Economics: Chapter 1

Economy

Structure of economic life in a country, area or period

Economics

Economics is the study of choices people make to satisfy their wants and needs with a limited supply of resources.

Microeconomics

Examines how individual buyers and sellers interact.

Macroeconomics

A broader view of the economy from a national perspective

Basic economic problem

The fundamental economic problem is the issue of scarcity and how best to produce and distribute these scare resources.

Scarcity

is one of the key concepts of economics. It means that a demand for a good or service is greater than the availability of the good or service.

Three basic economic question

What would be produced, How it will be produced, Who will use it

Unlimited wants

there is no end to the quantity of goods and services people would like to consume. Because of unlimited wants – People would like to consume more than it is possible to produce (scarcity).

Choice

refers to the ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options.

oppertunity cost

is the potential forgone profit from a missed

opportunity- the result of choosing one alternative and forgoing another

e.g. A business owner wants to add a new product to the lineup. It

requires an upfront investment of $1,000 to build and market. The

opportunity cost is the potential value of that money being spent

elsewhere or saved for the future.

Goods and services

are the output of an economic system. Goods are

tangible items sold to customers, while services are tasks performed

for the benefit of the recipients. Examples of goods are automobiles,

appliances, and clothing. Examples of services are legal advice, house

cleaning, and consulting services. The output of a business can lie

somewhere between these two concepts. For example, a landscaping

company could sell a homeowner a tree (goods) and also mow the lawn

(a service). Businesses also receive goods and services, not just

consumers.

production

is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output.

Production possibility curve (PPC)

a graphical model that represents all of the different combinations of two goods that can be produced.

consumtion

is the act of using resources to satisfy current needs and wants.

economic agents

are consumers, producers, and/or influencers of capital markets and the economy at large. There are four major economic agents: households/individuals, firms, governments, and central banks.

economic incentives

are financial motivations for people to take certain actions. The most common incentives are:

Tax incentive

“tax benefits”. Reductions in tax in order to encourage spending on certain products OR increase in tax in order to reduce the consumption

financial incentive

any monetary benefit given to incentivize peopleo do something they might not otherwise do

Nugde

“non- enforced compliance”. The nudge theory is a concept in behavioral economics that proposes adaptive designs of the decision environment (choice architecture) as ways to influence the behavior and decision- making of groups or individuals.

Non market production

covers the goods and services household members produce for their own consumption by combining their unpaid labour and the goods and services they acquire on the market

Trade off

refers to the situation where you have to give up one thing in order to gain something else. It’s about balancing between different options, as resources (like time, money, or labor) are limited and cannot be used for everything at once.

the four factors of production

in economics the four factors of production (also called inputs of production) are the resources used to create goods and services. These are the following

Land

refers to all natural resources that are used to produce goods and services. This includes not only physical land but also resources such as minerals, water, forests, and agricultural products. In economics, land is considered a factor of production that provides the raw materials needed for creating goods.

Labour

refers to the effort and skills of people who work to produce goods and services. This factor includes all forms of work performed by people, from unskilled labor to highly skilled professionals. Labor is essential for transforming raw materials into finished products and providing services to consumer

Capital

refers to the tools, machinery and other physical assets used to produce goods and services. Capital is distinct from land and labor, as it is created through human effort and investment.

entrepreneurship

is the ability and willingness to combine the other factors of production (land, labor, and capital) to create goods and services. Entrepreneurs take on the risk of starting and managing businesses, innovate to create new products, and drive economic growth. They play a crucial role in determining what to produce, how to produce it, and for whom to produce.

outward shift of PPC

An outward shift signifies economic growth, typically due to improvements in resources (labor, capital), technology, or productivity

inward shift of PPC

An inward shift represents economic contraction, typically due to a loss of resources (natural disasters, capital destruction, workforce reduction) or a decline in technology or productivity.

The circular flow model

is a graphical representation that illustrates the continuous movement of money, resources, and goods and services in an economy. It demonstrates how different sectors of the economy interact and the flow of economic activity between households and firms.

Housholds

are the consumers in the economy. They provide factors of production (such as labor, land, and capital) to firms and receive income in return (wages, rent, interest, and profits).

Firms

are the producers of goods and services. They use the factors of production provided by households to produce goods and services, which they then sell to households and other firms.

product market

This is where goods and services produced by firms are sold to households. Households spend their income to purchase these goods and services, creating a flow of money back to firms.

Factor Market

This is where firms buy factors of production (labor, land, and capital) from households. Households provide these resources in exchange for income, completing the flow of resources.