ECONOMIC Flashcards
What is the definition of a “Positive Statement”?
- the statement may be correct or incorrect, but it is stating a fact
- Example: In 202, 20% of homicides were linked to organized crime or street gangs.
What is the definition of a “Normative Statement”
A normative statement makes a claim about how the world should be.
- Example: Local governments in Canada need to initiate community-supported programs to reduce organized crime
What is the Economic Problem?
- The needs and wants of people are seemingly unlimited
- But the resources available to satisfy needs and wants are limited (Scarce)
Opportunity Cost:
Opportunity Cost: is defined as the utility of the best-forgone alternative
- Decision-makers must keep in mind the opportunity cost of each alternative
The Fundamental Economic Questions
1.) what to produce?
2.) how to produce?
3.) for whom to produce? (how is the economic pie divided?)
WHAT TO PRODUCE?
- What goods and services should be produced, and in what quantities?
- A society must determine how much of each of the many possible goods and services it will make, and when they will be produced
FOR WHOM ARE GOODS PRODUCED?
- Society must decide how the economic pie is divided up.
- More formally, how is the national product divided among different households?
- Do people who work harder get more?
- should it be divided up equally?
- Communissm or Socialism
Economic Efficiency
TWO KEY MEASURES:
(1) Allocative Efficiency
- Produce the goods and services people want most
(2) Productive Efficiency
- Economize resources in the production of goods and services to minimize the real costs of production
Allocative Efficiency
Produce the goods and services people want most.
Productive Efficiency
- Economize resources in the production of goods and services to minimize the real costs of production
Economic Systems
Given scarce resources, how do large, complex societies answer the three basic economic questions?
Economic systems are the basic arrangements made by societies to solve financial problems.
The 3 Economic Systems
(1) Traditional economies
- focus on non-economic concerns and have tight social constraints.
(2) Market Economies
- are consumer-centered and innovative but create inequality and instability
(3) Command Economies
- Have a plan that directs how all economic resources will be used. These economies equalize incomes but often lack freedom
MARKET SYSTEM
- A market is a set of arrangements between buyers and sellers that allows them to trade items for set prices
- Individuals are free to pursue their own self-interest.
Bases on private ownership of economic resources (private property rights) and the use of markets in making economic decisions
- often referred to as capitalism
- Government performs only the political functions of upholding the legal systems and maintaining public security
Benefits of a Market System
Consumer Sovereignty: the decision of what to produce is ultimately guided by the needs and wants of households in their role as consumers
Consumers use their dollar to “vote” on what types of goods and services should be produced based on the role of prices as a crucial signaling device.
Promotes Innovation
Drawbacks of a Market System
Unequal income distribution
Negative externalities - such as pollution
Instability - recessions and unemployment
The Command System
DEFINITION: A central authority (government) makes most of the major economic decisions
- In a Command economy, all productive property - natural resources and capital - is in the hands of government.
Benefits of a Command System
- Direct control over income distribution and the allocation of capital goods, which could promote economic development
Drawbacks of a Command System
- Planning difficulties - how to know what millions of people want
- Misplaced incentives, inefficiencies, and lack of freedom
