H Economics: Ch 1-2 Test: Modules 1-6

Market

not a place, but a collection of buyers and sellers wherever they may be

What are three economic questions that countries must ask about their resources?

1. What should be produced

2. How should it be produced

3. For whom it should be produced (everyone)

How do we know what should be produced?

Based on what we, as a society, need

-Additionally from tradeoffs because resources are limited and choices will need to be made

What is the most efficient economy?

Market economy

What are the economic goals that societies pursue?

1. Economic growth

2. Efficiency

3. Equity

4. Economic security

5. Economic freedom

Equity

the quality of being fair and just

-Are the goods distributed among the people in a fair and just way

Equity of outcome

Each member of society shares equally in what the economy produces; members can rely on each other

-this destorys incentives

equality of opportunity

Idea that everyone in a society should have the same opportunities in life; gives everyone the ability to make economic decisions for themselves

Economic Security

have confidence in their ability to support themselves and their families

-sources of this are well-paying jobs and social safety nets

Social Safety Net

Any form of government assistance or program for those with financial needs

Economic Freedom

people can make economic decisions for themselves

economic system

an organizational structure for addressing what, how, and for whom to produce

incentive

the prospect of a reward or punishment that influences a decision or motivates greater effort

Traditional Economy

economic system where decisions about resources are made by habit, custom, superstition, or religious tradition

Incentives in a traditional economy

-social approval for performing well at a traditional role

-disapproval for rebelling against traditions or performing poorly

Advantages of traditional economy

-Economic security: everyone has a role to play so will always be working as well as no dramatic changes in environment so jobs won't be lost either

-sustainable: low impact & green

Disadvantages of traditional economy

-Rarely achieve goals of economic freedom, growth, and high standard of living

-Equity between gender roles: unfavorable to women

-New technology: doesn't want to adapt to internet nor electricity

LOW STANDARD OF LIVING

command economy

An economic system in which the government controls a country's what, how, and why of production

-Ran by central planners/government

Ex. communist and socialist economies

incentives in a command economy

COMES FROM GOVERNMENT

-rewards and punishments are given-> whoever meets production quota might be rewarded but whoever falls short will be demoted

Advantages of command economy

-Economic security: as long as everyone works diligently and the country has reached a level of production high enought to provide basic goods, command economy will thrive

-Can adjust in hard times

-"You work for us and we will give you everything you need in return"

Disadvantages of Command Economy

-Poor economic track record: failed to meet several important economic goals

-Economic freedom: this is done so everyone obeys

-low standard of living

standard of living

a measure of comfort in terms of the goods and services available

market economy

an economy where most key economic decisions are made by business owners and consumers

-Ran by business owners and consumers

-operate under capitalist system

capitalist system

most resources and businesses are privately owned

Incentives in a market economy

-Gains and losses that follow from the economic choices of business owners and consumers: both sides must benefit from trade

-The need to please others in order to enjoy personal gain

Advantages of Market Economies

-Efficiency-> avalibility of goods

-Economic freedom

Disadvantages of Market Economies

-Equity: perceived as equity of outcome

-Economic security: no central plans to ensure everyone has a job because it is up to the worker

-Resource conservation

Mixed Economy

A combination of market economy with significant government involvement and elements of tradition

-FDR was the first to implement this in US

Ex. US and Canada

Karl Marx

1818-1883. 19th century philosopher, political economist, sociologist, humanist, political theorist, and revolutionary. Often recognized as the father of communism. Analysis of history led to his belief that communism would replace capitalism as it replaced feudalism. Believed in a classless society.

Friedrich Von Hayek

Wanted no government intervention. Disbelieved in the use of Keynesian economics. Defended free market capitalism - system could fix itself. His ideology was not accepted initially, however many countries practice this now.

Who are the most important decision makers in a market economy

Individuals and Firms

What does the circular flow model illustrate?

It shows how money, goods, and resources move through a market economy.

firm

a privately owned organization that produces goods or services and sells them to others

product markets

where goods and services are bought and sold in exchange for money

Factor Markets

the markets where productive resources are bought and sold

How does the government fit into the circular flow model

-Buying goods and services in product markets

-Producing goods and services

-Collecting taxes and making transfer payments

Transfer Payments

expenditures for which the government receives no good, service, or resource in return

Ex. police

Public Good

a good or service that can be consumed by many people at once and that other people can't be prevented from using

Ex. parks and benches

Factor payments

payments for the use of resources

property right

a legal claim of ownership

economics

The study of choice under conditions of scarcity

-the study of how to make the most of your life

Scarcity

Exists if we desire more of something; unlimited wants BUT limited resource

Why must we always make trade-offs

This is because we don't have unlimited money so we have to make choices for what we spend our money on

Opportunity Cost

the value of the best alternative given up when a certain choice is made

Ex. The opportunity cost of arriving to school on time is being well rested

Wants

Things that we desire that are not essential

-material things

Needs

Things that are required for survival

-food, water, sleep

What are the 4 categories of resources that go into production?

-Also known as the factors of production

Land, labor, capital, and entrepreneurship

Land

describes anything drawn from nature for use in the production of goods or services

-pure, not touched by man yet

Capital

anything long lasting that is created by humans for use in the production of other things

-has two types

Physical capital

any long-lasting good that is used to make other goods or services

Ex. tractors, pans, axes

Human Capital

the skills and knowledge gained by a worker through education and experience

Entrepreneurship

the willingness of people to organize, operate, and assume the risks involved with business ventures; bring together all the factors of production

Production Possibilities Frontier (PPF)

a curve that shows the maximum quantity of one good that can be produced for each possible quantity of another good produced

Four assumptions of the PPF

-Only 2 goods will be produced

-All resources are fixed

-All technology is fixed

-All resources are being fully use

What does "fixed" mean?

No one is coming up with anything to improve the economy

law of increasing opportunity cost

the tendency for the opportunity cost of a good to rise as more of the good is produced

What is efficiency?

No opportunity to make someone better without making someone worse off

-using resources fully; can’t improve one thing without hurting another

When is the economy the most efficient based on the PPF?

On the curve (frontier)

What is growth- and how does it occur?

Increase in ability to produce goods/services over time; With the discovery of new ways to produce goods and services using fewer resources

-curve will grow in size with this

What does unemployment look like on a PPF?

When the point is below the curve

What does an unattainable level of production look like on a PPF?

When the point is way above and right of the curve

Who is Adam Smith?

Scottish philosopher, economist and author of the Wealth of Nations in 1776

What are the 3 main points of Adam Smith?

-People should be free to make decisions without meddling from the government or outside force

-Believed that self-interest is guiding force that shapes behavior; invisible hand

-Free market system (in which everyone makes decisions that are best for themselves individually) can create the best outcome for society as a whole BECAUSE needed goods are supplied efficiently @ best price

What is the effect known as the "Invisible Hand"

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all

-the market encourages this

What does a straight downward-sloping line mean

Implies the resources are adaptable in production of both goods; this makes it possible to switch between the two without loss of efficiency (nothing is wasted)

-if you give up one thing, you always get it back regardless

Why does increasing production of the second good in a PPF come at a greater cost compared to when that good was first made?

This is because the resources are reallocated in order to make more of the second, changing its intended purpose

-resources are often better suited for producing one good over another

microeconomics

the study of how people make decisions and how those decisions affect others in the economy

-consumerism

Macroeconomics

The study of the economy as a whole

-big, picture topics

Positive Economics

the study of what the world is like and why it works the way it does

-about facts and cause-and-effect relationships; based on data

normative economics

the study of the way things should be rather than the way things are

-brings opinons and ideals into the process of answering questions