Ch 1 - Economic Issues and Concepts

What is scarcity, and why is it fundamental to economics?

Scarcity refers to the limited nature of resources, making it impossible to satisfy all human wants, necessitating choices.

What are the three factors of production?

Land (all natural endowments), Labour (mental and physical resources), Capital (manufactures aids to production)

How does scarcity lead to opportunity costs?

Scarcity forces choices, and opportunity cost is the value of the next best alternative foregone when making a choice.

What the does the slope of a budget line show?

It shows the opportunity costs of two things. For example, two kilometers of a bicycle path is is the opportunity cost of one kilometer of road repair. So, the opportunity cost of one extra kilometer of road repair means losing the funds to produce two kilometers of new bicycle paths.

What does the production possibilities boundary (PPB) illustrate?

The PPB shows the maximum combinations of goods and services that can be produced efficiently given limited resources.

Why is the PPB concave?

Because opportunity costs increase as more of one good is produced, reflecting the reallocation of resources less suited to that good.

What does it mean when you have a point on the line, outside the line, and inside the line on a PPB graph?

On the line = goods and services are being produced to the max amount of efficiency, outside = unattainable combination, inside = you are not using your resources efficiently and are capable of producing more goods and services without sacrificing others.

What is the difference between microeconomics and macroeconomics?

Microeconomics: the study of the determination of the prices and quantities of specific products and factors of production

Macroeconomics: the study of the determination of economic aggregates, such as total output, total employment, and the rate of economic growth

What does it mean for a market economy to be self-organizing?

In a self-organizing market economy, individuals act in their self-interest, and their interactions create spontaneous economic order.

How does the price system contribute to self-organization?

Prices coordinate the actions of buyers and sellers by signaling scarcity or abundance, aligning production and consumption decisions.

What the three types of decision makers that operate in any economy?

Consumers (purchase goods and services with their income), Producers (hire workers, have material inputs, and then produce to see their products), Government (provide 'free' goods and services, financed by taxes they collect)

What is marginal cost vs marginal benefit?

Marginal cost is how much you have to pay to purchase something whereas marginal benefit is the extra amount of satisfaction you get from purchasing that product

Why is specialization more efficient than universal self-sufficiency?

Specialization allows individuals to focus on tasks they perform best, increasing productivity through experience and efficiency.

What is division of labour?

The specialisation within the production process of a particular product

What role does trade play in a specialized economy?

Trade enables individuals to exchange surplus goods and services, meeting their diverse needs efficiently.

How does money facilitate trade?

Money eliminates the need for a double coincidence of wants, making exchanges more straightforward and efficient.

What is a maximizing decision in economics?

It is a choice aimed at achieving the highest possible benefit, such as utility for consumers or profit for producers.

What is the importance of marginal analysis in decision-making?

Marginal analysis compares the additional benefit (marginal benefit) to the additional cost (marginal cost) of an action to optimize decisions.

When do consumers and producers make a decision?

When the marginal benefit exceeds the marginal cost.

What are the three types of economic systems?

Traditional, command, and free-market economies.

What is a mixed economy?

A mixed economy combines elements of tradition, government intervention, and free markets.

What is a traditional economy?

A traditional economy is based primarily on tradition, custom, and habit. It works best in an unchanging environment.

What is a command economy?

Economic behaviour is determined by some central authority (e.g., government). Notoriously difficult to maintain due to unavailability of all essential, accurate, and up-to-date information

What is a free-market economy?

Also known as the market economy, the decisions about resource allocation are made without any central direction.

Why are most economies considered mixed economies?

Because they include decentralized market decisions, cultural influences, and government roles to address market failures and public needs.

What is an example of government intervention in a mixed economy?

Providing public goods like defense and managing externalities like pollution.

Why are free markets alone insufficient for some economic problems?

They may fail to address issues like inequality, pollution, or under-provision of public goods.