Economics

What to produce? How to produce? For whom to produce?

Three Basic Economic Questions

Economics

study of the production and distribution of goods and services

Opportunity Cost

cost of an economic decision

Free Products

Things like air and sunshine that no one can own

Paradox of value

assignment of the highest value to the most unnecessary things

Wealth

sum collection of useful, scarce, and tangible economic products

Utility

capacity to be useful

Value

assignment of worth, based on utility and scarcity

Capital Goods

Items used in the creation of other goods. factory machinery, trucks, etc.

Durable Goods

Any good that lasts more than 3 years when used on a regular basis

Non Durable Goods

Any item that lasts less than 3 years when used regularly

Consumer Goods

intended for final use by customers

conspicious consumption

use of a good or service to impress others

Productivity

Ability to produce vast amounts in an efficient manner

Traditional Economy

economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services

market economy

Economic decisions are made by individuals or the open market.

command economy

An economic system in which the government makes all economic decisions.

Communism

Governments owns all of the nation's means of production

Socialism

Government owns many major industries but allows for some individual business ownership

Capitalism/Free Enterprise

an economic system in which the majority of businesses are privately owned

Mixed Economic Systems

Most countries today have these, which combine free enterprise and government ownership

Freedom to choose businesses, right to private property, profit motive, competition, consumer sovereignty

Five Principles of Free Enterprise

Circular Flow Model

Three basic sectors of the economy work together to provide for our needs and wants. This is an incomplete theory that is commonly contradicted.

Consumer, Business, Government

3 basic elements of economy

Desire, ability to pay, willingness to pay

These things create demand

Marginal utility

the extra satisfaction a consumer realizes from an additional unit of that product

diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

Income effect

Change in amount purchased due to lower prices and surplus spending money

Substitution effect

As prices drop, consumers will buy more than usual at the expense of a different product

Law of Demand

Demand is inversely proportional to price

Law of Supply

Quantity is proportional to price

Equilibrium Price

Price that sellers are willing to sell at and buyers are willing to buy at

Demand Elasticity

Degree to which a price change effects a change in demand; if a demand is elastic, price changes bring about a great variability in demand

Elasticity of Supply

When supply increases, price decreases and vice versa

Food and Drug Administration (FDA)

Government agency that deals with food, drugs, and cosmetics

Securities and Exchange Commission (SEC)

Government agency that deals with sales of securities

Environmental Protection Agency

Regulates pollution of the environment

unlimited liability

owner may have to sell some/all of his personal possessions to help pay off company debt

limited liability

A form of business ownership in which the owners are liable only up to the amount of their individual investments.

Sole proprietorship

Non incorporated business owned and run by a single person

Partnership

Non incorporated business jointly owned by 2+ people

Corporation

Lawfully recognized as a separate legal entity

Private Corporation

Owned by an individual or group of individuals that do not offer ownership shares for purchase by the general public

Public Corporation

Owned by large numbers of investors

Common stock

Holders are entitled to a voting share in the company and a portion of the dividend (percentage of profits) if the company pays dividends to stockholders

Limited Partnership

Each partner assumes a different element of control; the "managing partner" is the one who has invested the most

Silent Partnership

Silent partner is an investor who puts up money but wishes no control over operations

General Partnership

Each partner is equal in stature and risk

multinational corporation

large firm with a head office in one country and several branches overseas

Economy of scale

Attempt to grow larger and make more profit

Conglomerates

One company buys others that are unrelated to that company's core business in an attempt to diversify

Corporate Structure

Typically organized hierarchically, in that the stockholders elect a board/directors and the boards run in a election

Hostile takeover

person purchases large amounts of stock

Vertical Components

Corporations that have purchased component businesses that make their product

Horizontal Corporations

Corporations that have purchased competing companies to eliminate competition

Cooperative Nonprofit

association performing some kind of economic activity for the benefit of its members

Consumer Cooperative

Nonprofit that buys bulk amounts of consumer goods so that members can purchase at prices below those charges

service cooperative

cooperative that provides a service, rather than a good

producer cooperative

association of producers helping members sell or market products, usually made up of farmers

trade association

nonprofit organization that promotes the interests of a particular industry

Professional Association

a group of people in a specialized occupation that works to improve the working conditions, skill levels, and public perceptions of the profession

pure competition

large number of knowledgeable and autonomous buyers and sellers of an identical product, none of which are capable of influencing the price

monopolistic competition

Elements of pure competition are not met; unlike pure competitor, products are not identical

Non price competition

competition based on factors other than price

Oligopoly

a few large sellers dominate and have the ability to affect industry prices

Pure Monopoly

One seller of a specific product with no substitutes

Market failure

Market fails to function properly, brought about by inadequate competition and uninformed buyers and sellers, resource immobility, and prices that don't reflect costs of production

Resource immobility

Resources are not free to move between industries

Externality

economic side effect that affects an uninvolved third party

Negative externality

harmful side effect that affects an uninvolved third party

positive externality

beneficial side effect that affects an uninvolved third party

Public Goods

Provided by the government due to a market failure and the market has not provided them; they are consumed collectively (highways, schools, national defense)

Near Monopolies

Natural Monopolies (franchises), geographic monopolies, technological monopolies, government monopolies

Trust

illegal combination of corporations or companies organized to hinder competition

cease and desist order

ruling requiring a company to stop an unfair business practice that reduces or limits competition

Price discrimination

the business practice of selling the same good at different prices to different customers

Public disclosure

requirement forcing a business to reveal information about its products or its operations to the public

Transfer payments

given by government, raised by taxes, to assist individuals who give the government nothing in return

Grants in Aid

Federal and state governments make payments to lower levels of government

Subsidies and Incentives

Payments to individuals or industries to encourage/discourage certain activities

Deficit

when a government spends more money than it takes in

Debt

Deficit carried over from year to year

Deficit spending

spending more than is collected in revenues

Federal Spending

Governments affect allocation of resources, the distribution of income, and could compete with the private sector

Blue collar

manual laborer

Pink Collar

associated with women, like nursing and secretarial

White Collar

Office worker

Skilled Worker

Receive specialized training to do their jobs

Unskilled Labor

Do not receive special training and have few specific skills

Professionals

Workers who need an advanced degree to do their jobs

Traditional Theory of Wage Determination

Law of supply and demand dictates salary

Theory of Negotiated Wages

Employees work in unions where union negotiates salary on behalf of all workers

Decrease in union membership

Today's worker tends to be more highly educated and tends to the professional class

Collective bargaining

Negotiations between an employer and a group of employees that determine the conditions of employment

Underground Economy

Activities not accounted for in the GDP, some of which are illicit

Measures inflation

consumer price index (CPI) and producer price index (PPI)

GDP

Measures the economic strength of a nation

Helping other nations

American demand for foreign made products increases, purchasing these helps create jobs and improve the nation of the foreign economy

Business Cycle

The changes that occur to the real GDP because alternating periods of expansion and contraction

Recession

Decline in the GDP, feed on themselves, reduced business spending