Exam 1 Flashcards
Define economics
the study of how society manages its scarce resources
scarcity
the limited nature of society’s resources
Organize economic activity
aka “managing scarce resources” and meaning determining :
- WHAT to produce
- HOW to produce
- WHO gets it
3 types of economic systems
- Traditional economy
- command economy
- market economy
Traditional Economy
make what we already make
Who is the father of economics
Adam Smith
Command Economy
- decisions made by small group of people
- they ask WHAT/HOW to produce, and WHO gets it
Wealth of Nations- Invisible Hand
The Wealth of Nations,1776 –Households & firms act as if “led by an invisible hand” to promote general economic well-being (decentralized decision-making)
3 Divisions of labor
specialization, economies of scale, trade
Markets organize economic activity through______.
prices
What is an economic MODEL and what does it do
simplified representation
What is an economic ASSUMPTION and what does it do
simplifies the complex world
Ceteris Paribus
all else held constant
What is the Circular Flow Model (CFM)
visual model of the economy, shows how households and firms interact in markets
What 2 types of “actors” are involved in the CFM
Households
Firms
What 2 types of MARKETS are involved in the CFM
- Goods and Services
- Factors and Production
What 3 things are involved with Factors and Production
- land
- labor
- capital
In the CFM, what do households do
Households:
- own factors of production,sell/rent them to firms for income
- buy and consume G & S
In the CFM, what do firms do
Firms:
- buy/hire factors of production used to produce G&S
- sell G&S
What does Microeconomics focus on
focuses on individual decision makers
What does Macroeconomics focus on
study of economy-wide phenomena
What are the two roles of an economist
- Scientist
- Policy advisors
What does the scientific role of an economist do?
tries to EXPLAIN the world through the scientific method
What does the policy advisor role of an economist do
tries to IMPROVE the world
