Chapter 1 Flashcards
Define Economics
Economics is the study of the use of scarce resources to satisfy unlimited human wants
What are the factors of production?
These are resources used to produce goods and services. They are divided into the basic categories of land, labour and capital
What is land?
Land includes all natural endowments such as arable land, forests, lakes, crude oil, minerals
What is labour?
Labour includes all mental and physical human resources including entrepreneurial capacity and management skills
What is capital?
Capital includes all manufactured aids to production, such as tools, machinery, and buildings
Define Goods
Tangible products, such as cars or shoes
Define Services
Intangible products, such as legal services and education
Define Production
The act of making goods or services
Define Consumption
The act of using goods or services to satisfy wants
What is an economy?
An economy is a system in which scarce resources - land, labour, capital are allocated among competing uses
What are the three types of economies?
traditional, command and free-market economies
Define traditional economy
An economy in which behaviour is based mostly on tradition, custom, habit. e.g. young men follow their father’s occupation.
Define command economy
An economy in which most economic decisions are made by a central planning authority.
Define free market economy/market economy
An economy in which most economic decisions are made by private households and firms.
Define mixed economy
An economy in which some economic decisions are made by firms and households and some by the government.
Define opportunity cost
A value a person could have received but passed up in pursuit of another option.
What is the production possibilities boundary?
A curve showing which alternative combinations of output can be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations.
Define resource allocation
The allocation of an economy’s scarce resources among alternative uses.
Define microeconomics
The study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system.
Define macroeconomics
The study of the determination of economic aggregates such as total output, employment, and growth.
Decision makers
- Incentives
- Rational self interest principle
- Maximization principle
Decision makers
- Incentives
- Rational self interest principle
- Maximization principle
Marginalisation principle
you only buy something if the marginal benefit exceeds the marginal cost.
An economy based on free-market transactions is?
Self organizing
What is the foundation of the economic order that Adam Smith developed?
Self interest and not benevolence is the foundation of the economic order.
Self-interested buyers and sellers respond to?
Incentives
Identify the types of decision makers in any economy
Producers, Consumers, Government
Consumers are assumed to make decisions that will?
Maximize their utility
Producers are assumed to make decisions that will?
Maximize their profits
Consumers and producers are assumed to weigh the costs and benefits of their decisions…
at the margin
for a consumer, the benefit of buying “one more” unit of a good must outweigh the ______ of buying that unit
marginal cost
Define specialization of labour
The specialization of individual workers in the production of particular goods or services.
Why is specialization of labour more efficient than universal self-sufficiency?
Individuals or countries can become more proficient and efficient at the activity.
Individuals or countries can focus on what they do relatively well while leaving everything else to be done by others.
Consider the market for doctors’ services. In what way has this market taken advantage of the specialization of labour?
Existence of both general practitioners and specific specialists makes the doctors’ services more efficient and less time-consuming.
Define barter
Used in early trading. Trading of goods directly for other goods. Double coincidence of wants.
How is specialization related to trade?
Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own. Countries produce a surplus of the product they specialize in and trade it for a different surplus good of another country.
Define globalization
Globalization is the growing interdependence of world economies through an increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and through the more widespread diffusion of technology
What are the two major causes of globalization?
The rapid reduction in transportation costs and the revolution in information technology that have occurred in the past 50 years.
How has the cost of moving products around the world decreased greatly over the last half of the 20th century?
Because of containerization and the increasing size of ships.
What are the challenges of globalization?
Canadian firms relocate production facilities to LICs meaning domestic workers are laid off and must search for new jobs, get retrained.
The location of production facilities in these LICs have lower environmental rights or human rights records. This raises questions about the standards that should be followed by Canadian-owned firms in foreign lands.
The allocation of different jobs to different people is referred to as the…
specialization of labour
The specialization within the production process of a particular product is referred to as the…
division of labour
When people specialize in their activities, it becomes necessary for them to ______ to obtain most of the things they need or want.
Trade.
Specialization must be accompanied by trade. People who produce only one thing must trade most of it with other people to obtain all the other things they want.
Money greatly facilitates trade, which itself facilitates _____
specialization
Why is trade facilitated by money?
because it eliminates the cumbersome system of barter.
Why is barter cumbersome or inefficient?
Because the system requires a double coincidence of wants which is very laborious and time consuming as you have to find out the person who want each other’s goods
Outline the great debate between command economies and free market economies
Adam Smith = stresses importance of efficiency of free market economies and allocation of resources
Karl Marx = stresses equity and distribution of income
What is marginal thinking?
requires decision makers to evaluate whether the benefit of one more unit of something is greater than its cost.
Markets are based on what?
based on voluntary transactions and free choice
How can the government improve market outcomes?
Public policy may promote efficiency. Govt may alter market outcome to promote equity. If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided.
