DP Economics: Introduction to Economics

Reward for land

Rent

Reward for labor

Wages

Reward for capital

Interest

Reward for entrepreneurship

Profit

Land

Provides raw materials used in production

Labor

Workers used in the production of goods and services

Capital

Machinery and equipment used in the production of goods and services. (Resources that can produce a stream of future benefits)

Enterprise

Person or group of people who manage the other factors of production to produce goods and services to make a profit

Value judgement

A subjective assessment of whether something is good or bad.

Scarcity

Resources are finite in supply relative to the infinite needs and wants of individuals and societies

Choice

Decisions made by individuals and societies that create an opportunity cost

Efficiency

A quantifiable measure of how well things are done, determined by an input-ouput ratio

Equity

The notion of perceived economic fairness

(economic) well-being

Level of economic prosperity and quality of life

Sustainability

The intergenerational equity in the pursuit of economic well-being and prosperity

Change

The inevitable and continual evolution of the economy and economic thinking

Interdependence

Growing interaction and reliance on others to acheive economic goals

Intervention

Roles and responsibilities of governments in monitoring and regulating the behaviour of different markets

The basic economic problem

Unlimited human wants are chasing too few resources; a choice has to be made because scarcity exists.

Opportunity cost

Cost expressed in terms of the next best alternative forgone

Sustainable development

Development which meets the needs and wants of the present without compromising future generations from doing the same

Types of capital

Physical capital (machinery), human capital, natural capital, financial capital (investments)

Free good

A good that is not scarce and thus has zero opportunity cost

Economic good

A good that is scarce or is produced using scarce resources

Three basic economic questions

What to produce, how to produce, for whom to produce

Resource allocation

Distribution of the factors of production to produce different goods and services in the economy

Free market economies

Economic system where the interaction of demand and supply determines allocation of resources.

Planned economy

Where the state determines the allocation of resources in the economy

Mixed economy

Where allocation of resources are determined by both market forces and the government.

Production Possibility Curve

Illustrates the possible quantities that can be produced of two products if all resources are fully employed in the economy.

Reasons why PPC are curved

Resources are better fit for one type of production
Workers need to be retrained
Workers most fit for other production are moved first
Specialized machinery and technology

Reasons for shift in PPC

Increase in quantity of resouces (FoP)
Improvement in quality of resources (FoP) such as by training/education
Technological improvements

Allocative efficiency

When production best matches tastes and preferences

Empirical evidence

Gaining knowledge through direct observation rather than speculation

Positive statements

Objective statements that can be proved true or false based on

empirical evidence

Normative statements

Value judgments that cannot be proved to be true or false

based on empirical evidence

Circular Economy

Interdependece of economic prosperity with nature (calls for production with NO waste resources)

Law of increasing opportunity cost

As you increase the production of one good, the opportunity cost to produce other goods increases. (this exists when the PPC is curved)

Advantage of free market economy

Competition → more choice and variety for consumers

Supply efficiently to minimize costs → increased efficiency

Disadvantages of free market economy

Underprovides merit goods → market failure
Monopoly (high prices, limited choice) → market failure

Advantages of mixed economy

Freedom to maximize efficiency in the economy
Fulfills the needs of a large number of stakeholders

Disadvantages of mixed economy

Different people benefit from what the country decides to be free
Inequality of what wants are satisfied

Advantages of a planned economy

Everyone can afford goods and services
Less inequality of wealth
Elimination of wealth from competitors

Disadvantages of a planned economy

Lack of profit movite → inefficiency
No or little individual freedom
Too much regulation prevent economic growth

Adam Smith

Believed that a free market led to efficient allocation of resources (classic economics)

Say’s law

Supply creates demand

Karl Marx

Critiqued classical economics, believing workers would eventually overthrow capitalism (because it exploits labor and creates class inequality) and replace it with socialism.

Total utility

Total satisfaction gained from the consumption of a good or service

Marginal utility

Additional satisfaction from the consumption of one more unit of a good or service

Keynesian Economics

Claimed government intervention can avoid recession and stimulate economic growth, argued that demand, not supply, drives the market

Monetarism

Idea that interest rates and supply of money in the economy is the key determinant of economic growth and inflation

Ceteris Paribus

Holding all other things constant (major economic assumption)

Hypothesis

Educated guess or proposed explanation for a particular phenomenon that can be supported with empirical evidence (help simplify IRL situations)