Econ 1000 Contemporary Economic Issues - CHPS 1-3

Economics

The social science that studies how people make decisions in the face of scarcity and the resulting impact of social decisions as a whole and on the individual members therein.

Scarcity

A universal phenomenon that arises because resources are limited and because no society has ever had enough resources to satisfy the desires of all of its people

Trade-offs

As a result of this scarcity, decision makers face trade offs - acquiring more of one thing can often only be done at the expense of getting by with less of something else

Microeconomics

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

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth / gross domestic product growth rate

Positive statement

One that aims to describe how the world actually is or functions

Normative statement

One that aims to assess the desirability of how the world is or functions, perhaps with suggestions of this that could be done to improve matters

Rational decision maker

someone with a well-defined goal, who takes actions to achieve the goal as best as possible.

Total benefits

the gains that a person realizes from taking an action

Total clsts

Refer to the burdens that a person incurs from taking the action

total economic surplus

the difference between total benefits and total costs

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

marginal benefit

The change in value of total benefits as more of an activity is undertsken

Diminishing marginal benefit

as you consume more of a good, your willingness to pay for an additional unit declines

Incentive Principle

States that: (I) if the marginal benefit of an activity increases, then a rational person will engage in more of the activity, whereas (ii) if the marginal cost of an activity increases, then a rational person will engage in less of the activity

Marginal cost

The change in the value of total costs as more of an activity is undertaken

Self interested individual

Refers to someone who makes his own personal assessment of the benefits and costs associated with different outcomes, and who subsequently uses these measures as the basis for decision making.

Goods and services

outputs of the production process, such as food, clothing, shelter, healthcare, education, and entertainment

Factors of production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

Two primary decision making entities in any economy

Households and firms

Households

Obtain benefits from consuming goods and services

Firms

Produce the goods and services for households and people

Production

Refers to the process by which a firm transforms inputs into an output

Households fulfill an additional role in the economy by doing what?

Providing factor of production to firms

Three Fundamental Economic Questions

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

Production Possibilities Frontier (PPF)

a curve that summarizes the limits of production that a society faces by illustrating the maximum amount of one good that can be produced for every possible level of production of another good

opportunity cost

A general concept that refers to the cost of giving up the best alternative that must be forgone in order to do or acquire something

The PFF provides a direction distinction between what?

Output combinations that are attainable versus ones that are unattainable

The ultimate aim through PPF is to do what?

See how the two individuals can increase their joint output through specialization in production

The first producer after being given a common amount of inputs possesses what?

An absolute advantage in the production of the good if she can produce more output than the second producer with the same amount of inputs

The first product possessions a comparative advantage in the production of the good if what?

If her opportunity cost of producing the good is lower than the opportunity cost of the second worker for producing the same good

Economic system

Refers to the rules and methods put in place by a society to answer the three fundamental economic questions

market

Can be defined as the collection of all potential buyers and all potential sellers of a good or service

Government

Refers to a decision making institution with the legal authority to impose restrictions or mandates on the behavior of other decision makers, or the ability to use legal coercion

Government plays the critical role of what in a modern economy?

Defining and enforcing property rights

Government also plays a key role in what?

Regulating the behavior of businesses, providing some goods and services and redistributing incomr

Government imposes constraints or restrictions on the behavior of decision-makers, thereby doing what?

Directly altering the costs and benefits of different actions and indirectly influencing how households and firms interact with each other in markets

There is a drastic difference in the power or authority that the decision making entity of government has when compared to what?

That of a household or business

The government or the states differs from other decision making entities in that it alone has established what?

"The monopoly of the legitimate use of physical force within a given territory"

The most basic of all economic systems is what?

Traditional System which can be seen in subsistence agriculture and fishing

comparative economic systems

the subfield of economics that compares and contrasts the structure and the performance of different types of economic organization (i.e., different economic systems).

Factors of production

The inputs such as factories, farms, stores, trucks and equipment used to produce goods and services

Feudalism

The system of aristocratic and hereditary ownership of landed estates and titles of nobility where society is divided between the nobles at the top and the serfs or peasants at the bottom

Socialism

A system in which society, usually in the form of the government, owns and controls the means of production.

Capitalism

An economic system based on private ownership of capital

Private property

property owned by individuals or companies, not by the government or the people as a whole

property rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Natural Rights Philosophy

Proposed by John Locke, it said that human beings had by nature certain rights, such as the rights to life, liberty, and property.

private ownership

property/resources that individuals own and control; a core principle of capitalism

Common property

Property owner simultaneously by everyone in society

Modern societies have dealt with many of the issues of conquered Indian land by invoking the principle of what?

Statute of Limitations

In pure capitalism this right to control the property you own is what?

Inviolable and is considered party of your human rights, similar to your right to freedom of religion or speech

All of the rights of property rights, freedom of religion and speech are considered to be what?

Negative in nature

negative rights

specify obligations of others not to interfere in your exercise of your rights

Social Justice

A conception of justice that transcends the capitalists conception of natural rights

Bourgeoisie

middle class

Proletariat

working class

What did Marx name the owners of the factories?

Capitalists since they owned the business capital, which is the technical name for all of the buildings, equipment, inventories and money invested in a business interprise

Marx believed that the relationship between the workers and capitalists was what?

Inherently exploitive. He believed that most of the improvements in productivity arising from the new factory system should accrue to the workers who produced the goods, not to the capitalists who simply owned the factories

Marx considered mere ownership as what?

Non-productive and that in claiming the income derived from the factory for himself, the capitalist was clothing naked aggression and greed in the mantle of morality and human rights

Collective property

owned and operated by the states

What did Marx believe about people?

That people were naturally good and would not be motivated by greed once the capitalist system was destroyed

Collectivized

brought under common ownership

The defining difference between capitalism and socialism is the answer to the question of who owns the means of production:

Under capitalism, the means of production are owned by individuals, whereas under socialism, the means of production are owned by the state

In a pure capitalist society the state is to act as what?

A night watchman

In a pure socialist system, the government would do what?

Make almost all important decisions, since all property is owned by the government

consumer sovereignty

the freedom for an individual to choose to purchase (or to not purchase) a good or services at a price determined in a free, unfettered market

Central planning system

Established to administer all of the thousands of factories, businesses and farms operating when the revolution came

Command System

Orders issued to get everyone doing what they are supposed to do

Command planning

The government directly controls nearly all economic activity

indicative planning

the government guides the behavior of individuals in regards to economic decisions by establishing policies which alter costs and benefits of different courses of action

Incentive

Refers to a change in cost or benefit which can cause a person to alter his behavior

Material rewards

Refers to monetary rewards or direct increases in consumption from engaging in an activity

moral suasion

describes attempts to convince individuals to behave in a certain manner because doing so is the right thing to do

coercion

use of force to get someone to obey

mixed economy

Refers to an economic system in which most factors of production are owned and controlled by individuals, while some factors of production are owned and controlled by the state