Unit 1 – What is economics

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Chapter 1.1 – scarcity and the science of economics

The fundamental economic problems

  • Societies do not have enough productive resources to satisfy everyone’s wants and needs
  • Scarcity – fundamental economic problem of meeting people’s virtually unlimited wants with scarce resources
  • Economics – social science dealing with how people satisfy seemingly unlimited and competing wants with the carful use of scarce resources
  • Need – basic requirement for survival, including food, clothing, and shelter
  • Want – something we would like to have but is not necessary for survival
  • There is no such thing as a free lunch

Three basic questions

  • What to produce
  • How to produce
  • For whom to produce

The factors of production

  • The factors of production – productive resources that make up the four categories of land, capital, labor, and entrepreneurs
  • Land – resources or other gifts of nature not created by human effort
  • Capital or capital goods – tools, equipment, and factories used in the production of goods and services
  • Labor – people with all their efforts, abilities, and skills
  • Entrepreneur – risk taking individual in search of profits

The scope of economics

  • Gross domestic product – dollar value of all final goods, services, and structures produced within a country’s borders during a one-year period
  • Using that comprehensive measurement of output, a country can analyze, explain, and predict the future.

Chapter 1.2 – basic economic concepts

Goods, services, and consumers

  • Good – tangible economic product that is useful, relatively scarce, and transferable to others
  • Consumer good – good intended for final use by consumers rather than businesses
  • Durable good – good that lasts for a least three years when used regularly
  • Nondurable good – good that wears out or lasts for less than three years when used regularly
  • Service – work or labor performed for someone
  • Consumers – people who use goods and services to satisfy their wants and needs

Value, utility, and wealth

  • Value – monetary worth of a good or service as determined by the market
  • Paradox of value – apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item
  • Utility – ability or capacity of a good or service to be useful and give satisfaction to someone
  • Wealth – sum of tangible economic goods that are scarce, useful, and transferable from one person to another

The circular flow of economic activity

  • Market – meeting place of mechanism that allows buyers and sellers to come together
  • Factor market – market where the factors of production are bought and sold
  • Product market – market where goods and services are bought and sold

Productivity and economic growth

  • Economic growth – increase in a nation’s total output of goods and services over time
  • Productivity – measure of the amount of output produced with a given amount of productive factors
  • Human capital – sum of people’s skills, ability, health, knowledge and motivation
  • Investing in education can have substantial payoffs
  • Division of labor – division of work into a number of separate tasks to be performed by different workers
  • Specialization – assignment of tasks to the workers, factories, regions, or nations that can perform them more efficiently
  • Economic interdependence – mutual dependency of one person’s, firm’s, or region’s economic activities on another’s
Economics Unit 6 – Money, Banking, and the Fed

1.3 – economic choices and decision making

Tradeoffs and opportunity cost

  • Trade-off – alternative that is available whenever a choice is to be made
  • Opportunity cost – cost of the next best alternative use of money, time, or resources when making a choice

Production possibilities

  • Production possibilities frontier – diagram representing the maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed
  • Identifying possible alternatives
  • Fully employed resources
  • Opportunity cost
  • Economic growth

Thinking like an economist

  • Economic model – simplified version of a complex concept of behavior expressed in the form of an equation, graph, or illustration
  • Models are based on assumptions
  • Cost-benefit analysis – way of thinking about a choice that compares the cost of an action to its benefits
  • Take small incremental steps towards the final goal

The road ahead

  • Free enterprise economy – one in which consumers and privately-owned businesses have the freedom to operate for a profit with limited government intervention
  • Standard of living – the quality of life based on ownership of necessities and luxuries that make life easier
  • Economic issues are often debated during political campaigns
  • Provides a framework for analysis – a structure that helps explain how things are organized and understand why and how the world changes

Chapter 2 – economic systems and decisions making

2.1 – economic systems

  • Economic system – organized way in which a society provides for the wants and needs of its people

Traditional economies

  • Traditional economy – economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit or custom
  • Advantage – everyone knows what role to play
  • Disadvantage – discourage new ideas and new ways to doing things
  • Lower standard of living

Command economies

  • Command economy – system with a central authority that makes the major economic decisions
  • Advantage – can change direction drastically
  • Disadvantage – ignore the basic wants and needs of customers; incentive to fill their quotas instead of producing a good product; requires a large decision-making bureaucracy; reward for individual initiative are rare in a command economy

Market economies

  • Market economy – economic system in which supply, demand, and the prie system help people make economic decisions and allocate resources
  • Market – meeting place or mechanism that allows buyers and sellers to come together
  • Capitalism – economic system in which private citizens own and use the factors of production in order to generate profits
  • Advantages – individual freedom; adjusts gradually to change over time; relatively small degree of government interference; decision making in decentralized; variety of goods and services; high degree of consumer satisfaction
  • Disadvantages – does not provide for everyone; may not provide enough goods and services; high degree of uncertainty

Mixed economies

  • Mixed economy – economic system that has some combination of traditional, command, and market economies
  • Socialism – political and economic system in which the government owns and controls some factors of production
  • Communism – economic and political system in which all factors of production are collectively owned and controlled by the state
  • Advantages – provides assistance for some people who might otherwise be left out
  • Disadvantages – cost of benefits can mean higher costs for citizens overall

2.2 – evaluating economic performance


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