UNIT 1 (CH 1, 2, 3) Understanding Economics, Introduction to Economics

scarcity

fundamental economic problem facing all societies resulting from a combination of limited resources and people's virtually unlimited needs and wants

economics

social science dealing with how people satisfy seemingly unlimited and competing needs and wants with the careful use of scarce resources

good

tangible economic product that is useful, transferable to others, and used to satisfy wants and needs

service

work or labor performed for someone; economic product that includes haircuts, home repairs, and forms of entertainment

value

monetary worth of a good or service as determined by the market (supply and demand)

paradox of value

apparent contradiction between the high value of a nonessential item and the low value of an essential item

intangible

not physical; something that cannot be touched

factors of production

productive resources needed to produce goods; the four factors are land, capital, labor and entrepreneurship

natural resources or "gifts of nature" not created by human effort; one of the four factors of production

land

capital or capital good

tools, equipment, and factories used in the production of goods and services

labor

People with all their efforts; does not include the entrepreneur

production possibilities curve

diagram representing all possible combinations of goods and/or services an economy can produce when all productive resources are fully employed.

trade-offs

alternative that must be given up when one choice is made rather than another.

productivity

measure of the amount of output produced in a specific time period with a given amount of resources; normally refers to labor, but can apply to all factors of production

human capital

sum of people's skills, abilities, health, and motivation.

division of labor

division of work into a number of separate tasks to be performed by different workers.

specialization

assignment of tasks to the workers, factories, regions or nations that can perform them most efficiently.

factor markets

markets in which factors of production are given to businesses and businesses pay for them

market in which goods and services are given to consumers and consumer pay for them.

product markets

cost-benefit analysis

comparison of the cost of an action to its benefits

traditional economy

economic system in which economic activity, is the result of ritual, habit or custom.

command economy

economic system characterized by a central authority that makes most of the major economic decisions.

socialism

economic system in which government regulates some factors of production, and may have a role in determining what and how goods are produced.

meeting place or arrangement through which buyers and sellers interact to determine price and quantity of an economic product; may be local, regional national, or global.

market

market economy

economic system in which supply, demand, and the price system help people allocate resources and make the WHAT, HOW and FOR WHOME to produce decisions; same as free enterprise economy.

capitalism

economic system in which private citizens own and use the factors of production in order to generate profits, without government regulation

mixed economies

economic system that has some combination of different economic systems (ex: traditional, command, etc.); also see modified free enterprise economy

allocation

distribution

privatization

conversion of state-owned factories and other property to private ownership

free enterprise

an economic system

Economic system in which individuals and businesses are allowed to compete for profit with a minimum of government interference

voluntary exchange

the act of buyers and sellers freely and willingly engaging in market transactions

private property rights

the concept that people have the right and privilege to control their possessions as they wish

incentive

something that motivates

profit

A financial gain; the difference between the amount earned and the amount spent in buying, operating, or producing something

competition

A rivalry between two or more businesses trying to sell products to the same customer or market

mixed economy

a system combining different degrees of government regulation, command, free enterprise and tradional

utility

the ability or capacity of a good or service to be useful and give satisfaction to someone

Simple Circular Flow: Household

an individual or group of people who live together and share income, such as you and your family (however you define that)

Simple Circular Flow: Firm

a privately owned organization that produces goods and services and sells them to others

Simple Circular Flow: Product Market

where goods and services are exchanged for money

Simple Circular Flow: Factor Market

where resources are exchanged for money

Market

A collection of buyers and sellers, wherever they may be

standard of living

the measure of the wealth of goods and services available to help people in a country to live comfortably

economic growth

an increase in the ability to produce goods and services over time

model

a simplified representation of reality

Production Possibilities Frontier/Curve

the maximum quantity of one good that can be produced for each possible quantity of another good produced

3 ways Government conrtibutes to Modern Market Economies

1. Establishing and reinforcing rules that improve market performance

2. Providing important goods and services that private individuals tend not to purchase,

aka, "public goods."

3. Help improve economic security, equity, and sustainability

Simple Circular Flow: Four (4) points of economic transaction

1. The Product Market

2. The Factor Market

3. Between Households & Government

4. Between Firms & Government

Scarcity

The lack of a sufficient supply to meet all desires - exists if we desire more of something than we can have

TNSTAAFL (there's no such thing as a free lunch)

Everything has a cost, be it money, time, effort, etc.

opportunity cost

the value of the next-best alternative given up when a choice is made

The "Three (3) Basic Economic Questions"

1. What to produce?

2. How to produce it?

3. For whom to produce?

The Four (4) Factors of Production

1. Land

2. Labor

3. Capital (Physical and Human)

4. Entrepreneur

Factors of Production: Land

Any and all natural resources used to produce goods and services

Factors of Production: Labor

Effort a person devotes to a task in which they are paid

Factors of Production: Capital (physical)

Any and all man-made resources used to produce goods and services (buildings, tools, money)

Factors of Production: Capital (human)

Knowledge and skills a worker gains through education and experience

Factors of Production: Entrepreneur

Pulls all other factors of production together to produce good and services

An economy

An organized way of providing for the needs and wants of people in society

Economic systems: Traditional

Almost all economic activity stems from ritual, habit or custom

Economic systems: Command

Central authority controls the Factors of Production, and makes most of the "what, how, and for whom" decisions

Economic systems: Free market/mixed

An arrangement that allows buyers and sellers to exchange goods & services - consumers play a key role in what is produced

Economics

the study of choice under scarcity

Macroeconomics

The study the economy as a whole

Microeconomics

The study of how people make decisions, and how those decisions affect others in the economy