Unit 1 - Basic Economic Concepts - DONE Flashcards
Ceteris Paribus
“All else equal” - used as a basis to compare things and models
GDP
Gross Domestic Profit (all of the money that passes a point in a circular flow model in a year)
Command Economy
A system such as socialism in which the government makes all economic decisions
Capitalism
(Free market economy)
A system where there is a free market and decisions are made on what can be sold for the most money and made for the least
The basic economic problem
Scarcity - there are finite resources, but infinite human wants (people have to choose what to produce and consume)
Opportunity Cost
The forgone benefit of the next best option when making a decision
The three economic questions
- What to produce?
- How to produce?
- For whom to produce?
Three economic questions, command economy answers
- What to produce? - What the government wants produced
- How to produce? - How the government wants it produced
- For whom to produce? - For everyone, equally
Three economic questions, free market economy answers
- What to produce? - What the consumers send signals to producers for
- How to produce? - At the lowest cost possible
- For whom to produce? - Consumers who have the money to buy
The purpose of a production possibilities curve
To compare the ability to allocate resources for production
PPC (ppf)
Production possibilities curve (frontier)
The slope of the PPC is
Opportunity cost
Factors of production definition
The things/resources that make production possible
Factor Endowment
Amount of each factor of production a person, company, society, or country has, determining their ability to produce a given product
Linear PPC
Perfectly transferrable resources
Curved PPC
Not perfectly transferrable resources
Absolute Advantage
When a country is able to produce more of a good or service than another country with the same amount of resources [higher up on PPC axis]
Comparative advantage
When a country can produce a good at a lower opportunity cost (of another good) –> countries should specialize in these goods
Terms of trade
The cost at which countries are willing to sell goods to one another
Marginal Utility
The benefit gained from consumption of the next good or service
Law of diminishing marginal utility
The consumption of each extra product results in a decrease in the amount of satisfaction gained
Land
The factor of production encompassing: anything produced by nature, natural resources, paid rent
Labor
The factor of production encompassing: time and effort of workers, paid wages
Capital
The factor of production encompassing: anything produced before to produce in the future, machines, buildings, etc. , paid interest
Entrepreneurship
The factor of production encompassing: creative ability to bring other factors of production together, paid profit
Resource Allocation
Involves answering 3 questions: What goods and services to produce? How to produce? And who consumes those goods and services?
Implicit Costs
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
Explicit Costs
Input costs that require an outlay of money by the firm - actual spending
Consumer Choice Theory
Relates consumers’ wants and preferences to the goods and services they actually buy
Marginal Cost
The additional benefit to a consumer from consuming one more unit of a good or service
Marginal Analysis
Analysis that involves comparing marginal benefits (MB) and marginal costs (MC) - helps individuals (firms) decide whether to increase, decrease, or maintain their consumption (production) levels
Optimal Quantity/Choice
Achieved when MB = MC or where total benefit is maximized
Good
Goods are materials that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product.
Service
A type of economic activity that is intangible, is not stored and does not result in ownership. A service is consumed at the point of sale.
PPC
Unattainable
Outside PPC
PPC
Inefficient
Inside PPC
PPC
Efficient
On PPC
Country Focused on future term growth
More focus on capital goods
Marginal
Additional; the change that results from an additional unit
Utility
Ability or capacity of a good or service to be useful and give satisfaction to someone
Private Property
Free Market Economy - property owned by individuals or companies
Utility maximizing rule
Equating the ratio of the marginal utility of a good to its price for all goods
Marginal Utility Per Dollar
The additional utility from spending one more dollar on that good or service (MU/P)
Causes of an outward shift of PPC
Change in resource quantity, quality; change in technology; change in trade
Consumer Surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it (benefit - cost)
Total Utility (TU)
The total amount of satisfaction obtained from consumption of a good or service
Cost-benefit analysis
A decision-making process in which you compare what you will sacrifice and gain by a specific action - MB = MC
