Economics Chapters 1-3: Scarcity, Market Forces, and U.S. Economy

Scarcity

Refers to the lack of enough resources to satisfy all the desired uses of those resources.

Opportunity Cost

Refers to the most desired goods or services that are foregone to get something else - what we give up.

Resources

Yes, resources are the factors used to produce goods and services.

Factors of Production

The four factors are Land, Labor, Capital, and Entrepreneurship.

Land

Refers to all natural resources.

Labor

Refers to the skills and abilities to produce goods and services.

Capital

Refers to final goods produced for use in the production of other goods.

Entrepreneurship

Is the assembling of resources to produce new, improved products and technologies.

Economics

The study of how best to allocate scarce resources among competing uses. It is about how choices are made due to limited resources.

Production Possibilities Curve (PPC)

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

Assumptions of PPC

1. Full Employment of Resources. 2. Efficient Use of Resources (Efficiency means squeezing out the maximum output from resources). 3. Fixed State of Technology (This means that along a given PPC, technology is not changing). 4. Imperfect Substitution of Resources (This applies only to a PPC which is bowed out to the origin).

Technological Advance on PPC

A shift outward of the production possibilities curve.

Decrease in Technology on PPC

The curve will shift inward.

Underutilization of Resources on PPC

This would be represented by a point inside the production possibilities curve.

Growth on PPC

Growth would be illustrated by an outward shift of the PPC.

Invisible Hand of Competition

Refers to the way markets work in terms of what to produce, how, and for whom. It is the allocation of resources by market forces.

Market Mechanism

The use of market prices and sales to signal desired outputs or resource allocations. The essential feature is the price signal.

Laissez-faire

The doctrine of nonintervention by government in the market mechanism.

Karl Marx's View on Government Intervention

Karl Marx argued that the government not only had to intervene but had to own all the means of production (e.g., Soviet Union).

John Maynard Keynes's View on Government Intervention

Keynes believed the government should play an active but not all-inclusive role in managing the economy.

Market Failure

An imperfection in the market mechanism that prevents optimal outcomes. It may lead to the wrong mix of output, too much unemployment, polluted air, or inequitable distribution of income. An example is the 2008 financial crisis.

Government Failure

Occurs when government attempts to make things better but instead makes them worse.

Capital-intensive production process

A process that uses a high ratio of machinery and other capital to labor. In the United States, production is relatively capital-intensive.

Gross Domestic Product (GDP)

A dollar measure of final output produced during a given time period within a nation's borders. It is a measure of how well a nation is doing economically because economists often assume that production of goods and services translates into income for its citizens.

Per Capita GDP

The dollar value of GDP divided by total population. It is an important measure of economic well-being because it describes how much income per person an economy generates.

Economic Growth

Implied as an increase in output over time.

Human Capital

The knowledge and skills workers possess.

Income Quintile

(Not explicitly defined in the provided snippets).

Factor Market

A market where the factors of production (land, labor, or capital) are bought and sold.

Product Market

A market where finished (final) goods and services are bought and sold.

Demand Curve

A graphical representation showing the quantities of a good demanded at various prices. Because price and quantity demanded are inversely related, the demand curve has a negative (downward) slope.

Demand Schedule

A table listing the quantities of a good demanded at various prices.

Ceteris Paribus

Means 'all other things held constant'.

Market Supply

The combined supply of all market participants.

Law of Demand

During a given period of time, the quantity of a good demanded increases as its price falls, ceteris paribus. Price and quantity demanded of an item are inversely related.

Law of Supply

(Not explicitly defined in the provided snippets, but generally means that as price rises, quantity supplied rises, ceteris paribus).

Outsourcing

Leads to increases in productivity and increases in total output. Outsourcing allows U.S. workers to pursue their comparative advantage, leading to an increase in productivity and total output capabilities that increases living standards.

Circular Flow

The two markets in the circular flow are Factor markets and Product markets.

Participants in Circular Flow

Consumers, business firms, government agencies, and foreigners.

Reasons for High U.S. GDP

One key reason is Human Capital - the knowledge and skills possessed by the workforce.

U.S. Income Distribution

Wealthier countries tend to redistribute more income than poorer countries, thereby reducing income inequality. Income inequalities are greatest in poor countries.

Differences in GDP Across Countries

Best explained by human capital. Real GDP growth is determined by the quality of factors of production such as human capital.

Worker Productivity

Increases as a country's human capital increases. Higher human capital individuals tend to be more productive.

Role of Government in Economy

One role is Providing a legal framework, such as protecting the ownership of private property to encourage the private sector.

Change in Demand vs. Change in Quantity Demanded

A change in demand means there has been a shift in the demand curve. A change in quantity demanded means that price has changed and there is movement along the demand curve.

Movements along a demand curve

Response to price changes for that good.

What causes movement on the demand or supply curve?

A change in the price of the good itself.

Determinants of demand (ceteris paribus conditions)

Expectations about future income, income, tastes, and the number of potential buyers. (Also includes prices of other goods, consumer expectations).

Determinants of supply (ceteris paribus conditions)

Technology, factor costs, taxes and subsidies, producer expectations, prices of related goods, and number of sellers.

How is market demand calculated?

We add the quantities demanded for each individual demand schedule horizontally.

How is market supply calculated?

The market supply represents the combined supply of all market participants. (Implied: add individual supplies horizontally).

Equilibrium

The intersection of the demand and supply curves, establishing the equilibrium price and output.

Market Surplus

Occurs when quantity supplied will be greater than quantity demanded at a given price.

Price Floor

A minimum price set by the government.

Market Shortage

Occurs when quantity demanded will be greater than quantity supplied at a given price.

Price Ceiling

A maximum price set by the government.

Self-adjusting prices versus price gouging

(No discussion provided in sources, only the prompt).

If a price is below equilibrium, what happens?

A shortage will cause the price to rise and the quantity supplied to increase.

A buyer is said to have a demand for a good only when...

The buyer is both willing and able to purchase the good.

Ceteris paribus, which of the following is most likely to shift both the demand and the supply curves?

Expectations.

Ceteris paribus, a consumer that purchases a sports car must consider the price of gasoline because these goods are...

Complements.

A shift in supply is defined as a change in...

The supply curve because of a change in a determinant of supply.

A rightward shift in a demand curve and a rightward shift in a supply curve both result in a...

Higher equilibrium quantity.

If corn products are found to cause cancer, then the most immediate effect will be that the demand curve for corn will shift...

Left.

An increase in the price of gasoline will...

Shift the demand curve for gas-guzzling automobiles to the left.