Chapter 1 & 2- Micro economics

Command system

An economic system in which most property resources are owned by the government and economic decisions are made by a central government body.

Market system

An economic system where property resources are privately owned and markets and prices are used to direct and coordinate economic activities.

Private property

The right of persons or firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.

Freedom of enterprise

The freedom of firms to obtain economic resources, to use those resources to produce products of the firms’ own choosing, and to sell their products in markets of their choice.

Freedom of choice

The freedom of owners of resources to employ or dispose of their resources as they see fit, and the freedom of consumers to spend their incomes in a manner they think is appropriate.

Self-interest

The most-advantageous outcome as viewed by each firm, property owner, worker, or consumer.

Competition

The presence in a market of independent buyers and sellers vying with one another, and the freedom of buyers and sellers to enter and leave the market.

Market

An institution or mechanism that brings buyers and sellers together.

Specialization

The use of resources of an individual, region, or nation to produce one or a few goods and services rather than the entire range of goods and services.

Division of labor

The separation of the work required to produce a product into a number of different tasks that are performed by different workers.

Medium of exchange

Any item sellers generally accept and buyers generally use to pay for goods and services.

Barter

The exchange of one good or service for another good or service.

Money

Any item that is generally acceptable to sellers in exchange for goods and services.

Consumer sovereignty

Determination by consumers of the types and quantities of goods and services that will be produced with the economy’s scarce resources.

Dollar votes

The votes that consumers and entrepreneurs cast for the production of consumer and capital goods when they purchase them in product and resource markets.

Creative destruction

The idea that the creation of new products and production methods may simultaneously destroy the market power of existing firms.

Invisible hand

The tendency of firms and resource suppliers that are seeking further their own self-interest in competitive markets to also promote the interest of society as a whole.

Circular flow diagram

The flow of resources from households to firms and of products from firms to households.

Households

One or more persons occupying a housing unit that provide resources to the economy and use income received to purchase goods and services that satisfy economic wants.

Businesses

Firms that purchase resources and provide goods and services to the economy.

Product market

A market in which goods and services are sold by firms and bought by households.

Resource market

A market in which households sell and firms buy economic resources.

Economic system

A particular set of institutional arrangements and a coordinating mechanism for producing goods and services

Economics

The study of how people, institutions, and society make economic choices under conditions of scarcity.

Economic perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs of their actions.

Opportunity cost

The value of the good, service, or time forgone to obtain something else.

Utility

The satisfaction obtained from consuming a good or service.

Marginal analysis

The comparison of extra benefits and costs for decision making.

Scientific method

The systematic pursuit of knowledge by observing facts and formulating and testing hypotheses to obtain theories, principles, and laws.

Principles

Statements about economic behavior that enable prediction of the probable effects of certain actions.

Other-things-equal assumption

The assumption that factors other than those being considered do not change.

Microeconomics

The part of economics concerned with individual decision making units, such as a consumer, a worker, or a business firm.

Macroeconomics

The part of economics concerned with the economy as a whole.

Aggregate

A collection of specific economic units treated as if they were one unit.

Economic problem

The need for individuals and society to make choices because wants exceed means.

Budget line

A line that shows various combinations of two products a consumer can purchase with a specific money income, given the products’ prices.

Constant opportunity cost

An opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line.

Economic resources

The land, labor, capital, and entrepreneurial ability used in the production of goods and services.

Land

Natural resources used to produce goods and services.

Labor

The physical and mental talents and efforts of people used to produce goods and services.

Capital

Human-made resources used to produce goods and services.

Investment

The purchase of capital resources.

Entrepreneurship

The human talent that combines the other resources to produce a product, make strategic decisions, and bear risks.

Factors of production

Economic resources: land, labor, capital, and entrepreneurial ability.

Consumer goods

Products and services that directly satisfy consumer wants.

Capital goods

Items that are used to produce other goods and therefore do not directly satisfy consumer wants.

Production possibilities curve

A curve showing the different combinations of goods and services that can be produced in a fully employed economy.

Law of increasing opportunity cost

The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.

Economic growth

An outward shift of the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology.

Economics is all about what? Give two examples.

Wants and needs

Biological needs vs. social wants

Water vs. bottled water

Online definition of economics

“the branch of knowledge concerned with the production, consumption, and transfer of wealth”

Opportunity Cost

The value of the good, service, or time forgone to obtain something else.

Utility

The satisfaction obtained from consuming a good or service.

Marginal Analysis

The comparison of extra benefits and costs for decision making.

Principles

Statements about economic behavior that enable prediction of the probable effects of certain actions.

Ceteris Paribus

The assumption that factors other than those being considered do not change.

What is the economic problem?

The need for individuals and society to make choices because wants exceed means. Unlimited wants vs. scare resources

Know how to draw budget line

An increase in money income shifts the budget line to the right; a decrease in money income shifts it to the left

The 4 factors of Production

Land, labor, capital, entrepreneurial ability

Be able to create a productions possibilities curve

Plot two goods on axes. creating a downward-sloping curve (usually bowed outward)

4 assumptions of the production possibilities curve

Full employment, fixed resources, fixed technology, two goods

2 types of goods and their definition

Consumer- used for personal use

Capital- used to produce other goods and services

What are the 3 qualifiers that make you unemployed?

18 years or older, currently do not have a job, actively seeking employment

What is optimal allocation

When marginal cost= marginal benefit

Economic growth=

increase in resources supplies, advance in technology

Why do economic systems differ?

who owns the factors of productions and the method used to motivate, coordinate, and direct economic activity.

Types of economic systems and definitions

Command (socialism or communism)- government owns most property resources and makes the economic decision making process through a central planning board (China, Russia, North Korea and Cuba)

Market (capitalism)- Private ownership of resources and the use of the markets and prices to coordinate and direct economy activity (US)

Laissez-faire (pure) capitalism

Mean “let it be”. Government role would be very limited to protecting private property and operation of the market system

What is the difference between North Korea’s and US’ economy?

US is massive, technologically advanced, North Korea is highly centralized and isolated

Division of Labor (Human specialization)

Makes use of differences in ability, fosters learning by doing, saves time

What are the four fundamental questions?

What goods will be produced?

How will the goods and services be produced?

Who will get the goods and services?

How will the system promote progress?

What goods will be produced?

Consumer sovereignty- spend their income on the goods they are willing to buy

Dollar votes- if the dollar votes are enough, businesses will produce these products

How will the goods and services be produced?

In combinations and ways that minimize the cost per unit of output

Who will get the goods and services?

Generally, distributed to consumers on the basis of their ability and willingness to pay its existing market price

How will the system promote progress?

Technological advance- promotes the rapid spread of technological advance throughout an industry

Capital accumulation- provides the resources necessary to produce additional capital through increased dollar votes for those goods.