Ch. 1: Economics Foundations & Models Flashcards
3 important ideas about markets
- People are rational.
- People respond to economic incentives.
- Optimal decisions are made at the margin.
3 Fundamental Economic Questions
1) What goods will be produced?
2) How will the goods be produced?
3) Who will RECEIVE the goods produced?
Who determines how goods will be produced?
Firms
What determines who will receive the goods and services produced?
Income (higher income = more receiving)
4 Main Types of Economies
1) Traditional Economy (always been that way)
2) Command/Centrally Planned Economies (gov’t or sole leader’s regulation of economy)
3) Market Economy (NO GOV’T involvement in economy)
4) Mixed Economy (some gov’t, some free)
Market Economy
decisions of households & firms interacting in markets determine allocation of economic resources
Centrally Planned Economy
gov’t determine how economic resources should be allocated
US as example of Mixed Economy
Social Security/Minimum Wage, but still market economy
Productive Efficiency
good or service is produced with the LOWEST POSSIBLE COST
Allocative Efficiency
production is in accordance with consumer preferences
Voluntary Exchange
both buyer and seller of a product are made better off by the transaction
Economic Model
SIMPLIFIED version of reality used to analyze real-world economic situations
Positive Analysis
analysis of what IS
Normative Analysis
analysis of what OUGHT to be
Microeconomics
how households and firms make choices, how they interact in markets, & how the gov’t attempts to influence their choices
Micro vs. Macro Issues
Micro: how consumers react to changes in price, how firms decide what prices to charge
Macro: why economies experience recession & unemployment. why some economies grow faster than others, what determines the inflation rate
Innovation
practical application of an invention
Revenue
total amount received for selling a good/service (R = price x units sold)
Profit
Profit = R - Costs
Accounting Profit
explicit costs
Economic Profit
implicit & explicit costs (opportunity cost)
Factors of Production
labor, capital, natural resources, & entrepreneurial ability
Physical Capital
physical, manufactured goods that are used to produce other goods/services (Computers, factories, trucks, etc)
Scarcity
wants are unlimited, resources available to fulfill those wants are limited
