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Social science concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants

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Economics

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Human property/resources are scarce (limited) therefore the goods and services we provide are also limited Scarcity limits our options and necessities so that we must make choices- we can't have it all

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Scarcity and Choice

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When you must sacrifice one thing order to obtain another -the cost of that which you get is the value of that which is sacrificed to obtain it

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Opportunity Costs

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Individuals pursue actions that will enable them to achieve their greatest satisfaction aka rational self interest

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Rational Behavior

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Marginal: extra, additional

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Marginalism

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Comparisons of marginal costs and marginal benefits -in the world of scarcity, the decision to obtain the marginal benefit associated with a specific option always includes the marginal cost of sacrificing something else -When we have too much of something- we keep obtaining a resource beyond the point where the marginal cost (value of the forgone options) equals the marginal benefit -at the margin: we are sacrificing alternative products that are more valuable at the place where we consider the very last units of each

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Marginal Analysis

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Stresses resource scarcity and the necessity of making choices, assumption of rational behavior, and marginal analysis The plight of the economist: getting politicians to think economically rather than in terms of getting elected

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Economic Perspective

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-As favorable results accumulate, a hypothesis evolves into a theory -a very well tested and widely accepted theory becomes a law or principle -simplified representations of how something works are models (combines laws and principles)

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Economic Methodology

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A supposition or explanation (theory) that is provisionally accepted in order to interpret certain events or phenomena, and to provide guidance for further investigation

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Hypothesis

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A set of assumptions, propositions, or accepted facts that attempts to provide a plausible or rational explanation of cause-and-effect (causal) relationships among a group of observed phenomenon -evolves from a hypothesis after favorable data is accumulated

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Theory

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Elementary assumption, concept, doctrine, maxim, or proposition generally held to be fundamental or true for a body of knowledge, conduct, procedure, or system of reasoning, and used as a basis for prediction and action -evolves from a theory once it has been very well tested and widely accepted

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Law or Principle

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Process of deriving theories and principles -the role is to systematically arrange facts, interpret them, and generalize from them

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Theoretical Economics

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Statements about economic behavior or the economy that enable prediction of the probable effects of certain actions -are expressed as the tendencies of typical/average consumers and institutions

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Economic Theories and Principles

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Ascertaining of cause and effect, action and outcome, within economic systems

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Analytical Economics

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Using economic principles to formulate economic policies Policy Making Steps: 1) State the Goal 2) Determine policy options 3) Implement and evaluate the policy that was selected

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Policy Economics

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1) Economic Growth: develop a higher standard of living 2) Full Employment: jobs for all citizens willing and able to work 3) Economic Efficiency: Achieve maximum fulfillment of wants 4) Price Level Stability: Avoid large changes in price level (inflation/deflation) 5) Economic Freedom: Businesses, workers, and consumers have a high degree of freedom in economic activities 6) Equitable Distribution of Income: No group of citizens faces poverty while others face abundance 7) Economic Security: Provide for those who cant provide for themselves 8) Balance of Trade: Balance with the rest of the world in transactions -some of society's economic goals are complementary, while others conflict and arise trade-offs

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Economic Goals

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Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, or business sectors -seeks to obtain an overview or general outline of the structure of the economy and the relationships of its major aggregates

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Macroeconomics

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Collection of specific economic units treated as if they were one unit

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Aggregate

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Looks at specific economic units and observes the details of an economic unit or very small segment of the economy under a figurative microscope

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Microeconomics

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Focuses on facts and cause-effect relationships- ----"What is" -includes description, theory development, and theory testing -scientifically based -Basis for Theoretical Economics

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Positive Economics

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Incorporates value judgments about what the economy should be like or what policy actions should be recommended -"What should be" -Basis for Policy Economics

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Normative Economics

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Assuming that what is true for one individual is true for all others

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Fallacy of Composition

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Assuming that because A precedes B that A causes B

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Post Hoc Fallacy

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Correlation doesn't always mean causation -a relationship could be completely coincidental or dependent on another factor

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Correlation vs Causation

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"assuming all other things equal" -assuming that all other variables except those under direct consideration are held constant for observation -no other variables are relevant except those in consideration

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Certeris Paribus

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Simplifications that omit irrelevant facts and circumstances

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Abstractions

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Independent- cause Dependent- effect -income is generally independent, consumption is generally dependent -when graphing income vs consumption, the monetary amount always goes on the Y Axis

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Independent and Dependent Variables

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Gross Domestic Product -final monetary value of goods/services produces by one economy in one period of time -must be positive for economic growth -ideal GDP: 2-3% growth

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GDP

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Two quarters in a row of negative economic growth (two 3 month periods)

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Recession

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Anyone 16 and older working or actively looking for work

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Labor Force

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Those of the labor force who aren't working (doesn't include those who CANT)

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Unemployment

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When the unemployment rate is 5%-5.2% or less -When unemployment is less than 5% there are too many jobs and not enough workers

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Full Employment

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Created the CEA- Council of Economic Advisers- expert economists that advise the president on economic policy

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Employment Act of 1946

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Maximizing fulfillment of wants with limited resources

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Efficiency

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Raise in prices, measured in percent -income raises should be at least the inflation rate -results in a reduction in the value of a dollar

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Inflation

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Drop in prices -Opposite effect of inflation

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Deflation

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Society's economic wants are unlimited and economic resources are limited (scarce)

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The Economizing Problem

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Desires of consumers to obtain and use various goods and services that provide utility (pleasure/satisfaction) -extend from necessities to luxuries -cant be completely satisfied

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Unlimited Wants

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All natural, human, and manufactures resources that go into production of goods and services -categorized as either property (land, raw materials, capital) or human (labor or entrepreneurial ability) -come together as factors of production aka inputs

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Economic Resources

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All natural resources

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Land

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aka investment goods -All manufactured aids used in producing consumer goods and services

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Capital

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Process of producing capital goods

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Investment

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Satisfy wants indirectly by aiding in the production of consumer goods

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Capital Goods

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Satisfy wants directly and immediately

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Consumer Goods

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Tools, machinery, productive equipment -money is not a resource because it doesn't produce anything

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Real Capital

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All physical and mental talents of individuals available and usable in production

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Labor

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Takes the initiative to combine resources, makes basic business policy, is an innovator, is a risk bearer

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Entrepreneurial Ability

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Rental income- received from supplying raw materials Interest income- received from supplying capital goods Wages- accruing to those who supply labor Profits- Entrepreneurial income

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Resource Payments

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The use of all available resources both human and property that are willing and able to work (of the labor force) -because resources are scarce a full employment, full production economy can't have an unlimited output

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Full employment

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All employed resources should be used so that they provide maximum possible satisfaction and are not underemployed - employs productive and allocative efficiency

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Full production

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Production of any mix of goods and services in the yeast costly way -full employment and productive efficiency must be realized in order to operate on the PPC

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Productive efficiency

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Production of any mix of goods and services most wanted by society -optimal amount of activity occurs when marginal costs=marginal benefits -as more units of product 1 are produced, marginal costs increase -the second unit of product 1 yields less additional utility to a person than the first and so on -total benefits rise when more products are produced, but marginal benefits decrease -the optimal quantity of a product is where costs and benefits are equal (intersect)- where allocative efficiency is achieved

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Allocative efficiency

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Lists or graphs all possible combinations of two products that can be produced with a specific set of resources Must assume: 1) full employment and full production 2) fixed resources- all available supplies are fixed in quantity and quality 3) fixed technology- the state of technology doesn't change during observation 4) economy is only producing these two products -the curve of the model is bowed out from the origin because product 2 must give out increasingly larger amounts of goods for an increase in product 1(gets steeper- concave to the origin) The curve shows: -scarcity of resources implied by area of unattainable combos - choice among outputs shown by variety of attainable combos - opportunity costs implied by downward slope - law of increasing opportunity costs shown by concavity of curve Points inside the curve show unemployment or productive inefficiency- not operating at full capacity Increases in resources and technology are shown by the curve moving outward and to the right A favorable change in production possibilities doesn't guarantee the economy will operate on at a point on the new curve An economy's position on the curve is a great determinant of where it will be in the future A economy is more likely to grow if they favor capital goods over consumer goods High unemployment doesn't alter the production possibilities, just the current efficiency -To calculate the opportunity cost of gaining production of one product, the product that is being decreased goes on top of the fraction

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Production Possibilities Model

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The opportunity cost of each additional unit of 1 product is greater than that of the preceding one -costs are measured in real terms (goods) rather than money -the more of a product that is produced the greater the opportunity cost -economic resources are not completely adaptable to alternate uses so some productivity is lost -caused by lack of flexibility/interchangeability

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Law of Increasing Opportunity Cost

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Am economy can avoid through international specialization and trade the output limits imposed by its domestic PPC -an exchange of domestic goods for goods produced abroad -same effect on the economy as having more resources

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International Trade

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Directing domestic resources to output that a nation is highly efficient at producing -same effect on the economy as having more resources

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International Specialization

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Particular set of institutional arrangements and a coordinating mechanism -differ as to who owns the factors of production and the method used to coordinate and direct economic activity

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Economic System

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Characterized by private ownership of resources and the use of markets and prices to coordinate and direct economic activity Each individual acts in his own self interest and businesses seek to maintain profits Results in competition among independent sellers and buyers

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Market System/ Capitalism

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Places where buyers and sellers come together

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Markets

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Government's role is limited to protecting private property and establishing an environment appropriate to operation- government interference is limited -market is the dominant force in deciding what to produce

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Pure Capitalism aka Laissez Faire

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Government owns most property resources and economic decisions are made through a central economic plan -government owns most business firms -pure command economy: would rather rely purely on central plan to allocate the government's property resources but most command economies don't operate this way

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Command System/Socialism/Communism

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Market economy has two groups of decision makers: households and businesses -also has two broad markets: resource market and product market -money flows clockwise -resources flow counter-clockwise -top half- buying and selling resources -bottom half- buying and selling products and goods

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Circular Flow Model

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Place where resources or the services of resource suppliers are bought and sold -households sell resources and businesses demand them

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Resource Market

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Place where goods and services are bought and sold -Businesses combine resources to produce and sell goods and households use income to purchase them -businesses by resources and sell products; households by products and sell resources

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Product Market

question

Measures inflation compared to a base period (1982-1984) -average consumer consumption per month measured in percent A) Housing- 41% B) Transportation- 17% C) Food/Beverage- 15% D) Education/Communication- 7% E) Medical Care- 7% F) Recreation- 6% G) Clothing- 4% H) Other/Misc- 3%

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Consumer Price Index aka The Market Basket of Goods and Services

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Accumulates statistics on labor

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Bureau of Labor Statistics

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When a resource is both limited and desirable

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Scarcity

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Private Property Freedom of enterprise Freedom of choice Self interest Markets and Prices Competition Reliance on Technology and capital goods Specialization Use of money Active but limited government

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Characteristics of the Market System

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Private individuals and firms, not the government own most property resources -encourages making use of property resources, investment, innovation, maintenance of property, exchange, and economic growth -the right to leave wills and designate heirs sustains the institution of private property -also extends to intellectual property- copyrights, patents, trademarks

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Private Property

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Entrepreneurs and private business owners are free to obtain and use economic resources to produce their choice of goods and to sell them in their chosen markets

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Freedom of Enterprise

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Owners employ/disperse of their property and money as they see fit; workers enter any line they are qualified for; consumers can buy whatever goods they want

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Freedom of Choice

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each economic unit tries to do what is best for itself -motivating force of all economic units

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Self Interest

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Independently acting sellers and buys operating in a particular resource/product market -freedom of sellers and buyers to enter/leave markets on the basis of their self interest -competition diffuses economic power within the businesses and households -businesses that control market supply can rig the market to their own advantage, but this isn't possible with competition - when there are multiple buyers single buyers cant manipulate the economy by refusing to pay the market price -freedom of entry and exit into markets enables the economy to adjust to changes in consumer tastes, technology, and resource availability -the diffusion of economic power inherent in competition limits the potential abuse of that power -the basic regulatory force of the economy

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Competition

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-those who respond to market signals and obey market dictates are rewarded with greater profit and income -helps decide what should be produced, how production should be organized, and how profit should be distributed

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Markets and Prices

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-Encourages extensive use and development of complex capital goods -most direct methods of production are the least efficient -round about production- avoiding inefficiency by first creating capital goods in order to create consumer goods

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Reliance on Technology and Goods

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Division of labor aka human specialization -makes use of differences in ability -fosters learning by doing -saves time

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Specialization

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Produces goods and services for which their available resources are suited and trades to obtain goods they are not suited to produce

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Geographic Specialization

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Money: medium for exchange that makes trade easier -a convenient means of exchanging goods is required for specialization -barter: an exchange of goods for goods, but requires a coincidence of wants -for an item to serve as money it must be generally acceptable to the sellers in exchange for goods and services

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Use of money

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-Government can increase the efficiency and overall effectiveness of economic system

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Active but Limited Government

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Highlight the economic choices underlying the PPC -what goods and services will be produced? -how will they get produced? -who will get the goods and services? -how will the system accommodate change?

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Four Fundamental Questions of a Market System

question

-because businesses seek profits and avoid losses, the goods and services produced at continuing profit will be produced -profits and losses depend on difference between total revenue and total cost -a product is produced only if total revenue is large enough to cover wages, interest, rent, and normal profit

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Market System: What will be produced?

question

payments that must be made to secure and retain resources necessary for production

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Economic Costs

question

Payment for the entrepreneur's contributions of organizing resources for businesses

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Normal Profit

question

Pure profit that exceeds all economic costs and goes to the entrepreneur as an extra reward

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Economic Profit

question

An industry that will gradually become larger because it can produce economic profit -as new firms enter the industry the market supply of a product will increase, which will lower the market price, and economic profit will eventually diminish and disappear= reaching equilibrium size

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Expanding Industry

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When economic cost exceeds total revenue persistently, causing a business to shrink or go out of business

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Declining Industry

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Consumers spend income on the goods they are most willing and able to buy and cast dollar votes to determine what goods are produced

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Consumer sovereignty

question

Determine which industries continue and which products survive -a consumer casts a dollar vote every time they purchase something by showing what products the consumers are interested in -voting for the production of a good by buying it

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Dollar Votes

question

The demand for resources is derived from the demand for the products they produce

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Derived Demand

question

-because competition weeds out high cost producers continued profitability requires that firms produce output at minimum cost -least cost production means that firms must employ the most economically efficient technique in producing output -goods are always produced in the least costly way -efficient production technique depends on: -available technology -prices of needed resources

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Market System: How will goods and services be produced?

question

obtaining a particular output of product with the least input of scarce resources, when both output and resources are measured in dollars and cents

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Economic efficiency

question

any product will be distributed to consumers on the basis of who is willing and able to pay for it -ability to pay equilibrium prices depends on the amount of income consumers have, which depends on the quantity of resources they supply and the prices of those resources

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Market System: Who will get the goods and services?

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When consumer tastes change from one product to another this causes one industry to expand while another to decline

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Market System: How will a system accommodate change?

question

Demand for certain products dictates prices and production of said product -the price of a good is determined strictly by supply and demand

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Guiding Function of Prices

question

The creation of new products and production methods completely destroys the market positions of firms tied to older products/methods

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Creative Destruction

question

Firms and resource suppliers seeking to further their own self interest will simultaneously promote the public interest -competitive markets reallocate resources in response to changes in consumer taste, technology, and resource supply

answer

The Invisible Hand

question

-People face tradeoffs- nothing is free -the cost of something is what you give up to obtain it (the cost of the next best alternative) -rational people think at the margin (extra) -people respond to incentives -markets organize the economy -trade can make everyone better off

answer

Main Principles of Economics

question

Organized our financial system, bringing stability and structure to the economy -created 12 regional banks, each located in a principal city in its area with individual branch banks

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Federal Reserve Act of 1913

question

Any government (congress) decision that affects money (taxing and spending)

answer

Fiscal Policy

question

Any decision by the federal reserve relating to interest rates and money supply

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Monetary Policy

question

Governed by a Board of Governors with 7 members that serve 14 year terms (a position is up for reelection every 2 years)

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Federal Reserve

question

Consists of 7 members of the Board of Governors and 5 regional bank presidents that meet to make monetary decisions -appointed February 1 of every even numbered year

answer

FOMC aka Federal Open Market Committee

question

Determines what percentage of money in each bank must be kept on reserve rather than being given out in loans

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Reserve Requirements

question

How easy money is to carry around

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Portability

question

Making more of something the fastest

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Absolute Advantage

question

Making something with the lowest opportunity cost -you should devote your resources to produce what gives you the comparative advantage

answer

Comparative Advantage

AP Economics Unit 1: Basic Economic Concepts – Flashcards

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