Economics: Topics 1 and 2 - Introduction to Microeconomics and Economic Systems

Vocabulary practice flashcards covering fundamental economic concepts, microeconomics versus macroeconomics, factors of production, the production possibilities curve, economic systems, and the circular flow model.

Economics (George Leland Bach definition)

The study of how our scarce productive resources are used to satisfy human wants.

Economics (Michael Parkin definition)

The social science that studies choices that individuals, governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Scarcity

The state in which the resources available are insufficient to satisfy people's wants; that is, a condition of unlimited wants and limited resources.

Wants

Human desires for goods and services that are unlimited, never-ending, and vary in importance.

Needs

Necessities essential for survival, such as food, water, shelter, and clothing, which unlike wants are not absolutely unlimited.

Demand

The quantities of a good or service that potential buyers are willing and able to buy, backed by purchasing power rather than merely an intention or desire to buy.

Opportunity Cost

The value to the decision maker of the best alternative that could have been chosen but was not chosen.

Microeconomics

The branch of economics whose focus is on the individual parts of the economy, such as the price of a single product, the decisions of individual consumers, or the choices of individual firms.

Macroeconomics

The branch of economics whose focus is on the economy as a whole, studying aggregates such as the consumer price index, inflation, total output, and total imports and exports.

Factors of Production

Scarce resources used to produce goods and services, consisting of natural resources (land), labour, capital, entrepreneurship, and technology. Money is not a factor of production.

Production Possibilities Curve (PPC)

An illustration of the combination of any two goods or services that are attainable when a community's resources are fully and efficiently employed, representing maximum attainable potential output.

Economic Growth (PPC context)

An increase in potential output illustrated by an outward shift of the PPC, caused by an increase in the quantity or productivity of available resources.

Economic System

The pattern of organisation that governs the production of goods, the allocation of resources for production, and the exchange and distribution of goods within a society.

Three Central Economic Questions

The fundamental problems every economic system must resolve: What goods and services to produce (output questions), How to produce them (input questions), and For whom to produce them (distribution questions).

Property Rights

One of the two basic criteria for classifying economic systems; the right to possess, use, or dispose of tangible and intangible assets, as well as a right to all or part of the income generated by those assets.

Coordinating Mechanisms

A means of providing and transmitting information so as to coordinate the economic activities of the greatest number of participants in an economy, comprising tradition, command, and the market.

Traditional System

An economic system coordinated by tradition, where the same goods, tasks, and methods of production and distribution are passed down from one generation to the next.

Command System

An economic system where the coordination of economic decisions is determined by a central plan drawn up by a central authority, instructing participants what, how, and for whom to produce.

Market

Any contact or communication between potential buyers and potential sellers of a good or service where an exchange ratio (market price) is determined and guaranteed by law or tradition.

Mixed Economy

An economic system that combines coordinating mechanisms of tradition, command, and the market to solve the three central economic questions.

Three Major Flows in the Economy

The continuous circular flow of production (goods and services), income (earned by factors of production), and spending (purchasing of output).

Household

All the people who live together and who make joint economic decisions or who are subjected to others who make such decisions for them.

Firm

The economic unit that employs factors of production to produce goods and services that are sold in the goods market.

Factor Market

The market where households provide factors of production to firms in exchange for factor income such as wages, rent, interest, and profit.

Goods Market

The market where firms sell consumer goods and services to households in exchange for consumption expenditure.

Circular Flow of Goods and Services (Real Flow)

The physical flow of factors of production from households to firms via the factor market, and the resulting flow of goods and services from firms to households via the goods market.

Circular Flow of Income and Spending (Money Flow)

The monetary flow of spending from households to firms through the goods market, and the return flow of income from firms to households through the factor market.

Injections

Additions of spending into the circular flow of income, consisting of investment (new production capacity), government expenditure, and exports.

Withdrawals

Deductions or leakages of income from the circular flow of spending, consisting of savings, taxes, and imports.