Fundamentals Flashcards
What are the two types of economics?
Macroeconomics
Microeconomics
Macroeconomics (Aggregate)
Looking at the state/country/global level where disasters/wars/pandemics can drastically have a toll on the economy
Ex: inflation or unemployment
Microeconomics
Opposite of macro
Smaller scale level (1-2) - individuals or markets affected by the weather or government regulation
Ex: gasoline
What are resources?
Relation to economics
Inputs that produce the goods and services
Also known as factors of production
What are the 4 categories of resources?
1) Land - natural resources
2) Labor - physical/mental activity
3) Capital - physical/human
4) Entrepreneurial ability - Land + Labor + Capital –> produce goods and services
What makes entrepreneurial ability different from capital?
Different from human capital (knowledge and skills that increase productivity) where one involves assumed risks and organizes resources in a productive process
Scarcity
Inability of limited resources to satisfy unlimited wants
Ex: farmland (food production) or give up for a car factory
Opportunity Cost (OC) "To see the unseen" (Frederic Bastiat)
Activity or opportunity one gave up for another (loss of time)
Value of the next best forgone alternative
How does opportunity cost relate to economics?
Individuals will want to make choices to maximize well-being or happiness in regard to not having enough resources or time
Rational Decision Making (key to economics)
1) Self Interest - do things that interest them
2) Marginal Decision Making - making choices in increments by evaluating benefits and costs
3) Optimization - make choices that maximize the overall benefit
Marginal Benefit (MB)
Additional benefit with more than one unit of activity
Marginal Cost (MC)
Additional cost with more than one unit of activity
Optimization
A) MB >= MC
B) MB < MC
A) Do it
B) Don’t do it
If there are less benefits, zero engagement compared to if more (+) people will engage
Ex: Budget constraint (influence)
Change in Total Benefit/Change in Quantity
Calculation for MB and MC
Optimal Level of Output
Similar concept when applying it to demand and supply
MB = MC
last unit of MB produced/consumed = MC of that unit
Production Possibilities Schedule
A table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology
Production Possibilities Frontier (PPF)
Graph to show the relationships between goods/services produced by fixed resources and technology
*Can show which production combos that are attainable and efficient
Does the opportunity cost change when PPF is a straight line?
No, the OC stays constant at every level of production
Describe what PPF means on the graph:
1) Falls on the PPF line
2) Falls (interior) left of PPF
3) Falls (exterior) right of PPF
1) possible/efficient
2) possible but inefficient
3) impossible with current resources and technology
Comparative Advantage (Critical in the world of scarcity - coined by David Ricardo)
Ability to produce a good or service at a lower relative opportunity cost than that of another producer
*Doesn’t mean one produces more goods
1) What would it mean if a producer had a comparative advantage?
2) Why would comparative advantage not work?
1) lower OC that they should specialize in the goods and to attain their other good (beans and corn) they would trade to be able to reach outside the PPF
2) Between X and Y (beans and corn) one cannot have a comparative advantage in both goods, then that would mean the OC are the same for both producers
Specialization
The practice of using available resources to produce a single good or service rather than multiple goods and services
1) Why would specialization help a worker?
2) How would specialization have a disadvantage?
1) Increases the productivity, more input = more goods produce and living standard rises
2) Can cause individuals and nations to become interdependent, will have to trade for goods they don’t want to produce
Terms of Trade
The price of one good, service, or resource in terms of another
- right cost at the OC between consumer and seller
Ex: too high, buyers won’t buy. too low, sellers won’t sell
Gains from Trade
The benefit or wealth that accrues to a buyer or seller as a result of trading one good, service, or resource for another
*($$$$) don’t equal wealth
Laws of Increasing Opportunity Costs
As production of a good increases, the OC of each additional unit rises
-as OC increases, the output increases
According to the law of increasing opportunity cost:
A) PPF is straight
B) PFF is curved (bowed)
A) The 2 units are identical - OC is assumed to be constant (in terms of micro - individual)
B) Different resources with different OCs (not constant) - in terms of macro
Circular Flow Model (dynamics of the economy)
model that describes how goods, services, resources and money flow back and forth in an economy
