Chapter 1: What is Economics?

What is economics?

the study of how people try to satisfy unlimited & competing wants with limited resources

What is scarcity?

not having enough resources to produce all things people want

What is a need?

basic requirement (food/water, clothing, shelter)

What is a want?

something we would like to have

What are the three basic economic questions?

• What to produce (what should we make)

• How to produce (hire workers or use machines?)

• For whom to produce (who will receive products?)

What are the 4 resources required to produce things?

1. land: natural resources

2. capital: tools, equipment, machinery, factories

3. labor: workers

4. entrepreneurs: people who take risks by starting a business

all four of these factors must be present to produce things

What is a good?

a useful, tangible, item

What is a capital good?

manufactured good that produces other goods/services (computer, oven)

What is a consumer good?

intended for individual use

What is a durable good?

lasts 3 years or more on a regular basis (computers, cars)

What is a nondurable good?

lasts less than 3 years (food)

What is a service?

work performed for someone (haircut, repairs, teachers, doctors, lawyers, etc.

What are economic qualities of goods and services?

are useful, relatively scarce, transferable, and command a price

What is the paradox of value?

some necessities (water) have low value, but non-necessities (diamonds) have high value

What must something have for it to have value?

it must have utility (capacity to be useful and satisfactory) AND be scarce

What is wealth?

accumulation of products

What is a market?

location of buyers & sellers

What flow does economic activity have?

circular flow

What is economic growth measured by?

an increase in productivity and human capital (skills, abilities, health, etc.)

What is division of labor?

organizing work into parts

What is specialization?

perform certain tasks more efficiently than others (Ford assembly line)

What is the US economy?

interdependent

What is an interdependent economy?

we rely on others, they rely on us for goods and services

What does every decision have?

trade-offs (alternatives) and opportunity costs

What is an opportunity cost?

cost of next-best alternative

What are the two ways of making a decision?

1. economic model

2. cost-benefit analysis

What is the economic model?

equation, graph, etc.; often based on assumptions

What is cost-benefit analysis?

compare costs of an action to the benefits received; making a grid

What Scottish economist discovered the paradox of value in 1776?

Adam Smith

What is the literal meaning of the word "entrepreneur?"

“to do something” “risk-taker” “to undertake”