UNIT 1 Flashcards
What is economics the study of?
Economics is the study of scarcity and choice.
What is individual choice
Every economic issue involves, at its
most basic level, individual choice—decisions by individuals about what to do and what not to do.
Economy
An economy is a system for coordinating a
society’s productive and consumptive
activities.
Market Economy
In a market economy, the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions
Property rights
Property rights establish ownership
and grant individuals the right to trade
goods and services with each other.
marginal analysis
Marginal analysis is the study of the
costs and benefits of doing a little bit
more of an activity versus a little bit less.
resource
A resource is anything that can be used
to produce something else.
land
Land refers to all resources that come
from nature, such as minerals, timber and
petroleum.
labor
Labor is the effort of workers.
capital
Capital refers to manufactured goods
used to make other goods and services.
entrepreneurship
Entrepreneurship describes the efforts
of entrepreneurs in organizing resources
for production, taking risks to create new
enterprises, and innovating to develop
new products and production processes.
scarce resource
A scarce resource is not available in
sufficient quantities to satisfy all the various
ways a society wants to use it.
microeconomics
Microeconomics is the study of how
people make decisions and how those
decisions interact.
macroeconomics
Macroeconomics is concerned with the
overall ups and downs in the economy.
economic aggregate
Economic aggregates are economic
measures that summarize data across
many different markets.
positive economics
Positive economics is the branch of
economic analysis that describes the way
the economy actually works.
normative economics
Normative economics makes prescriptions
about the way the economy should work.
tradeoff
You make a trade-off when you give up
something in order to have something else.
PPC
The production possibilities curve
illustrates the trade-offs facing an economy
that produces only two goods. It shows the
maximum quantity of one good that can be
produced for each possible quantity of the
other goods produced.
efficiency
An economy is efficient if there is no way to
make anyone better off without making at least one person worse off.
Technology
Technology is the technical means for
producing goods and services.
market economy
In a market economy, individuals engage in
trade: they provide goods and services to
others and receive goods and services in
return.
gains from trade
There are gains from trade: people can get
more of what they want through trade than
they could if they tried to be self-sufficient.
comparative advantage
An individual has a comparative
advantage in producing a good or service if
the opportunity cost of producing the good or
service is lower for that individual than for
other people.
specialization
This increase in output is due to
specialization: each person specializes in
the task that he or she is good at performing.
absolute advantage
An individual has an absolute advantage
in producing a good or service if he or she
can make more of it with a given amount of
time and resources. Having an absolute
advantage is not the same thing as having a
comparative advantage.
utility
Utility is a measure of personal satisfaction.
util
A util is a unit of utility.
marginal utility
The marginal utility of a good or service is
the change in total utility generated by
consuming one additional unit of that good or
service.
marginal utility curve
The marginal utility curve shows
how marginal utility depends on the quantity
of a good or service consumed.
principle of diminishing marginal utility
According to the principle of diminishing
marginal utility, each successive unit of a
good or service consumed adds less to the total
utility than does the previous unit.
budget constraints
A budget constraint limits the cost of a
consumer’s consumption bundle to no more
than the consumer’s income.
consumers consumption possibilities
A consumer’s consumption possibilities
is the set of all consumption bundles that are
affordable, given the consumer’s income and
prevailing prices.
consumer budget line
A consumer’s budget line shows the
consumption bundles available to a consumer
who spends all of his or her income.
optimal consumption bundle
A consumer’s optimal consumption
bundle is the consumption bundle that
maximizes the consumer’s total utility given
his or her budget constraint.
marginal utility per dollar
The marginal utility per dollar spent
on a good or service is the additional utility
from spending one more dollar on that good
or service.
optimal consumption rule
The optimal consumption rule says
that in order to maximize utility, a consumer
must equate the marginal utility per dollar
spent on each good and service in the
consumption bundle.
Scarcity
Economics is the study of scarcity. Scarcity is unlimited wants but limited resources.
Micro vs macro
Microeconomics is the study of smaller units such as individuals, firms, and markets. Macroeconomics is the study of the large economy as a whole or economic aggregates.
tradeoffs
Trade-offs are all the alternatives that we give up when we make a choice.
four factors of production
The four factors of production are land, labor, capital, and entrepreneurship.
opportunity cost
Opportunity cost is the most desirable alternative given up when you make a choice.
utility
Utility refers to satisfaction, while marginal means additional.
allocate
To allocate means to distribute.
price
Price is the amount the buyer pays, and cost is the amount the seller pays.
profit
Profit is calculated as total revenue minus total costs.
consumer goods vs capital goods
Consumer goods are created for direct consumption, while capital goods are created for indirect consumption.
investments
Investment is the money spent by businesses to improve their production.
productivity
Productivity is a measure of efficiency that shows the number of outputs per unit of input.
Three Economic Questions include:
- What goods and services should be produced? 2. How should these goods and services be produced? 3. Who consumes these goods and services?
economic system
The economic system is the method used by a society to produce and distribute goods and services.
centrally planned economy
In a centrally planned economy (communism), the government owns all the resources and answers all the questions.
free market economy
In a free market economy (capitalism), individuals own all the resources and answer all the questions.
mixed economy
A mixed economy is a system with free markets and some government intervention, which is the case in the U.S.
Why does Productivity create wealth?
Countries with free markets, property rights, and the Rule of Law have historically seen greater economic growth because they are more productive.
Production Possibilities Curve
A PPC is a model that shows alternative ways that an economy can use its scarce resources. It shows scarcity, trade-offs, opportunity costs, and efficiency.
Ceteris Paribus
All other conditions remain the same.
Constant Opportunity Cost
Resources are easily
adaptable for producing either good. Straight line PPC.
Increasing Opportunity Cost
As you produce more of any good, the opportunity cost will increase. Resources are not easily adaptable to producing both goods. Bowed out (concave) PPC.
Three PPC Shifters
- Changes in resources quantity or quality
- Changes in technology
- Changes in trade
Capital Goods and Future Growth
Countries that produce more capital goods will have more growth in the future.
Specialization and Trade
Countries should trade if they have a relatively lower opportunity cost.
Countries should specialize in the good that is cheaper for them to produce (the one in which they have a comparative advantage)
Comparative Advantage
The producer with the lowest opportunity cost.
Absolute Advantage
The producer that can produce the most
output or requires the least amount of
inputs.
Calculating Comparative Advantage for Output Questions
OOO
Output = Other goes Over
Calculating Comparative Advantage for Input Questions
IOU
Input = Other goes Under
Explicit Costs
The traditional out-of-pocket
costs associated with making
a decision.
Terms of Trade
The agreed-upon conditions
that would benefit both
countries.
Implicit Costs
The opportunity costs of
making a decision.
Cost-Benefit Analysis
The process used to measure
the benefits of a decision
minus the costs associated
with making that decision.
Marginal Analysis
Making decisions based on
increments.
Marginal Utility
The additional satisfaction
you get by consuming
additional units of goods or
services.
Law of Diminishing Marginal Utility
As you consume anything, the additional satisfaction that you receive will
eventually, start to decrease.
MB = MC
You will continue to consume until
Marginal Benefit = Marginal Cost
Utility Maximizing Rule
The consumer’s dollar should be spent so that the marginal utility per dollar of each good equals each other.
