Chapter 1 Flashcards
(27 cards)
What is economics?
Economics is the science of household management.
What does scarcity mean?
Scarcity refers to unlimited wants but limited means.
What does scarcity necessitate?
Scarcity necessitates choice.
What is opportunity cost?
Opportunity cost is the value to the decision maker of the best alternative forgone.
Provide an example of opportunity cost.
The total economic cost of concert A is $25 (out-of-pocket cost) + $15 (opportunity cost) = $40.
This example illustrates how an economist considers both out-of-pocket costs and the value of the next best alternative.
What is microeconomics?
Microeconomics focuses on individual parts of the economy, such as consumers and firms.
What is macroeconomics?
Macroeconomics focuses on the economy as a whole and studies aggregate economic behavior.
What are the three central questions of a mixed economy?
- What goods and services must be produced and in what quantities? 2. How should each of the goods and services be produced? 3. For whom should the goods and services be produced?
What are the three mechanisms to solve economic questions?
- Traditional: same goods produced by each generation. 2. Command: State makes decisions. 3. Market: Market mechanism drives decisions.
What is capitalism?
Capitalism is an economic system where the focus lies on private property rights.
What is a centrally planned economy?
A centrally planned economy is where the government controls production and distribution.
What are flow variables in economics?
Flow variables are measured over a period of time, such as production, income, and spending.
What is the essence of economic activity?
The essence of economic activity is production.
What are the factors of production?
- Natural resources 2. Labour 3. Capital 4. Entrepreneurship 5. Technology
What is the reward to factors of production?
Income is the reward to factors of production, including rent, wages, interest, and profit.
What are the components of spending in the economy?
Spending includes consumption expenditure by households, investment by firms, government spending, and foreign sector spending.
What are the two markets in circular flows?
The two markets are the goods market and the factor market.
What is the circular flow of goods and services?
Households sell factors of production to firms in the factor market, and firms sell goods and services to households in the goods market.
What is the flow of income and spending?
The flow of income and spending happens in reverse order to that of goods and services.
What are injections into the circular flow?
Injections include government spending, investment spending, and exports.
What are withdrawals from the circular flow?
Withdrawals include taxes, savings, and imports.
What is macroeconomic theory?
Macroeconomic theory involves simplification, abstraction, and modeling for explanation, prediction, and policy.
What are the five key objectives of macroeconomic policy?
- Full employment 2. Balance of payments stability 3. Economic growth 4. Equitable distribution of income 5. Price stability
What are the instruments of macroeconomic policy?
Instruments include monetary policy (interest rates) and fiscal policy (taxes and government spending).
