Chapter 1

Circular Flow Diagram

diagram that views economy as consisting of households and firms interacting in a goods and services market and a labor market

command economy

where economic decisions are passed down from authority and the government owns the resources

division of labor

the way which different workers divide required tasks to produce a good or service

economics

study of how humans make choices under conditions of scarcity

economies of scale

when average cost of producing each individual unit declines as total output increases

exports

products (goods and services) made domestically and sold abroad

fiscal policy

economic policy involving government spending and taxes

gross domestic product (GDP)

measure of the size of total production in an economy

imports

products (goods and services) made abroad and sold domestically

labor market

market in which households sell their labor as workers to business firms or other employers.

macroeconomics

focuses on broad issues such as growth, unemployment, inflation, and trade balance

market

interaction between potential buyers and sellers; a combination of supply and demand.

market economy

economic decisions are centralized, private individuals own resources, and businesses supply goods and services based on demand

microeconomics

focuses on actions of particular agents within the economy like households, workers, and business firms.

monetary policy

involves altering levels of interest rates, availability of credit in the economy, and the extent of borrowing

specialization

few tasks allow workers to focus on the parts of production process where they have an advantage (allows for the production higher quality products + for businesses to take advantage of economies of scale)

what are models used to do?

to test theories (they are a simplified version of reality)

traditional economy

organize economic affairs the way they have always done (occupations stay in the family, most families are farmers who grow the crops they have always grown, etc.)
-this causes little economic progress/development

mixed economy

most economic decisions result from interaction of buyers and sellers in a market (but gov plays a significant role in allocation of resources (most economies today are mixed)

motivation and work incentive for pure market + pure command economies

-pure market = self-interest + profit
-pure command= ideally a communal goal

productive efficiency

situation where good/service is produced at lowest possible cost

allocative efficiency

where production is in accordance w/ consumer needs (typically, every good/service is produced up to the point where the last unit provides a marginal benefit to society that is equal to the marginal cost of producing it)

why is at least some level of government intervention in the economy so important?

without it, there would be a market for things like human organs, prostitution, babies, etc. + more exploitation of people