Economic Systems Unit 1

Economics

The study of choices people make to satisfy unlimited wants with limited resources.

Scarcity

Limited resources used to satisfy unlimited wants.

Goods

Tangible (physical) items of value.

Services

Intangible actions or activities of value.

Natural Resources

Resources provided by nature in raw form, such as oil, coal, water, and forests.

Human Resources

Human effort used to produce goods and services, including blue-collar and white-collar labor.

Capital Resources

Human-made goods used to produce other goods and services, such as tools, buildings, and factories.

Entrepreneurial Resources

The organization of land, labor, and capital to produce goods or services.

Traditional Economy

An economic system based on customs, habits, and traditions from the past.

Command Economy

An economic system where a central authority or government makes all economic decisions.

Market Economy

An economic system where individuals make decisions based on supply and demand with little government involvement.

Mixed Economy

An economic system that combines traditional, command, and market systems.

Communism

A centralized economic system where the government owns and controls resources and production; associated with Karl Marx.

Problems with Communism

Lack of motivation, lack of choice, lack of freedom, and inefficiency due to government control.

Capitalism

An economic system where individuals own resources and make decisions based on self-interest and profit; associated with Adam Smith.

Problems with Capitalism

Inequality of wealth, profit prioritized over need, exploitation, and wasteful competition.

Socialism

An economic system where basic industries are owned by the government while individuals may own personal property.

Problems with Socialism

Limited incentives, lower efficiency, limited choices, and reduced productivity.

Public Good

Goods and services provided by the government for the benefit of all members of society.

Invisible Hand

The idea that individuals acting in their own self-interest benefit the economy as a whole.

Laissez-Faire

The idea that the government should have little to no involvement in the economy.

Wealth of Nations

Adam Smith’s book explaining capitalism and free markets.

Class Struggle

The conflict between social classes, especially the rich and the working class.

Communist Manifesto

A book written by Karl Marx explaining communism and class struggle.

Positive Externality

A beneficial side effect of an economic activity that affects a third party.

Negative Externality

A harmful side effect of an economic activity that affects a third party.

Costs

What is given up when making a decision, such as time, money, or effort.

Benefits

The gains or advantages received from a decision or action.

Absolute Advantage

The ability to produce more of a good using fewer resources than another producer.

Comparative Advantage

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

Opportunity Cost

The value of the next best alternative that is given up when a choice is made.

Production Possibilities Curve (PPC)

A graph that shows the maximum combinations of goods that can be produced with available resources.

PPC Measures

Opportunity cost.

Point on the PPC

Represents maximum efficiency.

Point Inside the PPC

Represents inefficient use of resources.

Point Outside the PPC

Not attainable with current resources.

PPC Shift

Occurs with new technology or new resources.

What advantage should a country produce under and why?

A country should produce goods it has a comparative advantage in because it can produce them at a lower opportunity cost.

Why is the Production Possibilities Curve downward sloping?

The PPC is downward sloping because producing more of one good requires giving up some of another due to limited resources.

What are the 5 guidelines of the Production Possibilities Curve?

The PPC is downward sloping, points on the curve show maximum efficiency, points inside show inefficiency, points outside are not attainable now, and the curve can shift outward with new technology or new resources.