Ch 1&2

Economics

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

Scarcity

Our inability to get everything we want; it limits what everyone and society can get based on available productive resources.

Incentive

A reward that encourages an action or a penalty that discourages one.

Microeconomics

The study of individual firms, consumers, and markets within the economy.

Macroeconomics

The study of the aggregate (overall) economy.

Goods

Physical objects that people value and produce to satisfy needs.

Services

Tasks performed for people that satisfy their needs.

Factors of Production

The resources used to produce goods and services, including land, labor, capital, and entrepreneurship.

Production Possibilities Frontier (PPF)

A curve that illustrates the maximum combinations of goods and services that can be produced with available resources.

Opportunity Cost

The next best alternative that is forgone when making a choice; represented as what you give up to gain something else.

Marginal Cost

The opportunity cost of producing one more unit of a good or service.

Marginal Benefit

The benefit received from consuming one more unit of a good or service.

Comparative Advantage

A person in an activity can perform the activity at a lower opportunity cost than everyone else.

Absolute Advantage

A person is more productive than another in producing a good or service.

Economic Growth

The ability to produce more goods and services over time, often illustrated by an outward shift in the PPF.

Capital Accumulation

The growth of capital resources, including human capital.

Property Rights

Socially determined legal rights that govern the use of and disposal of property.

Economic Coordination

The process by which firms, markets, property rights, and money work together to facilitate the economy.

the What?

what goods and services will be produced and in what quantities?

the how?

how will the goods and services be produced?

factors of production

land, labor, capital, entrepreneurship

the who?

for whom will the goods and services be produced

the owl question

• larger the income more ther can buy

• land earns rent

• labor earns wages

• capital earns intrest

• entrepreneurship earns profit

Traditional economy

this year’s answers are the same as last year’s answers

command economy

government planners determine the answers and then create plans for producers

• doesn't work out well because of people's behaviors

  • people make choices to advance their self-interest

    • self-interest vs social interest

capitalism economy

markets, prices, property rights

PPF

illustrate the “what?” and “how?” questions and limits to production

Law increasing opportunity cost

moving along a pdf, the opportunity cost of a product, good, or service increases as more is produced

why is the PPF bowed out?

because of the law of increasing opportunity cost

Difference between Comparative and absolute advancements

one is production per hour vs comparing opportunity cost

how can ppf show economic growth

because we have more resource the ppf moves outwards

firms

an economic uinit that hires factors of production and organizes them to produce and sell goods and services

markets

any arrangement that enables buyers and sellers to get information and to do business with another

property rights

the social arrangements that govern the ownership, use, and disposal of anything that people value

money

any commodity or tone that is generally acceptable as a means of payment