economics: the core issues

ch 1

economics

the study of how individuals and societies choose to allocate scarce resources

scarcity

the fact that there is a limited amount of resources to satisfy unlimited wants

economic resources/factors of production

the inputs used to produce goods and services, including land, labor, capital, and entrepreneurship

what are economic resources

land, labor, capital, entrepreneurship

land

natural resources

labor

skills and abilities to produce goods/services

capital

final goods produced for use in the production of other goods

entrepreneurship

the assembling of resources to produce new or improved products and technologies

models

graphical and mathematical tools created by economists to better understand complicated processes in economics

ceteris paribus

Latin for “all else equal”

agent

any entity making a decision

incentives

rewards or punishments that influence economic decisions

rational decision making

making choices that result in the optimal level of benefit for the agent, based on all available information

positive analysis

objective economical analysis

normative analysis

subjective economical analysis

microeconomics

the study of the interactions of consumers and producers in the markets for particular goods and services

macroeconomics

the study of national economies, focused on aggregates and overall comercial output

economic aggregates

quantitative measures that summarize economic activity and performance

examples of aggregates

GDP, unemployement rate, rate of inflation, national output

economic systems

ways of allocating resources to produce and distribute goods and services in an economy

production possibilities curve (PPC)

a graph that represents all of the different combinations of two goods that can be produced

what does the PPC show

scarcity of resources and opportunity costs

opportunity cost

the value of the next best alternative to any decision you make when choosing one option over another

efficiency

the full employment of resources in production

under-utilization of resources

the underemployment of any economic resources which leads to a loss in potential output and efficiency in production

growth

an increase in an economy’s ability to produce goods and services over time

contraction

a decrease in output that occurs due to the under-utilization of resourcesresulting in economic downturns.

constant opportunity costs

when the opportunity cost of a good remains constant as output of the good increases

increasing opportunity costs

when the opportunity cost of a good increases as output of the good increases

PPC variations

constant opportunity costs: PPC is straight
increasing opportunity costs: PPC bows out

calculating opportunity costs

to find the opportunity cost of any good X in terms of the units Y given up:
${Opportunity Cost}=\frac{Y_1-Y_2}{X_1-X_2}$ units of good Y

productivity

WHAT

what goods and services are produced

HOW

how outputs are produced

FOR WHOM

who will get the outputs

invisible hand

a concept that describes how individuals' self-interested actions can lead to positive economic outcomes for society as a whole, as resources are allocated efficiently through supply and demand

market mechanism

the use of market prices and sales to signal desired outputs (or resource allocations)

price signal

information conveyed to consumers and producers via market prices, indicating the relative scarcity, abundance, or desirability of a good or service

mixed economy

uses both market signals and government directives to allocate goods and resources

market failure

imperfection in the market mechanism that prevents optimal outcomes

government failure

government intervention that fails to improve economic outcomes.

production possibilities

alternative combinations of final goods and services that could be produced in a given period with all available resources and technology