Unit 1 Flashcards
Positive statement
Claim that attempts to describe the world as it is
FACT
Normative statement
Claims meant to prescribe how the world should be
OPINION
Economic system
An organized way of providing needs and wants to a society
Infinite demands, finite resources
3 Big Questions of Economics
- WHAT to produce
- HOW to produce it
- FOR WHOM to produce it for
3 economic systems
Traditional, command , market
Describe a traditional economy
The allocation of scarce resources and other economic activity stems from tradition
Roles are defined by customs
Advantages/disadvantages of a traditional economy
Advantages:
- everyone has a part
- jobs are filled
- everyone gets something
Disadvantages:
- no room for innovation or improvement
- dependent on the environment
- jobs aren’t given based on skill, if someone is bad at their job, they won’t be productive
Command economy
A central authority (government) decides what, how and for whom to produce
People have little choice
Ex. France under Louis XIV, North Korea, Soviet Union
Advantages and disadvantages of a command economy
Advantages: -everyone gets something -efficient Disadvantages: -no say in what you want -easily corrupt
Market economy
People and private firms decide what, how, and for whom to produce
Markets must exist in this economy
Examples: Walmart, BK, Ugg
Advantages and disadvantages of a market economy
Advantages: -able to target who you want -can make own decisions to benefit own business -improvement Disadvantages: -market failure can lead to crisis
Mixed economy
An economic system that adopts concepts from both command and market economies
All world economies are mixed to some degree
What did Adam Smith believe about economy?
- Self interest + competition (+ a little bit of morality) =best economic system
- Invisible hand
- Division of labor
- A country’s wealth is not a measure of how much gold or silver it has, but how many goods it produces
Division of labor (specialization)
-everyone works in a field where they have a comparative advantage
-people use their income to purchase goods
Advantages: if people are skilled, they will make innovations
Private property rights
Rights granted by the government
- Right to use the good
- Right to earn income from the good
- Right to transfer the good to others
Mixed economy
Why is it the best economic system?
An economic system in which both the state and private sector direct the economy
It is the best economic system because a central authority is directing somewhat, but individual can make their own decisions
Expropriation
Taking over property
What is the relation of protection from expropriation and GDP per person?
A strong positive relation
Why are property rights important in a market economy?
Control the free market by establishing rules
Production Possibilities Frontier
Shows the trade off in production of 2 goods
Factors of production (other term)
Aka inputs
The resource required to produce the goods that are demanded by the consumer
LAND, LABOR and CAPITAL
Production
creating goods and services
Factors of production: LAND
Natural resources are scarce
Factors of production: LABOR
Aka Human capital
People with efforts, abilites, and skills
Factors of production: CAPITAL
Capital goods, aka capital stock & physical capital
tools, equipment, machinery and factories used in the production of goods and services
Input
Factors of production (land, labor, capital) or time
Output
A good or service being create
What is the difference between a bowed out PPF and a straight PPF
Straight: constant cost model, equally adaptable resources
Bowed: increasing cost, specialized resources
Absolute advantage vs comparative advantage
Absolute: compares the productivity
Comparative: compares the opportunity cost, who has the lowest OC
Can something have a double AA? A double CA
There can be a double AA but not a double CA
How to calculate OC with Inputs
Amount produced/amount lost
How to calculate OC with Outputs
Amount lost/amount produced
Resources in a market economy are commonly allocated by…
The price system
An outward shift in the production Possiblities curve of am economy can be caused by an increase in
Output
A nation is producing at a point inside its PPF, what is a possibility of this outcome?
The nation has experienced an economic recession and has unemployment
