Economics Unit 1 Review Flashcards
What is Economics?
Economics is the study of choices made under conditions of scarcity.
What is Scarcity
The fundamental problem of having seemingly unlimited human wants in a world of limited resources.
What is Economic choice
Since resources are limited, choices must be made by individuals, firms, and governments on how to allocate these resources efficiently.
What is Microeconomics?
Focuses on the behavior and decision-making of small economic units, such as individuals, households, and businesses. It studies topics like supply and demand in specific markets, the price mechanism, and consumer behavior.
What is Macroeconomics?
Looks at the economy as a whole, dealing with national economic issues such as inflation, unemployment, economic growth, and fiscal policy.
What is Positive Economics?
Objective and fact-based; describes “what is” without any judgments. For example, “A rise in taxes will reduce disposable income.”
What is Normative Economics
Subjective and value-based; describes “what ought to be.” For example, “The government should reduce taxes to increase disposable income.”
All decisions involve what?
which are the alternatives that must be given up when one choice is made over another.
Marginal Analysis
Involves comparing additional benefits and additional costs when making decisions. It is about “thinking on the margin” or making choices based on incremental changes.
Opportunity cost
The most desirable alternative that is given up as a result of a decision.
Five Key Economic Functions
- Society has unlimited wants but limited resources (scarcity).
- Due to scarcity, choices must be made. Every choice has a cost (a trade-off).
- Everyone’s goal is to make choices that maximize their satisfaction. People act in their own “self-interest.”
- Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice.
- Real-life situations can be explained and analyzed through simplified models and graphs.
Factors of Production
- Land: Natural resources used to produce goods and services.
- Labor: Human effort used in production, which includes physical and mental effort.
- Capital: Manufactured goods that are used to make other goods and services.
- Entrepreneurship: The ability to combine land, labor, and capital to create and produce goods and services.
Production Possibility Curve
A graph that shows alternative ways to use an economy’s scarce resources.
Key Assumptions to the PPC
- Only two goods can be produced.
- Full employment of resources.
- Fixed resources (Ceteris Paribus).
- Fixed technology.
The possibility curve demonstrates what?
Demonstrates concepts like scarcity, trade-offs, opportunity costs, and efficiency. Points inside the curve represent inefficiency, points on the curve represent efficiency, and points outside the curve are unattainable given current resources.
Shifting the Production Possibilities Curve
- Change in Resource Quantity or Quality: More resources or better quality resources shift the PPC outward.
- Change in Technology: Advances in technology can produce more output with the same amount of resources.
- Change in Trade: Access to trade can allow for consumption beyond the PPC.
Types of Economic Systems
- Centrally-Planned Economy (Communism):
- The government owns all resources and makes all economic decisions.
- Examples: Cuba, North Korea.
- Advantages: Low unemployment, job security, equal incomes.
- Disadvantages: No incentive to work harder or innovate, poor-quality goods, shortages.
- Free Market Economy (Capitalism):
- Individuals own resources and make decisions based on profit motive.
- Prices and distribution of goods are determined by competition and self-interest.
- Advantages: Efficient production of goods, wide variety of goods, high-quality goods.
- Disadvantages: Can lead to economic inequalities, overproduction of negative externalities.
- Mixed Economy: Combines elements of both free markets and government intervention.
Law of demand
There is an inverse relationship between price and quantity demanded. As price decreases, the quantity demanded increases, and vice versa.
Law of supply
There is a direct relationship between price and quantity supplied. As price increases, the quantity supplied increases, and vice versa.
Market Equilibrium
The point where supply and demand curves intersect, indicating the price at which the quantity demanded equals the quantity supplied.
Shifts in Supply and Demand
* Demand Shifts
- Tastes and preferences.
- Number of consumers.
- Price of related goods (substitutes and complements).
- Income.
- Future expectations.
Shifts in Supply and Demand
* Supply Shifts
- Prices of resources.
- Number of producers.
- Technology.
- Taxes and subsidies.
- Expectations of future profit.
- Prices of resources.
- Number of producers.
- Technology.
- Taxes and subsidies.
- Expectations of future profit.
- Price Controls:
- Price Ceiling: A maximum price set by the government, below the equilibrium price, leading to shortages.
- Price Floor: A minimum price set by the government, above the equilibrium price, leading to surpluses.
- Subsidies: Government payments to producers to encourage production of certain goods.
- Excise Taxes: Taxes on the production or sale of specific goods, often used to discourage consumption of harmful goods.
- Import Quotas: Limits on the amount of a good that can be imported, intended to protect domestic producers.
Efficiency and Market Outcomes
- Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
- Producer Surplus: The difference between what producers are willing to accept for a good and what they actually receive.
- Deadweight Loss: A loss of total surplus that occurs when the quantity of a good that is bought and sold is below the market equilibrium quantity, often due to taxes, subsidies, or price controls.
