Command Economy
Central Authority that controls the who, what, and how.
Advantage: allows people to receive goods and services they normally couldn’t get
Disadvantage: loss of individual freedom to choose, no variety, low quality goods
Traditional Economy
Doing things how they’ve always done it. (Who, what, and how is and will be the same)
Advantage: no uncertainty for the future
Disadvantage: discourages new ideas and creativity
Market Economy
Based on capitalism, supply, demand, and the price system help people make decisions and allocate resources. (Who, what, and how is affected by consumers and private businesses)
Advantage: high degree of individual freedom, variety of goods, decentralized decision-making
Disadvantage: not providing for basic human needs, shortage of services, high degree of uncertainty
Utility
Usefulness and satisfaction
5 Key Economic Assumptions
1.) Scarcity
2.) Trade-offs
3.) Everyone acts in their own self interest
4.) Everyone acts rationally by comparing the marginal costs and benefits of every choice
5.) Real life situations can be shown through models/graphs
Normative Statement
Statement that includes value judgement. (What should be)
Positive Statement
Statement based on facts. (What is or will be)
Opportunity Cost
The most desirable result given up as a result of a decision. (Next best option)
Trade-offs
The alternatives given up when choosing one course of action over others.
Economics
The study of choices of individual firms and governments.
Four Factors of Production
1.) Land
2.) Labor
3.) Capital
4.) Entrepreneurship
Entrepreneurship
Leaders that combine factors of production to create goods and services. Ex: Owner
Human Capital
Any skills/knowledge gained by a worker through education and experience. Ex: Knowing how to cook
Physical Capital
Human made resources to create other goods and services. Ex: Processed goods, machines
Labor
The effort a person puts forward to create goods and services. Ex: Cook, Baker
Land
Untouched natural resources.
7 Economic and Social Goals
1.) Economic freedom
2.) Economic efficiency
3.) Economic growth
4.) Full employment
5.) Economic security
6.) Price stability
7.) Economic equity
Economic Freedom
The freedom to buy or sell what we want, to make choices.
Economic Efficiency
Using resources wisely and productively.
Economic Growth
The improving standard of living.
Full Employment
The highest amount of labor force that could be employed within an economy.
Economic Security
When the government provides a safety net in times of economic downturn.
Price Stability
Goods and services will consistently be available at stable prices.
Economic Equity
Workers being paid according to skill level and not being discriminated against by race, age, gender, religion, ethnicity, etc.
Production Possibilities Curve
Model that shows alternative ways that an economy can use it’s scarce resources.
4 Assumptions of PPC
1.) Only 2 goods can be produced
2.) There is full employment of resources
3.) There are fixed resources (Ceteris Paribus, all other things being equal)
4.) There is fixed technology
Efficiency (PPC)
Condition in which economic resources are being used to produce the max amount of goods and services. (On the curve)
Production Efficiency (PPC)
Products are being produced in the least costly way. (Any point on PPC)
Allocated Efficiency (PPC)
Products being produced are the ones most desired by society. (Optimal/specific point on the curve that depends on desires of society)
3 Ways a PPC Can Shift Outwards
1.) Increase in productive resources (Quantity or quality)
2.) New Technology
3.) International Trade
Product Market
Goods and services produced by businesses that are sold to households
Resource Market
Resources are sold to businesses by individuals/households
Microeconomics
Relationship between households businesses and government in resource and product markets
Private Sector
Individuals and business
Public Sector
Government
Transfer Payment
Government redistributes income (welfare/social security)
Factor Payment
Payment for the factors of production/household income
Subsidy
Government payment to businesses for production
Household
Person/group of people living in a residence
Absolute Advantage
Can produce the most outputs or requires the least input
Comparative Advantage
Producer with the lowest opportunity cost
Terms of Trade
Agreed upon conditions that would benefit both countries
Outputs
Shows the max that each country can produce (other goes over)
Inputs
Shows the number of resources/hours required to make products (other goes under)
Trade Barriers
Policies designed to make it more difficult to conduct international trade
Tariff
Tax on an imported good set by a nation
Import Quota
Limit imposed by a nation on the quantity of a good that can be imported during a given period of time
Export Subsidy
Government payment to domestic producers to reduce production costs
Voluntary Export Restrictions
Self-imposed limitations on the number of products shipped to a particular country
Law of Demand
Quantity demanded of a good falls when the price of the good rises
Quantity Demanded
Amount of a good that buyers are willing and able to purchase at different prices
Demand Schedule
Table that shows relationship between the price of a good and the quantity demanded
Demand Curve
Graph of the relationship between the price of a good and the quantity demanded
Market Demand
Sum of all individual demands for a particular good or service
Shifts in Demand Curve
1.) Consumer income
2.) Price in related goods
3.) Consumer tastes
4.) Expectations in price changers
5.) Number of buyers
6.) Government intervention
Substitutes
When a fall in price reduces the demand for another good/vice versa
Complements
When a fall in the price of one good increases the demand for another good/vice versa
Law of Diminishing Marginal Utility
When consuming anything the addition satisfaction will eventually start to decrease
Inferior Good Demand increases as income decreases/decreases as income increases
Demand increases as income decreases, and demands decreases as income increases
Normal Good
Demand decrease as income decreases, demand increases as income increases
Law of Supply
As price increases the quantity producers make increase, and as price falls the quantity produces make fall
Shifters of Supply
1.) Price and availability of resources
2.) Number of sellers
3.) Technology
4.) Government action
5.) Expectations of future profit
Market Equilibrium
Point when supply and demand meet = full efficiency of price and quantity
Shortage
Quantity demanded is more than supplied (price is raised by producers)
Surplus
Quantity supplied is more than needed leading to leftover product (price is lowered by producers)
Shifters of Quantity Demanded/Supplied
Price and only price