fundamental economic problem facing all societies resulting from a combination of scarce resources and people's virtually unlimited needs and wants
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Need
basic requirement for survival, including food, clothing, and shelter
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Want
something we would like to have but is not necessary for survival
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Land
natural resources or "gifts of nature" not created by human effort; one of the four factors of production
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Capital
tools, equipment, and factories used in the production of goods and services; one of the four factors of production
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Labor
people with all their abilities and efforts; does not include the entrepreneur; one of the four factors of production
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Entrepreneurs
risk-taking individuals who introduce new products or services in search of profits; one of the four factors of production
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Economic product
goods and services that are useful, relatively scarce, and transferable to others
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Good
tangible economic product that is useful, transferable to others, and used to satisfy wants and needs
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Service
work or labor performed for someone
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Consumer good
good intended for final use by consumers other than businesses
\ (ex. shoes, shirts, automobile)
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Capital good
tool, equipment, or other manufactured good used to produce other goods and services; a factor of production
\ (ex. machinery, equipment)
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Durable good
good that lasts for at least three years when used regularly \n \n (ex. robot welders, tractors, automobiles.)
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Nondurable good
item that wears out, is used up, or lasts for fewer than three years when used regularly \n \n (ex. Food, writing paper, most clothing items)
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Factor vs. product market
People buy and sell productive resources in factor markets and goods & services in product markets
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Circular flow of activity
An illustration used to show how markets connect people & businesses in the economy
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Value
monetary worth of a good or service as determined by the market
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Utility
ability or capacity of a good or service to be useful and give satisfaction to someone
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Wealth
sum of tangible economic goods that are scarce, useful, and transferable from one person to another; excludes services
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Paradox of value
apparent contradiction between the high value of a nonessential item and the low value of an essential item
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Division of labor vs. specialization
Division of labor divides the tasks of workers, specialization assigns the tasks to the workers as well as factories, regions, or nations.
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Human capital
sum of people's skills, abilities, health, and motivation
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Adam Smith
the father of economics
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Division of labor
division of work into a number of separate tasks to be performed by different workers
\ Adam Smith theory
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“Invisible hand” theory
the ideal economic system is shaped by the interaction of economic actors and should not be under government control.
\ Adam Smith theory
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Wealth of nations
manuscript considered to be the blueprint for economic theory today written by Adam Smith 1776;
reffers specifically to the abilities and skills of a nation's people as the source of its wealth.
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Trade-offs vs opportunity costs
Trade-offs are a choice between one choice or the alternative, opportunity costs are the cost of the next-best alterative.
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Economic model
simplified version of a complex concept or behavior expressed in the form of a graph, figure, equation, or diagram
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Cost-benefit analysis
comparison of the cost of an action to its benefits
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Product possibility frontier
diagram representing all possible combinations of goods/services an economy can produce when all productive resources are fully employed
\ inside PPF: doesn’t fully utilize resources to the best of ability
\ outside PPF: more resources needed to be acquired
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Change in quantity demanded vs. change in demand
in response to a change in price, a change in quantity demand involves a different quantity purchased, while a change in demand involves a different amount demanded
\ CQD: Movement
CD: Shift
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The total expenditures test
Price x Quantity Demanded
\ Elastic: opposite directions
Unit elastic: no revenue change
Inelastic: same direction
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Demand elasticity
the extent to which a change in price causes a change in quantity demanded.
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Determinants of demand elasticity
Can the purchase be delayed?
\ Are there adequate substitutes available?
\ Does the purchase use a large portion of income?
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3 factors of demand
desire, willingness, ability to buy
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Law of demand
rule stating that more will be demanded at lower prices and less at higher prices; an inverse relationship between price and quantity demanded
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Demand schedule or curve
listing or graph showing the quantity demanded at all possible prices that might prevail in the market at a given time.
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Marginal utility
additional satisfaction or usefulness as additional units of production are acquired
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Individual vs. market demand curve
demand schedule is about one person, while a market demand curve is about multiple people
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Demand curve
graph showing the quantity demanded at all possible prices that might prevail in the market at a given time.
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Microeconomics
branch of economics that deals with behavior and decision-making by small units such as individuals & firms
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Change in quantity demanded
movement along a demand curve showing only that a different quantity is purchased in response to a change in price
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Income effect
change in the amount that consumers will buy because the power of their income changes.
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Substitution effect
portion of a change in quantity demanded that is dues to the relative price of the good
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Change in demand
different amounts of a product are demanded at every price
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Substitutes
competing products that can be used in place of one another
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Complements
products that increase the use of other products
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Consumer income
when people earn more, they are usually willing to buy different amounts at all possible prices.
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Consumer expectation
t
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Consumer tastes
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Number of Consumers
when more consumers enter the market, market demand increases,
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Law of supply
principle that more will be offered for sale at a higher price than at a lower price
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Supply schedule
a table showing the quantities that would be produced or offered at each and every possible price in the market at a given point in time
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Supply curve
a graph that show the quantities supplied at each and every possible price in the market
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Market supply curve
supply curve that shows the quantities offered at various prices by all firms that sell the same product in a given market
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Change In quantity supplied
change in the amount offered for sale in response to a price change: movement along the supply curve
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Factors that can change supply
Cost of Resources \n Productivity \n Technology \n Taxes \n __Subsidies__ \n Government Regulation \n Number of Sellers \n Expectations
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Supply elasticity
responsiveness of quantity supplied to a change in price.
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Break-even point
production level where total costs equals total revenue; production needed if the firm is to cover costs
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Profit maximization
level of production where marginal cost is equal to marginal revenue
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Price
monetary value of a product
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Rationing
\n system of allocating goods and services without prices; gov controlled; most likely used in crisis
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Ration coupon
ticket or a receipt that entitles the holder to obtain a certain amount of a product.
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Rebate
a credit paid to a buyer of a portion of the amount paid for a product or service
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Familiarity
Allocate
Signals
People make purchasing decisions based on __________.
Prices help the economy run smoothly by providing a good way to __________ resources.
Price systems act as __________ that help us make economic decisions
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Price affects on 3 Q’s
What: companies won’t sell what doesn’t make a profit
How: cost of labor & raw materials affect how things are made
For whom: only those who afford a product will buy it
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Price system vs. rationing
a price system allocates resources with prices within/between markets, while a rationing system allocates resources without prices under government decisions
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Economic model
a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration
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Equilibrium price
price where quantity supplied equals quantity demanded
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Surplus
Prices are too high; situation where quantity supplied is greater than quantity demanded at a given price
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Shortage
Prices are too low; situation where quantity supplied is less than quantity demanded at a given point
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Price floor
highest legal price that can be charged for a product.
\n
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Price floor
lowest legal price that can be paid for a product
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Target price
price floor for agricultural products set by the government to stabilize farm prices.
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Nonrecourse loan
loan that carries neither penalty nor further obligation to repay, but will obtain assets. (Pretty much buying the sugar)
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Deficiency payment
relief in the form of payments to an industry struggling from regulation or natural disaster
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Gov interference with price system distorting of market outcomes
The gov can set prices for certain goods & services below or above equilibrium point by setting a max/min that can be charged for a product.
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Positives & negatives of price ceilings & floors
can stabilize prices
prominent shortage (C) or surplus (F)
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Commodity Credit Corporation
Gov-owned entity created in 1933 to stabilize, support, & protect farm income & prices.
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