ECON Exam 1

Economics

The study of how to allocate scarce resources among competing uses.

Scarcity

The lack of enough resources to satisfy all desired uses of those resources.

Limited resources

Resources are finite, so an economy cannot produce everything people want.

The economy

The total of all production and consumption activities in society.

Three basic economic questions

What to produce, how to produce, and for whom to produce.

What to produce

The decision about which goods and services to make with limited resources.

How to produce

The decision about which combination of resources and production methods to use.

For whom to produce

The decision about who receives the goods and services produced.

Factors of production

The resources used to produce goods and services.

Land

All natural resources used in production, such as water, minerals, air, and crude oil.

Labor

The human skills and abilities used to produce goods and services.

Capital

Final goods produced for use in producing other goods and services, such as machinery, equipment, and structures.

Entrepreneurship

The process of assembling resources to produce new or improved products and technologies.

Allocation

The process of deciding how scarce resources will be used among competing alternatives.

Opportunity cost

The most desired goods or services forgone to obtain something else.

Production possibilities

The alternative combinations of final goods and services that can be produced with available resources and technology in a given period.

Production possibilities curve (PPC)

A graph showing the maximum alternative combinations of two outputs that can be produced with available resources and technology.

Trade-off

Giving up some amount of one good or activity to obtain more of another.

Law of increasing opportunity cost

The principle that getting more of one good requires giving up ever-increasing quantities of other goods and services.

Why is a PPC usually bowed outward?

Because resources are not equally suited to every use, so opportunity costs rise as resources are shifted from one use to another.

Efficient production

Producing the maximum possible output from the resources used.

Point on the PPC

A point representing efficient production and full use of available resources and technology.

Point inside the PPC

A point representing inefficiency or incomplete use of available resources.

Point outside the PPC

A point that is unattainable with current resources and technology.

Economic growth

An increase in output and an expansion of production possibilities.

What shifts a PPC outward?

Increases in resources such as labor or capital, or improvements in technology.

Technology

Knowledge and methods used to produce goods and services; improved technology can increase output from existing resources.

Market economy

An economy in which market prices and sales signal what to produce, how to produce, and for whom to produce.

Market mechanism

The use of market prices and sales to signal desired outputs and resource allocations.

Price signal

Information conveyed by prices that guides buyers and sellers in market decisions.

Invisible hand

Adam Smith’s term for the way markets coordinate individual decisions to determine economic outcomes.

Laissez-faire

The doctrine of minimal or no government intervention in the market mechanism.

Government intervention

Government action intended to influence economic outcomes.

Means of production

The land, labor, capital, and other productive resources used to produce goods and services.

Mixed economy

An economy that uses both market signals and government directives to allocate resources and goods.

Market failure

An imperfection in the market mechanism that prevents optimal economic outcomes.

Examples of market failure

Wrong mix of output, unemployment, pollution, or an inequitable distribution of income.

Government failure

Government intervention that does not improve economic outcomes or makes them worse.

Positive analysis

Analysis focused on how things are or might be done, without subjective judgments about what is best.

Normative analysis

Analysis that includes subjective judgments about what ought to be done.

Macroeconomics

The study of aggregate economic behavior and the economy as a whole.

Microeconomics

The study of individual economic behavior and individual components of the larger economy.

Economic model

A simplified representation of the economy used to explain, predict, evaluate, or design policy.

Ceteris paribus

The assumption that nothing else changes.

Purpose of ceteris paribus

It isolates the effect of one variable by holding other relevant influences constant.

Gross domestic product (GDP)

The total market value of all final goods and services produced within a nation’s borders during a given time period.

Final goods and services

Goods and services purchased by their ultimate users rather than used as inputs in further production.

Per capita GDP

GDP divided by total population; a measure of average output per person.

Why is per capita GDP useful?

It indicates how much output the average person would receive if total output were divided evenly among the population.

Economic growth in GDP terms

An increase in total output over time.

Output mix

The combination of goods and services an economy produces.

Goods

Tangible products, such as cars, televisions, and potatoes.

Services

Intangible activities or benefits, such as medical visits, streaming, and education.

Service economy

An economy in which services make up the largest share of total output.

Human capital

The knowledge, education, training, and skills possessed by the workforce.

Capital-intensive production

A production process that uses a high ratio of capital inputs to labor inputs.

Capital stock

The accumulated machinery, factories, buildings, equipment, and other capital goods available for production.

Productivity

Output per unit of input, such as output per labor-hour.

High productivity

Producing a large amount of output from a given amount of resources or inputs.

Sources of high U.S. productivity

Highly educated workers, substantial human capital, and capital-intensive production processes.

Factor mobility

The ability to move factors of production from one industry or use to another in response to changing demand or technology.

Technological advance

An improvement in technology that allows an economy to produce more output with existing resources.

Effect of technological advance on PPC

It shifts the production possibilities curve outward.

Outsourcing

Having tasks or production performed by workers or firms in another country.

Comparative advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

Benefit of outsourcing and trade

They allow workers and firms to specialize in activities where they have a comparative advantage, raising productivity and total output.

Role of government in the economy

Government provides a legal framework and may protect the environment, consumers, and labor.

Income distribution

The way total income is divided among households or individuals.

Income quintile

One-fifth of the population when households are ranked by income.

Market distribution of goods

In a market economy, people with more income generally can purchase more goods and services.

Global inequality

Differences in income and access to goods and services across countries and populations.

Poverty

A condition in which people lack sufficient income or resources to meet basic needs.

Specialization

Focusing production on a limited range of goods or tasks and trading for other desired goods and services.

Exchange

The voluntary trade of goods, services, or resources between parties.

Why do people specialize?

Individuals cannot produce everything they need or want and have limited time, energy, and resources.

Market

Any arrangement or place where buyers and sellers exchange goods, services, or resources.

Product market

A market in which finished goods and services are bought and sold.

Factor market

A market in which factors of production, such as labor, land, and capital, are bought and sold.

Circular flow model

A model showing the exchanges of goods, services, resources, and payments among consumers, businesses, governments, and international participants.

Consumers in the circular flow

They supply factors of production, especially labor, and purchase final goods and services.

Business firms in the circular flow

They supply goods and services in product markets and purchase factors of production in factor markets.

Government in the circular flow

Government acquires resources in factor markets and provides services to consumers and businesses.

International participants in the circular flow

Foreign consumers, businesses, and governments that supply imports, buy exports, and trade factors of production.

Utility

Satisfaction or benefit that consumers receive from goods and services.

Utility maximization

The goal of consumers to obtain the greatest possible satisfaction from their available income.

Profit maximization

The goal of businesses to earn the greatest possible difference between revenue and cost.

Welfare maximization

The goal of government to promote the general well-being of society.

Demand

The willingness and ability to buy specific quantities of a good at alternative prices during a given period, ceteris paribus.

Supply

The willingness and ability to sell or produce specific quantities of a good at alternative prices during a given period, ceteris paribus.

Demand requires

Willingness and ability to pay for a good or service.

Demand schedule

A table showing the quantities of a good a consumer is willing and able to buy at alternative prices, ceteris paribus.

Demand curve

A graph showing the quantities of a good a consumer is willing and able to buy at alternative prices, ceteris paribus.

Law of demand

The quantity demanded rises when price falls and falls when price rises, ceteris paribus.

Why does a demand curve slope downward?

Because the law of demand describes an inverse relationship between a good’s price and the quantity demanded.

Quantity demanded

The amount buyers are willing and able to purchase at a particular price.

Change in quantity demanded

A movement along a demand curve caused only by a change in the good’s own price.

Change in demand

A shift of the entire demand curve caused by a change in a nonprice determinant of demand.

Determinants of demand

Tastes, income, prices and availability of other goods, expectations, and number of buyers.

Tastes as a determinant of demand

A change in consumers’ preferences can increase or decrease demand.

Income as a determinant of demand

A change in consumers’ income can alter their ability and willingness to buy goods and services.