Economics Key Terms: Scarcity, Opportunity Cost, and Trade Models

Scarcity

The basic problem in economics. People have unlimited wants and needs and limited resources. We must determine how to allocate resources efficiently.

Allocate

The process of dividing up and distributing the limited resources.

Economics

a social science that studies how individuals, governments, firms, and nations make choices on allocating scarce resources to satisfy their unlimited wants *** study of human behavior

Opportunity Cost

the value or benefit of the best option that someone forgoes (do not take) when making a choice

Two major branches of economics

microeconomics and macroeconomics

Microeconomics

Economic analysis on the individual level. How firms and households make choices

Ex: How has the price of milk changed this year?

individual product/market

Ex: Should Microsoft enter the smart phone market again?

individual firm

Macroeconomics

Economic analysis on the national level/ study of the entire economy

Ex: How have the prices of all goods changed this year?

inflation

Positive Economics

a system of economics that analyzes economic events objectively and factually. - completely based on facts

Normative Economics

economic analysis based on value judgements or opinion. - opinion based

Incentive

a reward or punishment that motivates behavior in particular ways (can be monetary or non-monetary); often have unintended consequences

Producers

create products to satisfy consumers wants and needs

Consumers

consume what producers create

Products

can be a good or service that consumers buy to satisfy a need or want

Good

physical objects produced by a producer

Service

activities or actions performed on the behalf of a consumer by a producer

Factors of Production

resources that can be combined to produce goods and services (land, labor, and capital)

Land (Natural Resources)

resources that come from nature

Labor (Human Resource)

Any human effort exerted during the production. Can be intellectual or physical.

Capital Resources (Capital)

manufactured goods used to produce products ***** Often called the means of production

Entrepreneurship

Organizing resources for production (land, labor, and capital), taking risks to create new enterprises, and innovating to develop new products

Efficiency

getting the most output from your factors of production

Technology

any idea or capital equipment that increases efficiency in production

Economic Model

a simplified representation for people to better understand a real-life situation - not just a math problem to solve but a way to demonstrate principles and ideas of economics

Assumptions

a way economists simplify or reduce the complexity of a situation to make it easier to understand. Economists assume certain (often very unrealistic) conditions exist

ceteris paribus (Latin phrase)

all other things being equal/all other relevant things remain unchanged

Marginal

one additional unit

Marginal Opportunity Cost

the opportunity cost of producing one additional unit

Trade

in a market economy, individuals provide goods and services to others and receive money or goods and services in return

Imports

goods and services coming into a domestic country from a foreign country in international trade

Exports

goods leaving a domestic country and sold in a foreign country

Trade Deficit

importing more than you export

Trade Surplus

exporting more than you import

Specialization

when a country focuses on producing what they are best at and trades for things that other countries are better at producing

Quota

placing a limit on the amount of imports allowed in a country.

Tax

a required payment to a local, state, or national government - this is placed on imported items

Barter

system of trading where money is not used but goods and services are traded for other goods and services

Positive-Sum

any situation where people or groups interact and they are BOTH better off in the interaction - mutually beneficial situation

Zero-Sum

any situation where two people or groups interact and for one person or group to gain, the other must lose

Mercantilism

dominant view of trade from 16th-18th century - they wanted gold and silver (saw it as military power) and believed that a nation's worth was measured by the total value of money, goods, and precious metals - believed that imports were bad and exports were good (trade was a zero-sum game)

The wealth of Nations

Adam Smith's book

Adam Smith

Father of economics; believed in positive sum and not mercantilism; wealth of nations should be measured by productivity not gold

David Ricardo

UK classical economist who became interested in economics after reading the Wealth of Nations - wanted to build an economic model that would show that trade is positive sum

Ricardian Trade Model

International trade model that shows how free trade is good (important assumptions: trading with the barter system; constant opportunity cost)

Absolute Advantage

a country has an absolute advantage in producing a good or service if they can make MORE of it within a given amount of time and resource

Comparative Advantage

being able to produce a good or service more efficiently or at a lower opportunity cost *** - more important in trade than absolute advantage

Terms of Trade

indicate the rate at which one good can be exchanged for another