Unit 1: introduction to Economics Flashcards
PPC
shows us how much of two goods can be produced or consumed; shows opportunity cost of future decisions; line indicates limit to possible production
any point on PPC is productively efficient - important to find the point that is allocatively efficient
Circular flow of income
complete circular flow of income model includes five sectors: Households, Firms, Government, Financial institutions and Foreign countries.
leakage
flows of money that leaves the economy as saving, taxes, or imports
what happens when leakages are greater than injections
the money that flows out is greater than the amount that flows in, so the national income will fall as there will be less income circulating and the economy will shrink.
injections
investment, government spending and exports. They are all the money received by domestic firms that does not come directly from domestic households
equilibrium
leakages are equal to injections
free market economy
prices are used to ration goods and services, all production is in private hands, no government intervention
how can the PPC shift out
growth in production possibilities - changes in education system improve quality of labor, better educated population for improved technolohies, no forms of energy
factors of production
- land
- labor -
- capital - e.g. buildings, offices, factories, machines; spending money on capital = investment
- entrepreneurship
ceteris paribus
all other variables are equal
opportunity cost
the next best alternative that is given up when an economic decision is made
scarcity
there are unlimited human needs and wants to be met by limited resources
basic economic problem
what to produce ?
how to produce ?
for whom to produce ?
