Chapter 1 - Microeconomics

Economics

is the study of how humans make decisions in the face of scarcity

Scarcity

means that human wants for goods, services and resources exceed what is available

Who introduced the idea of dividing labor into discrete tasks?

Adam Smith

Divison of Labor

the way in which different workers divide required tasks to produce a good or service.

Example of Divison of Labor

Workers on an assembly line.

Specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process

What is the benefit of specialization for businesses?

allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

Microeconomics

focuses on the actions of individual agents within the economy, like households, workers, and businesses

Macroeconomics

is the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

Monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowin

Fiscal policy

economic policies that involve government spending and taxes.

Most influential economist

John Maynard Keynes

Keynes beliefs on economy?

economics teaches you how to think, not what to think

Theory

a simplified representation of how two or more variables interact with each other

What to economists use to test theories?

Models

Circular flow diagram

shows how households and firms interact in the goods and services market, and in the labor market

Three ways societies organize an economy

Traditional economy, Command economy, Market economy

Traditional economy

typically an agricultural economy where things are done the same as they have always been done.

• Oldest economic system

• Used in parts of Asia, Africa, and South America

• Occupations tend to stay in the family

• What you produce is what you consume

• Little economic progress or development

Command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources.

• Government decides what goods and services will be produced and what prices it

will charge for them.

• The government decides what methods of production to use and sets wages for

workers.

• The government provides many necessities like healthcare and education for free.

Communism

Market Economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand.

Market

interaction between potential buyers and sellers; a combination of demand and supply.

Private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses).

Which economy is the US?

The U.S. economy is positioned toward the market-oriented end of the spectrum

Which economy is the UK?

while primarily market-oriented, have a greater degree of government involvement in economic decisions than the U.S economy.

Which economy is Russia and China?

while they have moved more in the direction of having a market-oriented system, remain closer to the command economy

Which is the best way to organize the economy?

A market economy (i.e., capitalism) is the best way to organize the economy.

Heavy regulated economies causes what?

Underground economies (black market)

Globalization

the trend in which buying and selling in markets have increasingly crossed national borders.

Exports

the goods and services that a nation produces domestically and sells abroad.

Imports

the goods and services that are produced abroad and then sold domestically.

Gross domestic product (GDP)

measures the size of total production in an economy.