Module 0 Notes Flashcards
A diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market. Households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.
Circular Flow Diagram
An economy where economic decisions are passed down from government authority and where the government owns the
resources.
Command Economy
The way in which different workers divide required tasks to produce a good or service.
Division of Labour
The study of how humans make choices under conditions of scarcity. For instance, we study how consumers spend their
income, how workers allocate time between work and leisure, and how business choose what and how to produce.
Economics
When the average cost of producing each individual unit declines as total output increases. For instance, in auto making, companies can reduce the unit cost per car by making large quantities of a particular make of car. This partly explains why auto makers tend to be large firms with large factories
Economies of Scale
Products (goods and services) made domestically and sold abroad. This include merchandise sales to other countries (e.g. cars, TV, cell phones), sale of commodities (e.g. grain, oil, gold) and sale of services (e.g. foreign tourism into the country, consulting by domestic firms in foreign countries).
Exports
Economic policies that involve government spending and taxes. It includes what governments spend resources on (health care, education, national defense, etc) and how they collect taxes (sales taxes like the GST, income taxes, corporate taxes, etc).
Fiscal Policy
The expanding cultural, political, and economic connections between people around the world.
Globalization
A market in which firms are sellers of what they produce and households are buyers. We also include firms purchasing from other firms (for instance, farmers will
purchase equipment from manufacturers and financial services from Banks).
Goods and Services Market
Measure of the size of total production in an economy. It provides a measure of how much an economy can make to support local communities.
Gross Domestic Product (GDP)
Products (goods and services) made abroad and then sold domestically. This include merchandise sales into our
Canada (e.g. cars, TV, cell phones), purchase of commodities (e.g. grain, oil, gold) and purchase of services (e.g. Canadian tourism into other countries, consulting by foreign firms in to Canada).
Imports
The market in which households sell their labor as workers to business
firms or other employers
Labor Market
The branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
Macroeconomics
Interaction between potential buyers and sellers; a combination of demand
and supply
Market
An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand.
Market Economy
The branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
Microeconomics
Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
Monetary Policy
System where private individuals or groups of private individuals own and operate the means of production (resources and businesses)
Private Enterprise
When human wants for goods and services exceed the available supply. For instance, households have limited incomes that cannot meet all their wants. Individuals have only 24 hours in a day to work, study, and play
Scarcity
When workers or firms focus on particular tasks for which they are well-suited within the overall production process. Often leads to higher productivity as workers can produce more goods in the same time
Specialization
Typically an agricultural economy where things are done the same as they have always been done. Most exchanges are through barter and direct trades. Individuals know each other and often have formal and informal social bonds.
Traditional Economy
A representation of an object or situation that is simplified while including
enough of the key features to help us understand the object or situation
Theory
A market where the buyers and sellers make transactions in violation of one or more government regulations. For instance, working ‘under the table’ means that workers do not have to pay income taxes and businesses do not record payments to these workers.
Underground Economy
When the mix of goods produced represents the mix that society most desires. Occurs when firms are
producing the optimal quantity of each output.
Allocative efficiency
All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent. It is the boundary of the opportunity set
Budget constraint
When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production. The concept also applies to individuals and to firms.
Comparative advantage
Adam Smith’s concept that individuals’ self-interested behavior can lead to positive social outcomes. It is the idea that firms,
motivated by profit, and household, motivated to maximize family welfare, lead to an economic outcome that maximizes social welfare
Invisible hand
As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units. For instance, first slice of pizza gives more utility than the second slice of pizza
Law of diminishing marginal utility
As we add additional increments of resources, such as labor or capital, to producing a good or service, the marginal
benefit from those additional increments will decline. So adding more labor increases output but each incremental
increase gets smaller and smaller
Law of diminishing returns
Examination of decisions on the margin, meaning a little more or a little less from the status quo.
Marginal analysis
Statement which describes how the world should be.
Normative statement
Measures cost by what we give up/forfeit in exchange.
Opportunity cost
All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
Opportunity set
Statement which describes the world as it is
Positive statement
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
Production possibilities frontier (PPF)
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or
service).
Productive efficiency
Costs that we make in the past that we cannot recover
Sunk costs
Satisfaction, usefulness, or value one obtains from consuming
goods and services
Utility
