economics and personal finance module 1: 'the basics' (lessons 1-40) {virtual virginia}

economics

the study of how people make choices under scarcity

scarcity

not enough resources

human resources

physical and mental capabilities of people

interchangeable with capital

natural resources

natural resources like wood, plants, water

capital

equipment used to produce goods

physical capital: tools

financial capital: money

interchangeable with labor, can improve productivity

microeconomics

study how people and businesses make decisions

macroeconomics

studying the whole economy

economic model

simpler representation of an economic environment

tradeoff

giving up something to gain something else

opportunity cost

the value of the next best choice after the choice that was made

PACED decision model

problem

alternative

criteria

evaluate

decision

intended consequences

expected results

unintended consequences

unexpected outcomes of a choice

marginal decision

doing a little more/less of something

marginal analysis

making marginal decisions. only take an action if marginal/additional cost is less than additional benefit

market economy

individuals and groups decide what and how things are produced, and for whom they are produced

command economy

an economy in which production, investment, prices, and incomes are determined centrally by a government.

traditional economy

production is based on tradition

mixed economy

some government regulation to regulate businesses

criteria for economies

what to produce?

how to produce?

who will buy the product?

3 characteristics of a market system

market incentives (money/personal gain)

property ownership (people decide how to use their property)

voluntary market exchange (people buy/sell without coercion)

adam smith

'father of economics', wrote the wealth of nations

distribution

producer-wholesaler-store-customers

exogenous factors

factors that affect a business from the outside

factor demand

demand of physical capital that is a derived demand from the need to produce more

derived demand

demand dependent on the demand from something else

capital goods

goods used to make final goods that are sold to customers and businesses

determinants

factors other than price that affect supply and demand

law of supply

increase of price = increase of supply

law of demand

price increase = demand decrease

production function

a measure of output based on variable inputs

total product

total quantity produced for each level of labor

average product

also called labor productivity, total product divided by number of workers

marginal product

additional product produced

total productivity

total product divided by total inputs

short run

period of time where one factor of production while the amount of other factors vary

law of diminishing returns

adding more of one resource leads to a point where adding more will add less to the output

long run

period of time long enough for a company to adjust its outputs

microeconomics- when there are no fixed factors of production that change the output level

macroeconomics- when the general price level, wage rate, etc adjust to the state of the economy

households

maximize satisfaction

firms

maximize profit

utility

the fulfillment a person receives from using a service or good

consumer sovereignty

the power to decide what is bought

trade

a commercial exchange involving the sale/purchase of a good, service, or information

international exchange

the exchange of goods and services across international borders

voluntary exchange

when both parties willingly exchange a product for a value

imports

buying goods from other countries

exports

selling goods to other countries

trade deficit

more imports than exports

absolute advantage

the ability to produce something with less resources

comparative advantage

being able to produce something at a lower opportunity cost than other countries

specialization

producing items with a higher comparative advantage to the firm of producing it

sole proprietorship

unincorporated business owned by one person

don't need to be a us citizen

can report business profits on personal tax returns

no need for annual meetings

partnership

business owned jointly by 2+ people

can report profits and losses on tax returns

can distribute special payments

no annual meetings

c corporation

a regular corporation

limited liability

state level registration

business lifetime can be perpetual

may be owned by another business

may issue stock

owners can split profits and losses with the business for a lower tax rate

annual meetings required

s corporation

corporation that is taxed as a partnership

limited liability

state level registration

business lifetime can be perpetual

limited number of owners

owners must be us citizens

must be owned by individuals

can issue stocks

owners can report profits and losses on tax returns

annual meetings required

limited liability company

a cross between the limited liability of a corporation and taxation/operational features of a partnership

limited liability

state level registration

business lifetime can be perpetual

unlimited number of owners

may be owned by another business

cannot issue stock

owners can report profits and losses on tax returns

can distribute special payments

cooperative (co-op)

organization owned and operated by people who use its services

franchise

the use of a brand and a person who wants to use it in business

entrepreneur

competes with others and established businesses for profit according to the law of supply and demand

competition

producers struggle to get the consumers money, reduces inefficiency

niche

one small section of a market

perfect competition

many buyers and sellers, no barriers to entry, fierce competition, homogeneous product

monopolistic competition

many buyers and sellers

no entry barriers

small firm size

substitute products with different branding

fierce competition

oligopoly

many buyers, few sellers

only seller entry barriers

average firm size

homogeneous / differentiate product

high competition

monopoly

many buyers, one seller

seller entry barriers

large firm size

no substitute

highest market share

private enterprise

allows individuals to invest their capital to make a profit

swot analysis

strengths, weaknesses, opportunities, threats

accounting profit

the profit that doesn't take opportunity costs into account

average cost

total cost / revenue / profit to the number of outputs sold

cost

amount of money paid to get inputs for the production of a good/service

economic profit

the profit that accounts for opportunity costs (total revenue - manufacturing costs - opportunity costs)

marginal cost

cost of each additional unit of output

marginal revenue

revenue obtained from selling each additional output

sunk cost

cost that can't be recovered

profit

the difference between total revenue and total cost

revenue

total amount of money gotten from the sale of total quantity of goods produced

circular flow model

shows how resources, goods, etc move around an economy

injections

increases economic activity

investments from govt, exports, etc

leakage

non-consumption of income

savings, taxes, etc