ECON 001 - Chapter 2: Factors of Production and the Economy

circular flow diagram

A diagram that represents in a simplified form how the economy works.

closed economy

An economy with a private and public sector only.  In a closed economy there is no connection with the rest of the world.

cost benefit analysis

A process of comparing costs and benefits to make a decision whether to take an action or not.
If the benefit exceeds the cost, people take the action. If the cost exceeds the benefit, people do not take the action.

economic system

That part of the social system that determines what goods and services to produce, how to produce these goods and services, and for whom.
All the economic systems have to answer the questions of what, how, and for whom.

factors of production

Inputs in the production process with which goods and services are produced.
The factors of production are: land, labor, capital, entrepreneurship.

gross domestic product

Measures the total output of goods and services in economy. GDP measures production-what is the economy's capacity to produce goods and services.

macroeconomics

Studies the economy as a whole.

The variables that give us a picture about the economy as a whole are GDP, inflation, and unemployment.

microeconomics

Studies how individual decision makers make decisions.
The individual decision makers are households and businesses. In economics all the decisions are made at the margin.

mixed economies

Economies that have signs of a capitalist market economy and signs of a socialist economy.

Most economies are mixed economies.

open economy

An economy with private, public and foreign sectors, where the foreign sector provides a connection with the rest of the world.

opportunity cost

The next best alternative given up when making a choice.

pig’s postulate

More is always preferred to less. People always want to have more of a good thing.

rational self-interest

A regard to one's personal advantage or interest.

resources

Inputs involved in the production of goods and services. The same as factors of production.

scarcity

a limited quantity of a resource