Test 1 Flashcards
Economics issues involve
Individual choice, decision by individuals about what to do
An economy is
A system that coordinates choices about production with choices about consumption
Market economy
The decisions of individual producers and consumers largely determine what, how, and for whom to produce
Command economy
Industry is publicly owned and a central authority makes production and consumptions decisions
Why have most command economies failed the test of history and market economies have succeeded? There are two primary reasons for the success of markets.
Incentives and property rights
What is a powerful incentive
Price
Why would the president of a company take good care of her factory and machinery if those capital resources were owned by the government?
She is unlikely to produce a high quality product, or invest in new and better ways of producing those goods, if she cannot enjoy the rewards from those investments.
In a command economy, the government owns the resources or property. So a farmer doesn’t
Own his land
What the four resources?
Land, labor, capital, and entrepreneurship
Labor
(the effort of workers)
Land
including timber, water, minerals, and all other resources that come from nature),
Capital
machinery, buildings, tools, and all other manufactured goods used to make other goods and services)
Entrepreneurship
risk taking, innovation, and the organization of resources for production).
Economic resources are
limited/scarce which implies that the goods/services they produce must be limited
Choices imply that
imply that things are given up
Opportunity cost
The Real Cost of Something is What You Must Give Up to Get It
Suppose you purchase a digital camera that costs $100, and you decided not to buy a pair of running shoes that also cost $100. The opportunity cost of buying the camera
buying the camera is $100, plus the forgone enjoyment of the running shoes.
The marginal benefit should always exceed
Marginal cost
Marginal decisions are
Involve trade-offs at the margin. Comparing the costs and benefits of doing more of an activity versus a little less
Marginal benefit
The gain of something doing one more time
Marginal analysis
The study of the costs and benefits of doing a little bit more of an activity than a little less
Microeconomics
The branch of economics concerned with how individuals make decisions and how these decisions interact. Microeconomics focuses on choices made by individuals, households, or firms—the smaller parts that make up the economy as a whole.
Macroeconomics
The branch of economics that studies the overall ups and downs of the economy.
Macro focuses on economic aggregates—economic measures such as the unemployment rate, the inflation rate, and gross domestic product—that summarize data across many different markets.
Macroeconomics focuses on the bigger picture.
Positive economics
Economic analysis used to answer questions about the way the world works.
Statements of “what is” or “what will be.” No value judgments are applied.
Normative economics
economic analysis that involves saying how the world should work. Statements of “what should be.” These involve value judgments of what is “right,” “wrong,” or “best.”
All production possibilities models have simplifying assumptions
Available supply of resources is fixed in quantity and quality at this point in time.
Technology is constant during analysis.
Economy produces only two types of products
Points on the curve represent
maximum possible combinations of Pizza and Bulldozers given resources and technology
Points inside the curve represent
underemployment or idle resources
Points outside the curve are
unattainable. We do not have the resources or technology to produce at point U
Efficient in allocation
refers to the point that this society wants above all others
