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Economics
The study of rationing systems and of how scarce resources are allocated to fulfill the infinite wants of consumers.
Needs
The basic necessities that a person must have in order to survive.
Wants
The desires that people have.
Scarcity
That society has limited resources to meet unlimited wants.
Basic Economic Problem (BEP)
The problem of how to allocate limited resources to satisfy unlimited wants.
Opportunity Cost
The real cost of the next best alternative that is forgone when a choice is made.
Economic Resources/Factors of Production
The inputs used to produce goods and services, including land, labor, capital, and enterprise.
Land
The natural resources used in production.
Labor
The human work force in production.
Capital
The non-natural resources used in production.
Enterprise
The management, organization and planning of the other three factors of production.
Consumer Goods
Products sold to the general public.
Capital/Producer Goods
Products purchased by other businesses to produce other goods and services.
Services
Intangible products provided by businesses.
Economic Systems
The function of an economic system is to decide how to address the BEP by answering the 4 questions.
Types of Economic Systems
Free market, Planned (command), Mixed (modified market).
Free Market
A system where the laws of supply and demand direct the production of goods and services.
Characteristics of Free Market Economies
Private Property, Freedom of Choice, Motive of Self-Interest, Competition, System of Markets and Prices.
Private Property
Individuals and businesses own assets, allowing them to profit from ownership.
Freedom of Choice
Owners can produce, sell, and purchase goods in a competitive market, with constraints on price and capital.
Motive of Self-Interest
Sellers aim for the highest price while buyers seek the lowest, benefiting the economy overall.
Competition
Drives innovation and efficiency, keeps prices low, and enhances resource allocation.
System of Markets and Prices
Prices reflect supply and demand, with equal access to information for buyers and sellers.
Limited Government
The government ensures open markets, prevents manipulation, and ensures equal access to information.
Planned Economy
A system where a central government makes all economic decisions.
Characteristics of a Planned Economy
The government develops a comprehensive plan to set economic and societal goals for all sectors and regions.
Resource Distribution in Planned Economy
All resources are distributed based on the central plan.
Efficiency in Planned Economy
The government aims to utilize capital, labor, and natural resources efficiently.
Employment in Planned Economy
It seeks to employ everyone's skills and abilities fully, striving to eliminate unemployment.
Mixed Economy
A system that combines characteristics of market, command and traditional economies.
Characteristics of a Mixed Economy
It protects private property.
Price Determination in Mixed Economy
It allows the free market and the laws of supply and demand to determine prices.
Motivation in Mixed Economy
It is driven by the motivation of the self-interest of individuals.
Demand
Refers to the quantity of a good or service that consumers are willing and able to purchase.
Law of Demand
When price decreases demand increases.
Substitution Effect
When a product becomes more expensive, consumers substitute toward a cheaper good.
Income Effect
When a product becomes more expensive, it takes up a larger portion of a consumer's income and so the consumer has less to spend on other goods.
Supply
The quantity of a good or service that producers are willing and able to sell.
Law of Supply
When price increases supply increases.
Supplier Willingness
At higher prices, suppliers are willing to produce more as it means that they can earn more profit.
Demand Curve
A graphical representation of the relationship between the price of a good and the quantity demanded.
Supply Curve
A graphical representation of the relationship between the price of a good and the quantity supplied.
Movements of Demand & Supply Curves
A movement along the existing supply curve occurs only due to change in price or demand/supply.
Shifting of Demand & Supply Curves
The quantity demanded of the good changes at every price, causing the entire curve to shift left or right due to non-price factors.
Non-Price Factors
Any variable other than the price of a good or service that influences the quantity demanded or supplied.
Factors Affecting Demand
Price of related goods, tastes and preferences, level of disposable income, demographic factors (age, gender, socioeconomic status), consumer expectation.
Factors Affecting Supply
Producer expectations, changes in technology, prices of other goods, production costs, government regulations.
Equilibrium
The price at which the quantity demanded equals the quantity supplied.
Surplus
When supply exceeds demand, leading to price reductions.
Shortage
When demand exceeds supply, leading to price increases.
Market Clearing
When the supply of a good or service matches the demand and equilibrium is achieved.
