free of governmental interference.

Economic Darwinism

Another name for the libertarian view of economic fairness allowing for a survival of the fittest in the accumulation of wealth.

Father of Communism

Karl Marx.

Core beliefs of communism

One party controls everything.

Mercantilism

Promoted the acquisition of precious metals, not as the means to an end but as the end itself.

Five points of the mercantilist program

Exploitation, Trade, Domestic Manufacturing, Colonization, and Alliances/Treaties/Conquest.

Favorable balance of trade sought by mercantilists

Increase exports and decrease imports to have more gold coming in than going out.

Root problem of mercantilism according to Adam Smith

The misconception that money is wealth.

Forms of capitalism

Radical capitalism, classic liberal capitalism, and state capitalism.

Form of capitalism based on Adam Smith's writings

Classic liberal capitalism.

Classic Liberal Capitalism

Which form of capitalism is based on Adam Smith's writings?

State Capitalism

Which economic system best describes America?

Welfare State

What is a common characteristic of a welfare state? Taxes are high and given to help citizens from birth until death.

Centralized Socialism

Argues that no government should be the chief owner and decision maker with everything economic. Stepping stone to perfect society.

Pure Communism

The government has complete control under CS, then gives the industries and power back to the people to share. Only exist in theory, not real.

Communist Manifesto

What book did centralized socialism originate from?

Social Democracy

Which economic system is a stepping stone to a perfect society?

Radical Capitalism

What is one similarity between radical capitalism and communism? They exist only in economic theory.

Class Struggle

What did Karl Marx see as economic history primarily characterized as?

Sole Proprietorship

What is the most popular business model in the United States?

Sole Proprietorship

What form of business gives its owner the most freedom?

Unlimited Personal Financial Liability

What is the biggest disadvantage for sole proprietorships and partnerships?

General Partnership Contract Questions

What questions must a general partnership contract answer?

Greater Management Skills

What is the primary advantage of a partnership over a sole proprietorship?

Partnership Model

What business form do many law and accounting firms use? Why?

Limited Personal Liability

Why would a sole proprietor incorporate a company?

Impersonality

What is a major disadvantage of a corporation based on their size?

Initial Public Offering (IPO)

What is the term for a corporation's first sale of stock?

NYSE

What is the best stock exchange in the world?

Great Britain and North Holland

Where was the first stock market located in the US?

NASDAQ

What stock exchange has 'no floor'?

Common Stock vs Preferred Stock

What is the difference between preferred stock and common stock?

Common Shareholders

Who is the last to receive stock?

Stock Index

What is the primary purpose of an index?

Charles Dow

List what you know about Charles Dow.

Dow Jones Industrial Average (DIJA)

What stock index is the best health indicator of the American industry?

1929 Stock Market Crash

Why did the 1929 Stock Market Crash happen?

1934

When was the SEC founded?

Market

What is a market?

Key Differences in Markets

What are the four key differences that separate one market from another?

Andrew Carnegie

In what industry did Andrew Carnegie earn his wealth?

Perfect Competition

Characteristics of perfect competition.

Imperfect Competition

Characteristics of imperfect competition.

Oligopoly

Characteristics of oligopoly.

Cartel

What is a cartel?

Most Well Known Cartel

What is the most well known cartel?

Cartel

A cartel is when producers firm collusive agreements in countries in which they are legal or when the agreements span across nation borders.

Monopoly

Number of Firms: One per industry; Control of Price: No direct competition with the monopoly, so monopoly completely controls the price; Product Differences: No differences in product because it is only one; also no competition so need to change; Ease of Exit/Enter Market: Impossible to enter or exit.

Example of a monopoly today

Public Utilities.