Chapter 1 : Economic Issues and Concepts Flashcards
Why is an economy with unlimited products and income impossible?
We in live in a world of scarcity. Supplies of resources are sufficient to produce only a small fraction of goods and services for people to consume.
What is “Economy”?
The study of the use of scarce resources to distribute to the people.
What are 3 categories of society’s resources?
Land, Labor and Capital
What decision does scarcity imply?
It makes a society choose on what goods/services to produce and in what quantities.
Explain the concept of “Opportunity Cost”
It emphasizes the problem of scarcity and choice. Cost is measured by the value of one alternative over the next best alternative that is given up.
What does “Production Possibilities Boundaries” show?
Shows all the combination of goods that can be produced by an economy whose resources are fully employed. Movement from one point to another requires a reallocation of resources.
What are 4 basic questions that must be answered in all economies?
1- What is produced and how?
2- What is consumed and by whom?
3- Is productive capacity growing?
4- Why are resources sometimes idle?
Issues of government policy enters the discussion.
What is the difference between Macroeconomics and Microeconomics?
Microeconomics is the study of individual and business decisions. Macroeconomics is the study of decisions made by the country and government. (Much larger scale)
Why is a market economy “self-organizing”?
When consumers and producers act independently to pursue their own self-interest, the collective outcome is coordinated.
Why is self-interest is efficient for an economy?
The nation will be organized so as to produce goods and services that people want to purchase and produce them with the least possible amount of resources.
What central role is played by incentives and self-interest? (Decision Makers)
Consumers, Producers and Governments.
What are the motives of producers and consumers?
Consumers -> maximize their well-being and utility.
Producers -> maximize their profits.
What is the “Flow of Income and Expenditure”?
Displays the interaction between consumers and producers through goods and factor markets.
What is “Specialization”?
Allocation of different jobs to different people.
Why is “Specialization” used in modern economies?
Specialization and division of labour necessitate the exchange of goods and services. Exchange takes place in markets and is facilitated by the use of money.
What is the cause of globalization?
Reduction in transportation costs and the revolution in communication technology.
What the 4 types of economy systems?
1- Traditional Economy: Economic behaviour is based on tradition, custom and habit.
2- Command Economy: Economic behaviour is determined by some central authority. (Government, Dictator)
3- Free-Market Economy: Economic behaviour is the result of many number of independent decisions by consumers and producers.
4- Mixed Economies
It combines significant elements of all three economy system and determines economic behaviour. Every economy is mixed economy .
What happened in the 1980s with central planned economies?
Centrally planned economies failed to produce acceptable living standards for their citizens. They have now moved on toward a market with less state of command in their market.
Why do the governments play an important role in modern mixed economies?
They create and enforce important institutions such as private property and freedom of contract. They intervene in market failures and redistribute income in interests of equity.
