Economics: Unit Review
Scarcity
Definition: Not enough resources for everyone to have everything they want for free.
Example: Money is something people want, but there isn't enough for everyone to have as much as they want for free.
Opportunity Cost
Definition: The value of the next best choice you give up when making a decision.
Example: Choosing to buy a burger instead of pizza. The opportunity cost is the pizza.
Microeconomics
Definition: Focuses on individual people and businesses and how they make decisions.
Example: A landlord increasing rent due to higher demand.
Macroeconomics
Definition: Looks at the economy as a whole, such as inflation, unemployment, or economic growth.
Example: Unemployment rates rising across the country.
Traditional Economy
Definition: Economy where people rely on customs, traditions, and bartering instead of money.
Example: Small villages where people farm, hunt, and trade goods instead of using cash.
Command Economy
Definition: The government controls everything, including production, prices, and distribution.
Example: North Korea’s government decides what products factories make and how much workers earn.
Pure Market Economy
Definition: Businesses and individuals make all decisions with no government involvement. Prices are set by supply and demand.
Example: No real-world examples, but the U.S. and Singapore are close.
Mixed Economy
Definition: Combination of market and command economies. Businesses have freedom, but the government regulates certain areas.
Example: Canada – Businesses operate freely, but the government provides public services like healthcare.
Production Possibilities Curve (PPC)
Definition: Shows all possible ways an economy can use its resources to produce two different goods.
Points on curve: Efficient use of resources.
Points inside curve: Inefficient use of resources.
Points outside curve: Not possible with current resources.
Gross Domestic Product (GDP)
Definition: Measures the total value of all goods and services produced within a country in a given period.
High GDP: Strong economy (more jobs, higher incomes).
Low GDP: Weak economy (less production, possible recession).
GDP Formula
Formula: GDP = C + I + G + (X - M)
C (Consumption): Household spending on goods and services.
I (Investment): Business spending on factories, equipment, and housing.
G (Government): Government spending on public services, roads, welfare.
X (Exports): Goods sold to other countries.
M (Imports): Goods bought from other countries.
(X - M): Net Exports (how much a country sells vs. buys from other countries).
Nominal GDP
Definition: GDP measured at current market prices, without adjusting for inflation.
Example: If GDP in 2020 was 1 trillion and in 2023 it is 1.5 trillion, it looks like the economy grew. However, inflation may mean actual growth is smaller.
Real GDP
Definition: GDP adjusted for inflation, showing actual growth in production.
Example: If Nominal GDP increased by 10% but prices also increased by 5%, Real GDP would only increase by 5%.
GDP per Capita
Definition: GDP divided by population, showing average economic output per person.
Formula: GDP per Capita = GDP / Population
Intermediate Good
Definition: Product used to make a final good, not counted in GDP to avoid double counting.
Example: Tires used in making a car. The final product is the car.
Final Good
Definition: A product sold to consumers for use, counted in GDP.
Example: A car you buy from a dealership.
Capital Good
Definition: A good used to produce other goods and services, not consumed directly. Counted in GDP only when newly produced under Investment (I).
Example: A bakery oven used to bake cakes.
Inflation
Definition: Increase in prices over time, reducing the value of money.
Example: A loaf of bread cost $5 last year but $6 this year.
Marginal Analysis
Definition: Evaluates whether to do one more unit of an activity by comparing its marginal benefit (MB) to marginal cost (MC).
Best for: "Should I do one more?" decisions.
Cost-Benefit Analysis (CBA)
Definition: Compares total costs and total benefits of a decision to determine the best option.
Formula: Total Benefits > Total Costs
Best for: Yes/no decisions or comparing multiple options.
Utility
Definition: Total satisfaction gained from consuming a product.
Marginal Utility
Definition: Additional satisfaction from consuming one more unit of a product.
Law of Diminishing Marginal Utility
Definition: As someone consumes additional units of a product, the marginal utility of each extra unit declines.
Adam Smith
"Father of Capitalism"
Invisible Hand: Markets regulate themselves through competition and self-interest.
Laissez-Faire: Limited government interference.
Division of Labor: Specialization increases productivity.
Karl Marx
"Father of Communism"
Co-wrote "The Communist Manifesto."
Criticized capitalism as exploitative and unfair.
Wanted a classless, stateless society where wealth is shared equally.
John Maynard Keynes
"Father of Modern Macroeconomics"
Believed government intervention could stabilize the economy.
Argued spending and taxes could prevent recessions.
Milton Friedman
Leader of Monetarism
Supported free markets.
Believed controlling money supply was the best way to manage the economy.
Opposed government spending, arguing it causes inflation.
Capitalism
Definition: System where private individuals and businesses own and control production, not the government.
Key Features:
Private Ownership
Free Market (Supply & Demand)
Competition-driven
Limited government involvement
Communism
Definition: System where the government owns all resources and production for a classless society.
Key Features:
No Private Property
Government Control
Wealth Distribution
Socialism
Definition: System where government and individuals share control of industries to reduce inequality.
Key Features:
Government controls key industries (healthcare, education).
Private property exists, but high taxes fund social programs.
Fascism
Definition: Authoritarian ideology emphasizing strict hierarchies, nationalism, and central control.
Key Features:
Authoritarian leadership (one leader/small ruling group).
Extreme nationalism.
Opposition is suppressed.
State influences the economy.