Unit 1 - Basic Economic Concepts

Economics

the study of scarcity and choice

Trade-Off

give something up in order to have something else

Resource

anything that can be used to produce something else

Factors of Production

Land, labor, capital, entrepreneurship

Land

all resources that come directly from nature, including plants, water, and minerals

Labor

the effort of workers

Capital

manufactured goods used to make other goods and services, such as machinery, buildings, and tools; skill and knowledge of workers

Entrepreneurship

risk-taking, innovation, and organization of resources for production

Scarce

not enough of a resource available to satisfy all of the various ways a society wants to use it

Opportunity Cost

the value of the next best alternative that you must give up when you make a particular choice

Microeconomics

the study of how individuals, households, and firms make decisions and how those decisions interact

Household

person or group of people who share their income

Firm

any organization that produces goods or services for sale

Macroeconomics

overall ups and downs of the economy

Positive Economics

facts about economics, definite right and wrong answers/statements

Normative economics

saying how the economy SHOULD work

Economy

system for coordinating the production and distribution of goods and services

what, how, and for whom to produce?

Market Economy

production and consumption are the result of decentralized decisions by many firms and individuals

Invisible Hand

consumers and producers decide what to make, how to make it, and who gets it

Command Economy

industry is publicly owned and there is a central authority making production and consumption decisions

Mixed Economy

combines elements of free market and command

what and how is answered by consumers and producers together

for whom answered by whoever is willing and able to pay and who the gov provides for

Marginal Analysis

tool companies use to evaluate the benefits and costs associated with making a decision/change

Model

simplified representation used to better understand a real-life situation

Other Things Equal Assumption

in a model, all other relevant factors remain unchanged to focus on 2 variables at a time

ceteris paribus

Production Possibilites Curve

illustrates the necessary trade-offs in an economy that produces only 2 goods

Inside PPC

ineffecient

Outside PPC

unattainable

On PPC curve

most efficient

Efficient

there is no way to make anyone better off without making at least one person worse off

How to calculate opportunity cost

opportunity cost / opportunity

Increasing opportunity cost

as more of one good is produced, opportunity cost increases b/c resources specialized for producing that good are used up so resources specialized for producing the other good must be used

Increasing opportunity cost graph

bowed out curve

Economic growth

an increase in the maximum amount of goods and services an economy can produce

increase in availability of resources, increased technology

Shrinking Economy

loss of resources or technology which causes lower output

Trade

people provide goods and services to others and recieve goods and services in return

Specialization

each person specializes in the task that they are good at performing

Comparative advantage

having the lowest opportunity cost among producers

Absolute Advantage

being able to produce more of something with a given amount of time and resources

Terms of trade

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

Mutually beneficial trade

any price/item between opportunity cost of item producer and opportunity cost of item buyer

if price of item each person obtains from trade is less than opportunity cost

Gains from trade

by specializing in the production of 1 good and trading for the other, a country can consume beyond its original production possibilities frontier (PPF)

Productive Efficiency

achieved when all resources are being used in the production of goods and services, anywhere on the PPC curve

Allocative Efficiency

combination of goods and services most desired by society

determined through supply and demand graphs, not on PPC

Output

total production of a good within a given time period

Input

amount of time it takes to produce a certain amount of goods

Calculating Output Opportunity Cost

Other Goes Over

Calculating Input Opportunity Cost

Other Goes Under

Substitutes

if a rise in the price of one good leads to an increase in demand for the other good

Complements

if a rise in the price of one good leads to a decrease in demand for the other good

ex. milk and cookies

Normal Goods

the demand for the good increases when consumer income rises

Inferior Goods

the demand for the good decreases when consumer income rises