TW Chapter 1 - The Central Idea

Scarcity

Limited availability of resources compared to unlimited wants and needs. It forces individuals and societies to make choices and prioritize.

Budget Constraint

The budget constraint represents the limit of an individual's or a consumer's spending based on their income and the prices of goods and services. It shows the different combinations of goods and services that can be purchased within the given budgetary limitations.

Opportunity Cost

The value of the next-best forgone alternative that was not chosen

Gains from Trade

Trade reallocates goods between 2 individuals (both willing) so they both get what they want

specialization

Economic interaction allows for…

Specialization definition

people concentrating on their production efforts on what they’re good at

a division of labor

Specialization then creates…

Division of Labor Definition

One worker specializes in one thing and another at a different task, so they divid over-all production into parts

Comparative Advantage

One has this advantage if they can produce a good at a lower cost than someone else

International Trade

When two people in different countries trade with each other

scarcity

Just like people, economies can also face…

Labor, land, machines, factories

What are considered “resources” in an economy?

how much to invest to produce more/better goods in the future vs how much to consume now

Fundamental Economic Problem is…

there’s less of another product produced

If society produces more of one product, that then means…

Production Possibilities Definition

Alternative combinations of production of various goods that are possible, given the economy’s resources

Increasing Opportunity Costs Definition

A situation where producing more of one good requires giving up an increasing amount of production of another good

resources going to another product

Opportunity costs increase due to more and more….

Production Possibilities Curve Definition

A curve showing the max combination of production of 2 goods that are possible, given the economy’s resources

To indicate that the opportunity cost of creating one product increases as another product is produced more

Why is the ppc curve concave down (or bowed away from origin)?

Inefficient Points on PPC

whole resources aren’t available or aren’t being used, so less product is created

Efficient Points on PPC

Represent the max amount that can be produced with available resources; show a trade off

Impossible Points on PPC

No resources vaia

More resources become available, higher investment levels

What causes the PPC graph to shift outwards (or to the right)?

1. What is to be produced? Where on the curve should the economy be?
2. How will these goods be produced?
3. For who are the goods to be produced?

3 Problems for Economies:

Market Economy Definition

An economy characterized by freely determined prices and the free exchange of goods/services in markets

Command Economy Definition

An economy I which the government determines prices and production, also called a centrally planned economy

individuals, firms, governments, organizations

Decisions in a market economy are made by…

The government

Decisions in a command economy are made by…

Eastern Europe, China, Soviet Union

Examples of past command economies

Freely Determined Prices Definition

Prices that are determined by the individuals and firms interacting in markets

market economies

FDPs are only available in….

Property Rights Definition

Rights over the use, sale, and proceeds from a good or resources

Incentive Definition

A device that motivates people to take action, usually to increase economic efficiency

interact freely

To interact in a market economy, people need to …

The opportunities to gain from trade

International trade increases what?

Laissez Faire

Adam Smith’s theory of extremely limited interference from the government in a market economy

Capitalism Definition

An economic system based on a market economy in which capital is individually owned and production and employment decisions are decentralized

Socialism Definition

An economic system in which the government owns and controls all the capital and makes decisions about prices and quantities as part of a central plan

Mixed Economy Definition

A market economy where the government plays a significant role

Market Failure Definition

Any situation in which the market does not lead to an efficient economic outcome and in which the government has a potential role

Government Failure Definition

A situation in which the government fails to improve on the market or even make things worse

In organizations, like families, firms, etc.

Economic interactions between people take place where?

1. Prices serve as signals about what should be produced and consumed when there are changes in taste or tech
2. Prices provide incentives so people alter their production or consumption
3. Prices affect the distribution of income, or who gets what, in the economy

The Three Big Things About Prices

An incentive for firms to produce, new firms will enter the business

Higher prices signal….

Financial Crises Definition

Disruptions to financial markets that make it difficult for people and business firms to borrow and obtain loans

Recession Definition

A decline in production and employment that lasts for 6 months or more

U.S Great Depression, Latin America, Russia and Asia in the 1990s

Examples of Recessions

scarcity for some goods, which increases the price for what is left

Disasters can create…