Unit 2: The Language of Economics – Flashcards
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Scarcity
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The condition that arises because society does not have enough resources to produce all the things people would like to have
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Four Factors of Production
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Land, Labor, Capital, Entrepreneurship
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Land
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Refers to the "gifts of nature" or natural resources not created by human effort
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Labor
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People with all their efforts, abilities, and skills which may vary in size overtime
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Capital
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The tools, equipment, and factories used in the production of goods and services
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Entrepreneurship
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Entrepreneurs are risk-takers in search of profits
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Three Basic Questions
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An economy must answer these three basic questions: 1) What to produce? 2) How to produce? 3) For Whom to produce?
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Economics
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The study of human efforts to satisfy what appear to be unlimited & competing wants through the careful use of relatively scarce resources
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Trade-Off
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Alternative Choice
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Opportunity Cost
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The cost of the next best alternative use of money, time, or resources when one choice is made rather than another
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Production Possibilities Frontier
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Shows various combinations of goods and/or services an economy can produce
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Need
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A basic requirement for survival
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Want
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A means of expressing a need
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Free Product
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Something no one can own and no price can be attached to
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Economic Product
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Goods and services that are useful, relatively scarce, and transferable to others
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Value
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Something that has a worth that can be expressed in dollars and cents
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Diamond-Water Paradox
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Some things that are essential to life, like water, are worthless compared to unessential things, like diamonds
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Utility
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The capacity to be useful to someone
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Wealth
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The sum of those economic products that are tangible, scarce, useful, and transferable from one person to another
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Production
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The process of creating goods and services
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Productivity
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Using all productive resources efficiently
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Specialization
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Means that productive inputs do whatever task they are able to do best
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Free Enterprise Economy
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An economy in which consumers and privately owned businesses, rather than government, make the majority of the WHAT, HOW, and FOR WHOM decisions
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Economic System
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An organized way of providing for the wants and needs of their people
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Traditional Economy
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The allocation of scarce resources and nearly all other economic activity stems from ritual, habit, or custom
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Command Economy
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One in which a central authority makes most of the WHAT, HOW, and FOR WHOM decisions
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Market Economy
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People and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM decisions
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Economic and Social Goals
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-Economic Freedom -Economic Efficiency -Economic Equity -Economic Security -Full Employment -Price Stability -Economic Growth
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Economic Freedom
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People place a high value on the freedom to make their own economic decisions
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Economic Efficiency
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Americans recognize that resources are scarce & that factors of production must be used widely
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Economic Equity
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Many people believe in equal pay for equal work
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Economic Security
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Americans desire protection from such adverse economic events as layoffs and illnesses
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Full Employment
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People want their economic system to provide as many jobs as possible
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Price Stability
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Makes budgeting easier and adds a degree of certainty to the future
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Economic Growth
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Most people hope to increase their economic livelihood for the better
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Capitalism
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A system in which private citizens own the factors of production
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Voluntary Exchange
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The act of buyers & sellers freely and willingly engaging in market transactions
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Private Property
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People have the right and privilege to control their possessions as they wish
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Motivation of Profit
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The extent to which persons or organizations are better off at the end of a period than they were at the beginning
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Consumer Sovereignty
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Describes the role of the consumer as sovereign, or ruler, of the market
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Economic Institution
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Persons & organizations that use or represent the factors of production
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Sole Proprietorship
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A business owned and run by one person
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General Partnership
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A business jointly owned by two or more persons
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Corporation
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A form of business organization recognized by law as a separate legal entity having all the rights of an individual
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Stockholders
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Corporations often sell ownership parts of the firm (known as stock) to investors
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Board of Directors
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Direct the corporation's business by setting broad policies & goals
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Microeconomics
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The part of economics that deals with behavior and decision-making by small units, such as individuals and firms
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Demand
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The desire, ability, and willingness to buy a product
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Demand Schedule
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A listing that shows the quantity demanded at all prices that might prevail in the market at a given time
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Demand Curve
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Tells the quantity that consumers will demand at each and every price
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Law of Demand
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States that the demand for an economic product varies inversely with its price
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Change in Quantity Demanded
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This movement along the demand curve shows a change in quantity demanded, or a change in the quantity of the product purchased in response to a change in price
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Income Effect
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The change in quantity demanded because of a change in the consumer's real income
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Substitution Effect
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The change in quantity demanded because of the change in relative price of the product
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Change in Demand
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The entire demand curve shifts to the right (increase) or to the left (decrease)
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Substitute
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A product that can be used in place of other products
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Complement
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The increase of one increases the use of another
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Diminishing Marginal Utility
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States that the more units of a certain economic product a person acquires, the less eager that person is to buy more
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Demand Elasticity
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The extent to which changes in price cause changes in the quantity demanded
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Elastic Demand
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A relatively small change in price causes a relatively large change in the quantity demanded
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Inelastic Demand
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A given change in price causes a relatively smaller change in the quantity demanded
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Supply
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A schedule of quantities that would be offered for sale at all possible prices that could prevail in the market
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Supply Schedule
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Tells the quantities offered at each and every possible market price
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Supply Curve
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Slopes upward and to the right to reflect the tendency of suppliers to offer greater quantities for sale at higher prices
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Law of Supply
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States that the quantity supplied, or offered for sale, varies directly with its price
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Quantity Supplied
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The amount that producers bring to market at any one price
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Change in Quantity Supplied
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The change in amount offered for sale in response to a change in price. This is represented by movement on the supply curve
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Change in Supply
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Producers offer different amounts of products for sale at all possible prices. This is represented by a shift in the supply curve to the left or the right
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Taxes
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The cost of production goes up causing the supply curve to shift to the left
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Subsidies
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Government payments to individuals, businesses, or other groups to encourage or protect a certain type of economic activity, which causes the supply curve to shift to the right
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Supply Elasticity
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Tells the way in which changes in the quantity supplied are affected by changes in price
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Theory of Production
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Deals with the relationship between the factors of production & the output of goods and services
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Input
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Anything you can "put in" to the economy that will help to produce an economic output
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Output
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Anything you get out of the economy
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Short Run
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A period of production that allows producers to change only the amount of variable inputs (labor)
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Long Run
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A period of production long enough for all inputs (capital) to vary
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Law of Variable Proportions
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States that in the short run, output will change as one input is varied while the others are held constant
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Marginal Product
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Extra output generated by adding one more unit of variable input
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1st Stage of Production- Increasing Returns
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The stage where marginal product is increasing
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2nd Stage of Production- Diminishing Returns
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As more units of a certain variable input are added to a constant amount of resources, total output rises but only at a diminishing rate
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3rd Stage of Production- Negative Returns
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Too many variable inputs (workers) have been added and are causing a negative marginal product
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Fixed Cost
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A cost that is incurred even if work is idle and output is zero
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Variable Cost
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A cost that changes when output changes
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Total Cost
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The sum of the fixed and variable costs
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Marginal Cost
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Extra cost incurred when a business produces one additional unit of a product
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Revenue
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Number of units sold multiplied by average price per unit
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Market Equilibrium
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A situation in which prices are relatively stable and quantity supplied= quantity demanded
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Price Ceiling
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The maximum legal price that can be charged
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Price Floor
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The lowest legal price that can be done
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Surplus
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A situation in which the quantity supplied is greater than authority demanded
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Shortage
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A situation in which quantity demanded is greater than quantity supplied
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Macroeconomics
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The part of economics that deals with the economy as a whole, and with the behavior and decision-making by large units, such as labor unions and governments
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Laissez-Faire
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A philosophy that government should not interfere with commerce or trade
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Market Structure
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The nature and degree of competition among firms operating in the same industry
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Pure Competition
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A type of market structure that includes independent and well-informed buyers and sellers of exactly the same economic product
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Monopolistic Competition
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Market structure that has all the conditions of pure competition except for identical products
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Oligopoly
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A market situation in which a few very large sellers of a product dominate
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Negative Externality
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Actions that harm a third party
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Positive Externality
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Actions that benefit a third party
