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.