Unit 1: Basic economic concepts – Flashcards
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Economics
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The study of how we must make efficient choices in using limited resources to fulfill our unlimited wants
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Positive statement
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facts (what is)
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Normative statement
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Value and judgement (what ought to be)
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Five key economic assumptions
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-Society has unlimited wants, but resources are limited (scarcity) -Due to scarcity, choices must be made. every choice has a cost -Everyone's goal is to make choices that maximize their satisfaction -Ppl make decisions by comparing marginal cost and marginal benefits -Real life situations can be explained through simplified graphs and models
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Marginal Analysis
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making decisions based on the additional benefit vs. the additional cost
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trade-offs
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the alternative we give up whenever we choose one course of action over others
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opportunity cost
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the most desirable alternative given up as a result of a decision
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price
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amount buyer pays
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cost
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amount seller pays to produce good
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investment
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$ spent by businesses to improve their production
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consumer goods
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created for direct consumption (pizza)
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capital goods
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created for indirect consumption (oven) countries that produce more of these will have more goods in the future
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accountants
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look at explicit costs (out of pocket costs of decision making)
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economists
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look at explicit & implicit costs (opportunity costs such as forgone time & income)
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Four factors of production
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-land -labor -capital (physical [human made] & human [knowledg]) -entrepeneurship
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profit
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revenue - costs
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Production possibilities graph
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model that sows alternative ways an economy can use its scarce resources
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Four key assumptions of PPG
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-only two goods can be produced -full employment of resources -fixed resources -fixed technology
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Constant opportunity cost
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resources are easily adaptable for producing either good. results in a straight PPC line (UNCOMMON)
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Law of increasing opportunity cost
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as you produce more of any good, opportunity cost will increase bc resources are not easily adaptable to producing both goods. (CONCAVE PPC)
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how much each marginal unit costs
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opportunity cost/units gained
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productive efficiency
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products produced in least costly way (any point on the production possibility curve)
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allocative efficiency
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products produced based on most desirable
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three shifters of the PPC
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Change in resource quantity/quality, technology, or trade
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absolute advantage
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the producer that can produce the most output or requires the least amount of inputs (resources)
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comparative advantage
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the producer with the lowest opportunity cost (countries should trade if they have lower opportunity cost)
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input method
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if problem sets up a comparison based on the amount of time or resources used
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output method
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if problem sets up a comparison based on amount of units produced. same resources used, diff production levels
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economic system
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method used by a society to produce and distribute goods and services
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centrally planned economies (command/communism)
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gov't owns all resources and answers all econ questions (what, how, for whom) results in high prices and low quality
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Why do centrally planned economies fact problems?
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No profit means no incentive to work hard
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free market system (capitalism)
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little gov't involved with economy (Laissez faire) competition and self interest work together to regulate the economy (keep prices down and quality up) results in low prices and high quality
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invisible hand
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competition and self interest act as an invisible hand that regulates the free market
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attacks against capitalism
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companies a greedy and do anything to take advantage of consumers capitalism causes companies to outsource US jobs overseas capitalism only helps the rich. US companies enslave and exploit third world workers in sweatshops
