Economics Unit 1

Chapter 1: Basic Economic Concepts

1. Economics & Scarcity: Economics is the study of how people make choices under scarcity (limited resources).

2. Opportunity Cost: The value of the next best alternative given up when making a choice.

3. Production Possibilities Frontier (PPF): A graph showing the maximum feasible production combinations of two goods. Efficient points lie on the curve; unattainable points are outside, and inefficient points are inside.

4. Shape of PPF:

   • Bowed outward: Occurs when opportunity cost increases as resources are reallocated, typically when people have different skills.

   • Straight line: Occurs when opportunity cost is constant, typically when people have the same skills.

5. Economic Growth: Increase in an economy’s production of goods and services, achieved through generalized or specialized growth. Sources include technological advancements, capital accumulation, and labor force expansion.

6. Circular Flow Model: Describes the movement of money and resources between households and firms in two markets:

   • Households are buyers in the goods/services market and sellers in the factor/input market.

   • Firms are buyers in the factor/input market and sellers in the goods/services market.

7. Marginal Benefit & Marginal Cost: Marginal benefit refers to the additional satisfaction gained from consuming one more unit, while marginal cost is the cost of producing that unit.

8. Positive & Normative Analysis:

   • Positive: Objective, fact-based analysis.

   • Normative: Subjective analysis based on opinions or value judgments.

9. Incentive: A factor that motivates individuals to take action or make a choice.

10. Correlation vs. Causation: Correlation refers to a relationship between two variables, while causation means one variable directly causes changes in the other.

11. Fallacy of Composition: The mistaken belief that what is true for an individual is also true for the group.

Chapter 2: Markets & Supply and Demand

1. Market: A system where buyers and sellers exchange goods and services.

2. Demand Schedule: Shows the quantity demanded at different prices.

3. Law of Demand: As price decreases, quantity demanded increases (and vice versa).

4. Determinants of Demand: Factors like income, prices of related goods, tastes, expectations, and number of buyers that affect demand.

5. Normal vs. Inferior Goods:

   • Normal goods: Demand increases as income increases.

   • Inferior goods: Demand decreases as income increases.

6. Substitutes vs. Complements:

   • Substitutes: Goods that can replace each other.

   • Complements: Goods that are consumed together.

7. Supply Schedule: Shows the quantity supplied at different prices.

8. Law of Supply: As price increases, quantity supplied increases (and vice versa).

9. Determinants of Supply: Factors like input prices, technology, number of sellers, and expectations that affect supply.

10. Market Equilibrium: The point where the quantity demanded equals the quantity supplied.

11. Shortage & Surplus: A shortage occurs when demand exceeds supply, and a surplus occurs when supply exceeds demand.

12. Movement vs. Shift in Curves: Movement refers to a change in quantity due to price changes; a shift refers to a change in demand or supply due to non-price factors.

Chapter 38: Poverty

1. Relative vs. Absolute Poverty:

   • Relative poverty: Poverty measured in relation to others in society.

   • Absolute poverty: A condition where basic needs cannot be met.

2. Poverty Line: A threshold that defines the minimum income needed to meet basic living needs.

3. Adjusted for Family Size: The poverty line is adjusted depending on family size to reflect the varying cost of living.

4. Poverty Rate: The percentage of people living below the poverty line.

5. Poverty Gap: The difference between the poverty line and the income of those living in poverty.

6. Causes of Poverty: Include factors like lack of education, unemployment, and health crises.

7. Cash vs. In-Kind Transfers:

   • Cash programs: Direct financial assistance like TANF or SSI.

   • In-kind programs: Non-cash benefits like food stamps, Medicaid, or housing assistance.

Chapter 34: Inequality

1. Measurement of Inequality: Income distribution is measured to understand how wealth is shared across society.

2. Money Income: The total income received by individuals from all sources.

3. Government Income Transfers: Include social security payments and unemployment compensation as part of money income.

4. In-kind Transfers: Non-cash benefits, such as food assistance or health services, are not counted as money income.

5. Capital Gains Tax: Affects income distribution by taxing profits from investments.

6. Wealth Inequality: Measures the distribution of assets, with a focus on the disparity between wealth accumulation.

7. Causes of Inequality: Include education, inheritance, discrimination, and globalization.

8. Intergenerational Income Elasticity: The degree to which income is passed down across generations.

9. Facts about Income Inequality:

   • Income and wealth gaps are increasing.

   • The middle class is shrinking.

   • Upper-income groups are growing richer faster.

10. Gini Coefficient: A measure of income inequality, with 0 representing perfect equality and 1 representing perfect inequality.

Chapter 9: Global Economic Issues

1. Developing Countries: Mostly located in Latin America, Africa, and Asia.

2. GDP, GNP, and GNI: GDP measures the total output within a country; GNP measures the total income of a country's residents; GNI includes GDP plus net income from abroad.

3. GDP per capita vs. GNI per capita: Both are measures of a country’s prosperity per person.

4. World’s Poorest Country: Burundi is currently the poorest.

5. Limitations of GDP/GNI: These measures do not account for inequality, environmental degradation, or non-market activities.

6. Standards of Living: Indicators like life expectancy, infant mortality rate, literacy rate, etc., are better for assessing well-being.

7. Future Poverty Causes: Factors like coronavirus, climate change, and conflict.

8. Fragile Contexts: Countries or regions that face difficulties due to political instability, poor governance, or conflict.

9. Economic Growth vs. Economic Development: Growth refers to the increase in economic output, while development refers to broader improvements in quality of life.

10. Capital-Intensive vs. Labor-Intensive Technology:

• Capital-intensive: Technologies that require significant capital investment.

• Labor-intensive: Technologies that require significant human labor.

11. Investment in Human Capital: Investments in education, training, and healthcare to improve the productivity and well-being of a population.