Unit 1 - The Nature and Importance of Economics Flashcards
Utility
The usefulness of a product
Economics
The study of choices made by individuals and societies in the use of scarce resources to satisfy wants and needs
Diminishing marginal utility (law)
- As a product’s consumption is increased, the satisfaction from it per a certain amount is decreased.
- Ex: a person’s first glass of water brings more satisfaction than a person’s seventh glass.
Economic Profit
The financial revenue of a business minus costs (including opportunity costs).
Productivity
The real output produced per unit of input over a given period of time
Positive Economics
The study of the behavior of economic units within an economic system (i.e. tries to explain what will happen under certain conditions).
Normative Economics
Proposes ideas on what an economic scenario should ideally be. [i.e. tries to judge whether economic outcomes are good or bad and how they can be improved].
Positive Statements
- Facts expressed in a verifiable (or testable) manner [what is]
- Ex: “An increase in the money supply will lead to a higher rate of inflation”
The three questions of economics
- What gets produced (consumption)
- How it gets produced (production)
- For whom products are produced (distribution)
Factors of production
- Land (natural resources)
- Labor (human capital)
- Capital (real)
- Entrepreneurship (capitalist system only)
Financial compensation for factors of production
- Land: Rent
- Labor: Wages, Salaries and Benefits
- Capital: Interest and Dividends
- Entrepreneurship: Profit
Capital v. Consumer Goods
- Capital: Produced and then used to produce other goods and services
- Consumer: Goods produced for consumption
Production
- Transforms resources into goods and services.
- Factors of production are the inputs into production; goods and services of value are the outputs of production.
Opportunity cost
What we forego when we make a decision
Real Capital Goods
Used to produce other goods and services
Investment
- Using resources to produce new capital.
- Capital is the accumulation of previous investment.
- The opportunity cost of every investment in capital is foregone present consumption.
The economic problem
Given scarce resources, how do complex societies answer the three economic questions?
Rationality
- Individual take actions to achieve their objectives
- Eg. If someone was offered a higher wage, it’s acceptance is expected
“Other Things Being Equal” (ceteris paribus)
- Compensates the inability to control particular variables in the real world. For theories and models, economists assume that other things (eg. variables) are equal or unchanged
- Eg. “As the price of a good increases, fewer units of the good will be demanded other things being equal”
Stock
The quantity that exists at any particular point in time [eg. There were 14.1 million persons in the labour force in August 1990]
Flow
The change in the quantity occurring during a period of time [eg. 157,000 persons were added to the labour force during the 12 months prior to August 1990]
Economic prediction
Prediction of events based on the fulfillment of certain conditions
Variables
Anything that can assume different values under different circumstances.
Endogenous variables
Variables that are explained within a model
Increasing opportunity cost
As the production/purchase of one product is raised, the amount of alternative products that are given up raises even higher, as resources are not equally efficient in all uses
Economic growth
An increase in real per capita output
Normative Statements
Value judgements of ideal scenarios in economics (ex: the money supply should be reduced)
Exogenous Variables
Variables determined by factors outside a model (exogenous variables are important in economics and affect endogenous variables)
Economic Forecast
Gives the specific value of a particular variable
Economic Policy
A course of actions to achieve economic objectives
Constant
Any value that does not vary.
Economic Goods
Goods which have an opportunity cost
Free goods
Goods that don’t have an opportunity cost and are not analyzed in economics
Production Possibilities Schedule
Table showing various combinations of goods that an economy can produce if it uses all of its resources
Shifts in PP curve:
- Parallel: Both industries are affected equally
- Non - parallel: Both industries are not affected equally
Factor Combination/Substitution
The combination/substitution of factors of production, typically to produce the most amount of goods at the lowest cost
Increasing opportunity cost
As the production of one product is raised, the amount of alternative products that are given up raises even higher, as resources are not equally efficient in all uses
Law of diminishing returns
As factors of production are switched from one good to another, the rise of output of the latter good decreases
Reasons for imperfect mobility of factors of production
- Capital (like factories and machinery) will need to be redesigned and re-organized
- Labor will need to be re-trained
Time Preferences
Whether individuals in an economy prefer immediate consumption or delayed consumption for investment.
Potential growth
A growth in possible economic output (and thereby shifting the PPC) when resources are fully utilized
Public Enterprise
Business activity owned by the government
Public v. Private
- Public: Owned by the government
- Private: Owned by private (i.e. non-public) producers and institutions
Marketplace
The interaction between consumers and producers
Entrepreneur
An organizer of a business who takes a greater financial risk to do so (by identifying a demand and establishing businesses to produce goods/services in response)
Capitalism
An economic system in which trade is privately organized for profit
Labour market
The supply and need of employment [within one or more sectors]
Economic Growth
An increase in real per capita output
Economic Developments
An increase in living standards from economic output, such as literacy, healthcare and housing.
Technological Changes/Development
The development of better production of goods and services
Economic system
- A system that transforms its resources into goods and services [i.e. set of institutions and practices that determine the production, consumption and distribution of scarce resources].
- Economic systems should provide economic stability, growth and security.
Command (Socialist) economy
A central government either directly or indirectly sets output targets, incomes, and prices
Laissez - Faire (Free Enterprise) economy
Individuals and firms pursue their own self-interests without any central direction or regulation.
Mixed economy
An economy mixing central oversight and private entrepreneurship
The goals of government
- Minimizing market inefficiencies
- Providing public goods
- Redistributing income in an equitable manner
- Stabilizing the macroeconomy by reducing unemployment and inflation
- Protecting personal freedom and private property
- Enforcing signed contracts and agreements
Free Enterprise
Individual producers must organize and distribute the production of products and services
Price
The amount that a product sells for per unit (not the same as cost), reflecting what society is willing to pay for a good or service and is the coordinating mechanism in a free market
Sustainability
The conservation of natural resources to safeguard the economic needs of future generations
Equality
Economic outcomes are similar for different people/social groups
Equity (a normative concept)
Economic outcomes where every person or social group receives a desirable economic outcome corresponding to each person’s need [the idea of fairness]
Economic well-being
A multidimensional concept on living standards of members of an economy, including
- Present/future financial security
- Ability to acquire necessities
- Ability to make economic choices that permit satisfaction
Consumer Sovereignty
Consumer Sovereignty: Consumers dictate what will be produced by choosing what to purchase.
Production Possibilities Curve/Frontier (transformation curve):
Illustrates opportunity cost with two possible products as opposite axis, assuming all resources are utilized
Production Possibilities Point
A combination of goods or services an economy can produce
Actual growth
The annual rate (i.e. actual) change of national output
Conditions for Economic Growth
The increase in the national income/GDP of a country OR the country’s productive capacity (being a country’s ability to generate national income.
Conditions for Economic Development
Investment in capital rather than products intended for consumption drives economic growth → Allows the PP curve to shift to the top-right
Producer Sovereignty
Producers dictate what to produce before convincing consumers to buy it
Inequality
Unequal income distribution, wealth or human opportunity
Economic security
- The stability of income and resources for a standard of living in the present and future
- Is ensured by minimum wage laws, social security, subsidies, welfare, and other means
Consumer sector
Sell factor inputs and use money from selling inputs to purchase consumer goods
Business sector
Purchases resources from consumers/other firms and uses them to create goods to sell for profit
Government sector
Taxes money from businesses and consumers, provides goods and services through agencies and departments at three levels, and regulates economic activity
Interdependence
The exchange of resources and goods to satisfy the needs of a person or group.
Specialization
The concentration of labor from a broader set of less efficient outputs to fewer, more efficient outputs
Market Mechanism
A network of markets and price systems based on supply and demand of goods
Market Economy Elements
- Private property
- Freedom of enterprise
- Profit maximization
- Competition
Mixed private enterprise economy
A free enterprise economic system with government intervention
Price system
A system in which market forces determine prices
Elements of a Price System
- No. of consumers willing to pay
- Quantities consumers willing to pay at particular price
- Quantities sellers willing to supply at particular price
- No. of producers creating a good
Economic stability
A high rate of employment with little inflation
Barter
The exchange of goods and services without a formal currency
Crown land/corporation
Land/corporation owned by the federal or provincial government
Hidden/Underground Economy
Economic activity not included in official statistics
How govt affects distribution in a market economy
- Subsidizing prices
- Increasing incomes (ex: welfare)
- Providing social services (ex: education)
Consumption - Free Enterprise
Consumption is determined by what consumers are willing to pay for goods and services based on their income and wants
Production - Free Enterprise
Production is determined by the most effective method of production in order to earn profit.
Distribution - Free Enterprise
Distribution is determined by the income people receive for their contributions (mostly labor) to the production of goods (i.e. the income of an individual answers the for whom question)
Consumption - Command Economy
Consumption is determined by what a central authority decides what to produce, and is therefore less personalized than in a market economy
Production - Command Economy
Production is determined by the state’s goals and methods of production outlined by its plans
Distribution - Command Economy
Distribution is determined by the state’s decision (such as a central committee) of the contributions a worker has made to the economy.
Independence
The lack of control from outside economic factors or institutions
Pros of Free Enterprise
- Individuals enjoy freedom of choice in what they can produce and consume
- It is very efficient and promotes innovation and development
Pros of Command Economies
- Can maintain full employment
- Can shift resources from one use to another with ease
