Unit 1 Introduction to Economics Test – Flashcards
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absolute advantage
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A nation has an absolute advantage over another person in the production of a good/service when it can produce more of the good using the same # of resources
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allocation (allocate)
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the action or process of allocating or distributing something.
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bond/IOU
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IOU (a signed document acknowledging a debt.) loan for capital investment
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closed economy
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an economy that does not interact with other economies in the world
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command economy
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-goods and resources allocated according to CENTRAL directions -EX. KOREA/STALIN RUSSIA
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commodity
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a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk
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comparative advantage
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Explains why there are MUTUAL GAINS from SPECIALIZATION and TRADE -occurs when a nation can produce a good at a LOWER OPPORTUNITY COST than another nation
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consumers
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a person who purchases goods and services for personal use.
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corporation
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A business owned by stockholders who share in its profits but are not personally responsible for its debts
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cost/benefit analysis
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A comparison of estimated costs and benefits of actions such as implementing a pollution control regulation, building a dam on a river, or preserving an area of forest.
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deficit
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the amount of money spent is more than the amount of money collected
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dividend
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A payment from profits by a company's Board of Director's to shareholders. (Dividends are issued on a regular basis and can be either increased or decreased).
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economics
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Economics is the study of: -activities with/without money that involves EXCHANGE and TRANSACTIONS -how people use PRODUCTIVE RESOURCES to PRODUCE and DISTRIBUTE GOODS and SERVICES -how people EARN a LIVING and how they "enjoy" life -WEALTH that can sustain INCOME (such as a house) -how to IMPROVE SOCIETY -who get WHAT and HOW MUCH -how society ALLOCATES SCARCE RESOURCES -satisfaction of UNLIMITED WANTS
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final goods & services
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A good/service purchased by the final user
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firms
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institutions that organize the production of goods and services
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free enterprise
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Economic system in which individuals and businesses are allowed to compete for profit with a minimum of government interference
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government sector
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made up of all three levels of government- federal, state, and local. This sector produces goods and services like national defense, health, education, transportation, and housing
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households
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consumers as individuals or in groups living under one roof
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implicit costs
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opportunity cost of using resources owned by the firm. Example: You invest your money in your in a company however what else could you have done withyour money.
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inefficient
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lacking the ability or skill to perform effectively
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incentives
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REWARDS or PUNISHMENT that MOTIVATE particular CHOICE -LACK OF THIS IN COMMAND ECONOMY
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input
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takes a certain amount of input to get a given product EX. #hrs to do a job, # of gallons to paint a house
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investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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labor
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Human effort directed toward producing goods and services
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laissez-faire
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Idea that government should play as small a role as possible in economic affairs.
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macroeconomics
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branch of economics that examines the economic behavior of AGGREGATE (total) economy- such as income, employment, output, and inflation on a national and international scale.
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margin
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related to or located at the margin or border; at the lower limit of quality; insignificant
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marginal benefit
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the GAIN of doing something ONE MORE TIME the extra benefit of adding one unit
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market economy
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-goods and resources allocated according to the DECISION of INDIVIDUAL producers and consumers -free entry/free exit -based on ability to earn a profit -capitalism
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microeconomics
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branch of economics that examines the functioning of individual industries and the behaviors of individual decisions making units-business firms and households
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mixed economy
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-a BLEND of MARKET forces and GOVERNMENT participaion -capitalism/socialism -private and collective ownership -flow of goods and resources is primary through a system affected by a government's actions
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needs
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items that are usually essential for well being
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open economy
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an economy that interacts freely with other economies around the world
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opportunity cost
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What you give up when you make one choice over another
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output
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states each person gets a certain amount of product out a given input
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private sector
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Any organisations owned, controlled, and managed by private individuals, usually with the objective of making a profit.
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product markets
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markets where producers offer goods and services for sale
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Production Possibility Curve
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curve represents full and efficient use of resources represented on the curve
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Frontier Curve
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the line in an opportunity cost graph
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profit
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Revenue minus expenses
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public sector
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The part of the economy that is under control of the government. examples may include state health and education services, the emergency services and roading infrastructure
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rent
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A payment, per unit of time, to owners of land resources who supply their land to the production process.
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resources
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LAND-things that are developed LABOR-humans CAPITAL-machinese than can be reused
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retained earnings
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An amount earned by a corporation and not yet distributed to stockholders.
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scarcity
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human wants are unlimited; resources are limited -Demand > Supply -EXAMPLE -Japan has little resources but they trade so their Modern -HOW DO WE GET THE THINGS WE WANT? -do without things we don't have -trade -steal/take it/WAR -search/discover new resources -new ideas/technology/innovation
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specialization
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Goods and services are produced in better quality, quantity and speed when people focus on producing a few things instead of making everything they want by themselves.
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standard of living
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A measure of quality of life based on the amounts and kinds of goods and services a person can buy.
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stock
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A certificate of ownership in a corporation
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surplus
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A situation in which quantity supplied is greater than quantity demanded
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sunk costs
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costs that have already been incurred and cannot be recovered or refunded
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trade off
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Giving up one thing for another
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traditional economy
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-goods and resources allocated by PATTERNS -agriculture, hunting, fishing -usually subsistence level -SAME as they have been for GENERATIONS -PRODUCE and CONSUME their own goods
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transaction
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A business activity that changes assets, liabilities, or owner's equity
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wants
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usually desired items that may not be attainable
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How is economics defined?
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A social science that studies how individuals, governments, firms and nations make CHOICES on allocating SCARCE resources to satisfy their unlimited wants.
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Why is economics considered the dismal science?
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Because it follows straight systematical and practical methods
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What are the basic economic questions?
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1. WHAT should be produced? 2. HOW MUCH should be produced? 3. HOW SHOULD the products be produced? 4. WHO gets WHAT? and HOW much? 5. WHO answers the FIRST FOUR QUESTIONS?
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What are the core principles of economics?
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CHOICE
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tyranny of choice
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The impairment of effective decision making when confronted with an overwhelming number of choices.
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How do economists illustrate economic choice?
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PPF
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Why specialize?
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It usually increases productivity
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Land
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including timber, water, minerals, and all other resources that come from nature
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Labor
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the effort of workers
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Capital
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machinery, buildings, tools, and all other manufactured goods used to make other goods/services
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OPEC
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Organization of Petroleum Exporting Countries
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economic freedom
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-entails freedom WHAT to BUY, WHERE to move/what to SELL/taxes RESTRICT economic interests
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economic growth
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- As we become more INDUSTRIALIZED, MORE people have ACCESS to GOODS
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economic efficiency
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using LIMITED resources and PRODUCTION must be analyzed from BENEFIT point of view
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economic security
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-dont want to LOSE jobs, natural disasters, government creates PROGRAMS to help people. -OLD PEOPLE care alot about this because they don't work -there are TRADE OFFS because SCARICITY of resources
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economic stability
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things are staying the same. Economy is under control, stable
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What are the 5 BROAD SOCIAL GOALS for the economy?
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1. economic efficiency 2. economic equality 3. economic freedom 4. economic growth 5. economic security
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Who are the great industrial nations?
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-United States -Great Britain -Germany -Japan
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What are elements of an Industrial Nation?
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-EDUCATED population -STABLE Goverment -Access to NATURAL RESOURCES -Nearness to TRADE ROUTES -CAPITAL MARKETS
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Scare items
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-Water -Gasoline -Sunshine -Gold -Diamonds
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How does SCARCITY affect CHOICE?
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-All society and individuals must make economic choices -Scarcity is when WANTS are UNLIMITED and RESOURCES are LIMITED
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What does a PPF illustrate?
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-constrained choices -opportunity costs -scarcity
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INSIDE THE CURVE
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inefficient use of resources
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OUTSIDE THE CURVE
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unattainable (burnt out) beyond the scope of resources
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ON THE CURVE
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efficient use of resources
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How can the curve SHIFT?
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-introduction of new resources -introduction of new technology -educational training
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REMEMBER THIS
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INCREASE CONSUMPTION DOES NOT LEAD TO GROWTH
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SHAPE OF CURVE- CONSTANT
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CONSTANT Opportunity cost- same trade off as you move along the curve
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SHAPE OF CURVE- INCREASING
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INCREASING Opportunity cost- the MORE you get of one thing, the MORE you have to GIVE UP for each ADDITIONAL item
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SHAPE OF CURVE- DECREASING
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DECREASING Opportunity cost- the MORE you get one thing, the LESS you have to give up for each ADDITIONAL item
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Motivation for Trade
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-people/nations trade in order to IMPROVE standards of living -decisions to trade only happen if BOTH parties expect to GAIN from it because trade is VOLUNTARY exchange of goods/services -VOLUNTARY trade promotes economic PROGRESS b/c allows people to SPECIALIZE in what they do BEST
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DETERMINING ABSOLUTE ADVANTAGE
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-For OUTPUT it is the one with the MOST OUTPUT -For INPUT it is the one with the LEAST INPUT -If a person has an absolute advantage in PRODUCT A and the other has absolute advantage in PRODUCT B, that is aslo the comparative advantage for them
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DETERMINING COMPARATIVE ADVANTAGE
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-INPUT- INPUT GOES UNDER -OUTPUT- OUTPUT GOES OVER
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SOLE PROPRIETORSHIP ADVANTAGES
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DOES NOT have to pay CORPORATE INCOME TAX OWNER can always be the BOSS EASIEST kind of business to ORGANIZE
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SOLE PROPRIETORSHIP DISADVANTAGES
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-UNLIMITED LIABILITY (can lose everything if get sued) -HAS LIMITS ON SIZE -Business END w/ DEATH of ONE OWNER, unless arrangements -OWNERSHIP is relativily difficult to TRANSFER
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PARTNERSHIP ADVANTAGES
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-COMBINES FUNDS of MORE than one person for startup/expansion -DOES NOT have to PAY CORPORATE INCOME TAX -OWNER can always be its OWN BOSS
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PARTNERSHIP DISADVANTAGES
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-UNLIMITED LIABILITY -has LIMIT on SIZE -Business ENDS w/ death of one owner unless arrangements -OWNERSHIP relatively difficult to TRANSFER
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CORPORATION ADVANTAGES
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-people can buy/sell SHARES of OWNERSHIP w/o ending business -LIMITED LIABILITY -MANAGEMENT SEPARATE FROM OWNERSHIP -OWNERSHIP RELATIVELY EASY TO TRANSFER FROM ONE PERSON TO ANOTHER -can CONTINUE OPERATIONS INDEFINITELY
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CORPORATION DISADVANTAGES
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-MUST pay a special TAX on profits -You MUST hire an LAWYER to ORGANIZE IT
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UNLIMITED LIABILITY
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The owner is personally and fully responsible for all losses and debts of the business
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LIMITED LIABILITY
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A form of business ownership in which the owners are liable only up to the amount of their individual investments.
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Terms of Trade
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the amount of one good a country is willing and able to trade for another COUNTRY A x corn for y car COUNTRY B x corn for z car answers is x corn for any number of car btwn y and z
