1. Foundations of Economics Flashcards
Define opportunity cost
The next best alternative foregone when an economic decision is made
What are the factors of production used to produce goods and services
CELL Capital Entrepeneurship Land Labor
Define land as an FOP
All resources provided by nature used to produce goods - Natural capital
Define labor as an FOP
Physical and mental contribution of the existing workforce to production - human capital
Define capital as an FOP
Includes all buildings, officed, factories, machines, tools, infrastructure - physical capital, needed to produce things
Define entrepreneurship as an FOP
Organizing and risk taking
Define an economic good
useful to people but scarce
Define a free good
no opportunity cost - sun, air
A PPC curve shows…
Maximum combo of two types of output that can be produced in an economy at a given time when resources are used efficiently and state of tech is fixed
What does it mean to produce at an extreme point on the line? (close to either axis)
The economy would be dedicating more of its resources for one over the other
Points beyond the PPC are unattainable given..
The current amount of resources and state of technology
Points beyond the PPC are unattainable given..
The current amount of resources and state of technology- scarcity
Points within the PPC..
means unemployment or inefficient use of resources - (lack of) efficiency
Using FOPs more efficiently the economy could move closer to the PPC meaning..
actual economic growth
Why might productive efficiency (the economy using everything at its full extent) be bad?
- An unsustainable rate of resource use and extraction - threatening environment and sustainability
- could reduce production possibilities in the future
- could create costs for future economic well being
Why is the PPC concave?
Moving resources from the left to the right of the diagram increases opportunity costs- the FOPs for the products might not be interchangeable and the same
When might a PPC be straight?
Where there is constant opportunity costs perhaps for a combination of very similar or substitute goods (limes and lemons)
When might a PPC shift outwards?
A growth in production possibilities:
- changes in education system could improve quality of L
- increases in immigration could improve quantity and quality of L
- better educated pop. could develop improved tech
- new forms of energy (fuel) could increase quantity of resources produced
When might a PPC shift inwards?
A reduction in quantity or worsening of quality of FOPS
- wars
- epidemics
- natural disasters
Explain the role of firms in a TWO sector circular flow of income model (households and firms)
they are the productive units
- hire FOPs from households
- use factors to produce output sold to those households
- receive expenditure by those households
Explain the role of households in a TWO sector circular flow of income model (households and firms)
SRB
- supply FOPs to firms
- recieve income for factors
- buy stuff
Leakage
income that leaves the sector and is not passed on to domestic households by producers
3 types of leakage from the circular flow of income model
TIS
Tax- goes to gov
Imports- not everything people need is made locally, money would go to foreign producers
Savings- reserve income in banks, stock markets, pension funds - financial sector
3 types of injections into the circular flow of income model
GIE
Government spending- public amenities, infrast.,salaries
Investment- when the financial sector lends money to firms
Exports- foreign households and firms buy a country’s exports injecting money
Planned economy
- what how and for whom to produce is decided by the government
- resources collectively owned - arranged and planned by gov
- in theory in their best interests
free market economy
- prices used to ration goods and services
- private production
- demand and supply set wages and prices
- should be few cases of shortage and surplus
Name a disadvantage of pure free markets
- demerit goods could be overproduced, driven by high price thus high profit motive
- merit goods underprovided: only produced for those who can afford them
- resources may be used too quickly damaging environment when driven by high profit motive
- orphans, the sick and long term unemployed wont be able to look after themselves
- large firms may grow to dominate industries - high prices excessive power
Name a disadvantage
of planned economy
- too complicated to plan efficiently - misallocation
- no price system- resources wont be used efficiently
- output and quality may suffer- workers may be difficult to motivate when employment is guaranteed while gaining no share of profits
- loss of personal liberty and freedom of choice
- government may not share same aims and interests as the people
law of diminishing marginal utility
the satisfaction or utility someone derives from a product decreases as they consume more and more, ceterus pareibus
what is scarcity
resources are insufficient to satisfy unlimited human needs and wants
utility
total satisfaction received from consuming a good or service
