Unit One Flashcards
Positive statement
Claims that attempt to describe the world as it is
Claim is reinforced by data
Facts
Normative statements
Claims that are made to prescribe how the world should be
Opinions
Economic system
An organized way of providing needs and wants to a society
Society has infinite demands, finite resources
Three big questions of economics
What to produce
How to produce it
For whom to produce it
Three economic systems
Traditional, command, market (us is market based but not all though)
Command economy
A central authority decides the what, how, and for whom
The decisions are made by the government, people have little choice
Market economy
People and private firms decide what, how, and for whole
Markets must exist in this economy
Market
A mechanism that allows people to exchange goods and services
Advantages are efficiency, disadvantages are no equity
Mixed economy
An economic system that adopts features of both a command economy and a market economy
All world economies are mixed economies to some degree
Specialization
Also known as the division of labor
Everyone works in a field in which he/she has a comparative advantage
People use their income to purchase other goods
Trade offs
With every decision there is a choice (a trade-off). Everything has a cost
“There is no such thing as a free lunch”
People behave rationally
People make choices to benefit themselves (and not hurt themselves)
Needs
Peoples’ needs are highly individualized
Self interest does not equal greed
People are self interested
Self interest to Adam smith was discussed within an ethical context
Ceteris paribus
Latin for with all things being equal
We study economic events frozen in time with all variables held constant
Economics
The study of how people make choices/decisions based on the use of scarce resources
Scarcity
The limited supply of a good/resource
The basic problem that economics studies
Microeconomics
The study of decisions made by individuals and firms
Macroeconomics
The study of the decisions made by nations with respect to open and closed economies
Production possibilities frontier
Shows the trade off in the production of two goods
PPF can be nosed out due to gains from specialization
The opportunity cost of moving from one point to another can be calculated using the PPF
All points on the PPF are equally efficient
Production
The process of creating goods and services
Factors of production
The resources required to produce the goods that are demanded by consumers
Aka inputs
Land
Natural resources which are scarce
Labor
People with their efforts, abilities, and skills
Also known as human capital
