Economics Ch. 1

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scarcity
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the condition that results from society not having enough resources to produce all the things people would like to have
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economics
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the study of how people try to satisfy what appears to be seemingly unlimited and competing wants through the careful use of relatively scarce resources
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need
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basic requirement for survival
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want
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a way of expressing a need
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factors of production
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(aka resources required to produce things we would like to have) includes land, capital, labor, entrepreneurs, and production
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land, capital, labor, entrepreneurs, production
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the five factors of production
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entrepreneurs
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the most important factor of production
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land
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“gifts of nature”, or natural resources not created by humans
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capital
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the tools, equipment, machinery, and factories used in the production of goods and services
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financial capital
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the money used to buy the capital goods
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labor
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people with all their efforts, abilities, and skills (does not include entrepreneurs)
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entrepreneur
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a risk-taker in search of profits who does something new with existing resources
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production
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the process of creating goods and services
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Gross Domestic Product (GDP)
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the dollar value of all final goods and services, and structures produced within a country’s borders in a 12-month period
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scarcity
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what is the fundamental economic problem we face
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needs
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are these wants or needs? food, clothing, shelter
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wants
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is this a need or a want: pizza
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“There is No Such Thing as a Free Lunch” (TINSTAAFL)
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a concept that even though you may not being paying for something/ it is free to you, someone along the line had to pay for it and therefore nothing is truly free
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the prices the firm charges for its products
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In TINSTAAFL how do businesses recover the costs that you don’t pay? the price of the givaway is hidden somehwere in….
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the more it has to raise prices for the items sold
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the more a business gives away for “free” –>
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what to produce, how to produce, for whom to produce
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the three basic economic questions
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land
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– includes deserts, fertile fields, forests, mineral deposits, livestock, sunshine, and climate necessary to grow crops – considered being fixed/ in limited supply because only so many ****** are available at a given time
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capital good
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is a bulldozer a capital or consumer good?
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population growth, immigration, famine, war, and disease
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factors affecting the quantity of labor
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entrepreneurs
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– responsible for much of the change in our economy/ seen as the driving force in an economy because they exhibit the ability to start new businesses or bring new products to market – provide the initiative that combines the resources of land, labor and capital into new products – needed to organize the other three factors and make sure everything gets done
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the other four factors of production
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what must be present for production to take place?
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deals with the behavior of people as they deal with this basic issue
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why is economics a social sciene?
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description, analysis, explanation, prediction
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four key elements to the study of economics
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GDP
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o The most comprehensive measure of a country’s total output o A key measure of the nation’s economic health
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analysis
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the element of the study of economics that helps us discover why things work and how things happen –> will help s deal with problems
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explanation
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what comes after analysis
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GDP
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what do economists often use to explain economics
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why the measure is, or is not, performng in the expected manner
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economists often spend time explainin gGDP: ******
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Alexis de Tocqueville
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who said this: “What astonishes me in the United States is not so much the marvelous grandeur of such undertakings as the innumerable multitude of small ones”
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global shift
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– the only difference between reality now and when Tocqueville observed it, is that there has been a BLANK BLANK
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global shift
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these are examples of the BLANK that has occurred since de Tocqueville’s observations: Russian biznez-men and Chines chang-shang are reshaping their nations’ economies in the same way Yankees created the American business culture
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entrepreneurial qualities
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– changes in the rules of the business game are putting a premium on the BLANK of the smaller companies
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nimble, innovative, close to the customer, & quick to market
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entrepreneurial qualities of small businesses (4)
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bureaucratic, centrally controlled institutions that are slow to change; many require size and scale
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large company qualities (3)
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swift pace of technological change and the fragmentation of markets
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– the BLANK AND BLANK are eroding the traditional economies of scale & therefore putting larger businesses at a disadvantage
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diseconomies of scale
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o larger business disadvantage referred to as the “BLANK”, high cost that comes with bureaucracy
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younger and smaller
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– overall, by today BLANK AND BLANK companies have emerged as the agents of change in economies around the world
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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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good
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an item that is economically useful or satisfies an economic want
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consumer good
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a good that is intended for final use by individuals
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capital good
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manufactured good used to produce other goods and services
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durable good
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any good that lasts three years or more when used on a regular basis (includes both capital and consumer goods)
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nondurable good
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an item that lasts for less than three years when used on a regular basis
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service
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work that is performed for someone
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consumer
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a person who uses goods and services to satisfy wants and needs
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consumption
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the process of using up goods and services in order to satisfy wants and needs
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value
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a worth that can be expressed in dollars and cents
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paradox of value
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the situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value
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utility
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the capacity to be useful and provide satisfaction
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wealth
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the accumulation of those products that are tangible, scarce, useful, and transferable from one person to another
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market
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a location or other mechanism that allows buyers and sellers to exchange a certain economic product
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factor markets
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the markets where productive resources are bought and sold
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product markets
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markets where produces sell their goods and services to consumers
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economic growth
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occurs when a nation’s total output of goods and services increases over time
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productivity
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a measure of the amount of output produced by a given amount of inputs in a specific period of time
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division of labor
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work is arranged so that individual workers do fewer tasks than before
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specialization
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factors of production perform tasks that they can do relatively more efficiently than others
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human capital
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the sum of the skills, abilities, health, and motivation of people
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economic interdependence
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we rely on others, and others rely on us, to provide the goods and services that we consume
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economic products
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BLANKS are scarce in economic sense: one cannot get enough to satisfy individual wants and needs
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goods, consumer goods, capital goods, services
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four types of economic products
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consumer good
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these are examples of what kind of good: book, car, compact disc player
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capital good
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these are examples of what kind of good: robot welder in a factory, oven in a baker, computer in high school
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defense goods
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this type of good indicates government spending
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defense, capital, noncapital, nondefense
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the four types of goods that are included in the Department of Commerce’s report on durable goods (highlights the number of new orders placed with domestic manufacturers for goods that are supposed to be durable)
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Department of Commerce’s report on durable goods
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highlights the number of new orders placed with domestic manufacturers for goods intended to be durable; includes defense, nondefense, capital, and noncapital goods
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intangible
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services are different from goods because services are BLANK
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services
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are these services or goods: haircuts, home repairs; the work that doctors, lawyers, and teachers perform
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consumption
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consumers indulge in BLANK
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scarce and utility
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for something to have value it must have both BLANK and BLANK (solution to the paradox of value)
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scarcity
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this is an example of why BLANK is required for a good to have value: water was so plentiful in many areas it had little or no value; diamonds were so scarce they had great value
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utility
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o not something that is fixed or measurable o the BLANK of a good or service may vary from one person to the next o a good or service doesn’t have to have BLANK for everyone, only BLANK for some
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nation’s wealth
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o a BLANK’S BLANK is comprised of all items, including natural resources, factories, stores, houses, clothing, etc.
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services bc they’re intangible
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what is not counted in wealth? why?
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circular flow of economic activity
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– the wealth an economy generates is made possible by the BLANK
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businesses –> factor market –> individuals –> product markets –> businesses
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monetary flow of circular flow of economic activity
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businesses –> product markets –> individuals –> factor markets –> buisnesses
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goods/services/resources flow of circular flow of economic activity
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factor markets
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o individuals earn their incomes in BLANK o this is where entrepreneurs hire labor for wages and salaries o you participate in it whenever you go to work and sell your labor to an employer
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product markets
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o after individuals receive their income from the factor market, they spend it in the BLANK → the money that individuals receive from businesses in the factor markets returns to businesses through the BLANK
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markets
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what serves as the main link between individuals and businesses?
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economic growth
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o results in: the circular flow becomes larger, more factors of production, goods, and services flowing in one direction, and more payments flowing in the opposite direction o a number of factors are responsible for BLANK, including productivity
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productivity
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o goes up whenever more output can be produced with the same amount of inputs in the same amount of time o often discussed in terms of labor, but applies to all factors of production • business owners try to buy the most efficient capital goods, and farmers try to use the most fertile land for their crops
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division of labor & specialization
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– BLANK AND BLANK can improve productivity
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division of labor
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benefit of BLANK: a worker who performs a few tasks many times every day is likely to become more proficient than a worker who performs hundreds of different tasks in the same period –> increased productivity
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specialization
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unlike division of labor, BLANK is not limited to a single factor of production such as labor o ex: complex industrial robots are built to perform just one or two tasks
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regional specialization
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different regions of the country often specialize in things they can produce the best
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division of labor & specialization
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an infamous example of the advantages of BLANK AND BLANK is Henry Ford’s introduction of the assembly line into automobile manufacturing (he cut the time necessary to assemble a car, cut the price of new cars→ result: improved productivity)
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human capital
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o one of the main contributions to productivity o government can invest in hc by helping to provide education and healthcare; businesses can by training and other programs that improve worker skills and motivation of workers; individuals can by investing in their own education
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helping to provide education and healthcare
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how can government invest in human capital
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training and other programs that improve worker skills and motivation of workers
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how can businesses invest in human capital
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investing in their own education
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how can individuals invest in human capital
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economic interdependence
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– ex of disadvantage of BLANK: bad weather in countries where sugar cane is grown→ affects sugar prices in the US → affects the price of snack foods & demand for sugar substitutes
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economic interdependence
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– why BLANK is worth it: the gain in productivity and income as a result of increased specialization almost always offsets the costs associated with the loss in self-sufficiency
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The Wealth of Nations 1776
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what did Adam Smith write and when
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Adam Smith
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who is the father of economics
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Adam Smith
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His ideas: o labor becomes more productive when each worker becomes more skilled at a single job o new machinery, the division of labor, and specialization would lead to an increase in production and greater “wealth of nations” o new idea: the wealth of a nation should be defined as the sum of its labor-produced goods, not by who owned the goods o most influential contribution: laissez faire (French “let it be”)
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each worker becomes more skilled at a single job
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Adman Smith believed that labor becomes more productive when…
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new machinery, the division of labor, and specialization
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what three things did Adam Smith think would lead to an increase in production and greater “wealth of nations”
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the sum of its labor-produced goods, not by who owned the goods
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Adam Smith changed the definition of wealth of a nation to meaning BLANK, not BLANK
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laissez faire
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Adam Smith’s most influential contribution
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laissez faire
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• individuals intend only for their own gain and are driven by an invisible hand… competition acts as an “invisible hand” that guides resources to their most productive uses • a truly free, competitive market- operating with a minimum of government intervention- would bring about the greatest good for society
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a truly free, competitive market
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what kind of market did Adam Smith think would be most beneficial?
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trade-off
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alternative choices
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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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demonstrates concept of opportunity cost) a diagram representing various combinations of goods &/or services an economy can produce when all productive resources are fully employed)
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cost-benefit analysis
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a way of thinking about a problem that compares the costs of an action to the benefits received
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free-enterprise economy
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one in which consumers & privately owned businesses, rather than the government, make the majority of the what, how, and for whom decisions
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standard of living
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the quality of life based on the possession of the necessities and luxuries that make life easier
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listing the alternatives and several criteria by which to judge them (cost, utility, durability, etc.)
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trade-offs: – To help make the decisions, constructing a grid is one way to approach it: grid summarizes a decision to be made by …
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opportunity cost
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example: you spend $5,000 on a used care… the BLANK is the value of the sterio, apartment, vacation, or other items and activities that you could have purchased with the money spent on the car
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no
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can all opportunity costs be measured in monetary value?
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maximum combinations; fully employed
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production possibilities frontier: all points on the curve represent BLANK of output potential when all resources are BLANK
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it indicates the maximum combinations of goods and/or services that can be produced
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why is the production possibilities frontier called the “frontier”?
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produce outside the frontier
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production possibilities frontier: it is not possible to BLANK unless resources increase
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idle resources
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– if some resources were not fully employed (aka if there were BLANK), then it would be impossible for the country in the example to reach its potential
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idle resources; cost of idle resources
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In the country Alpaca that produces butter and guns with its limited resources: if it was producing at the frontier at point b (400 units of butter and 40 guns) but then butter workers went on strike, butter production would fall and the opp. Cost of the BLANK would be 100 units of lost butter production; this is an example of the BLANK
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idle resources
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examples of BLANK: factories or land that is available but not being used
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idle
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– if resources are BLANK the country can’t produce on its frontier, meaning it can’t reach its full production potential
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production possibilities frontier
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– the BLANK represents potential output at a given point in time
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population growth, capital stock growth, increase in productivity
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what are three factors that could enable a country to produce more in the future than it can today if today it is producing on the frontier
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outward
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– economic growth made possible by having more resources or increased productivity → production possibilities frontier to move BLANK
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build simple models, employ cost-benefit analysis, and take small, incremental steps
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what are the three strategies economists use to make decisions
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model
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a simplified theory or a simplified picture of what something is like or how something works
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models
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– reduce complex situations to their most basic elements: ex- circular flow diagram and production possibility frontier
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assumptions that we take for granted as true
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models are based upon….
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the assumptions it is based on
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the quality of a model is no better than the…
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revised
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models can be BLANKED: – models are used to better understand the past or present and predict the future… if the model’s production turns out true, the model can be used again. If the prediction is wrong, the model might be changed to make better predictions next time
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cost-benefit analysis
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this is an example of BLANK: – ex: suppose you like choices A and B equally well. If B costs less it would be the better choice because you would receive more satisfaction per dollar spent (this is how businesses make investment decisions)
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receive more satisfaction per dollar spent
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suppose you like choices A and B equally well. If B costs less it would be the better choice because you would BLANK
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cost-benefit analysis
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this strategy that economists use to make decisions can be used through a grid comparing different alternative’s benefits, costs, uses, etc.
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we are unsure of the exact, or total, cost involved
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the strategy of taking small, incremental steps towards the final goal is especially valuable when…
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free-enterprise economy
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– the study of economics provides a more detailed understanding of a BLANK
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standard of living
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economics provides us with a working understanding of things such as property rights and competition, that have a bearing on the standard of living
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three
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how many kinds of economic systems are there
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free-enterprise
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what type of economy does America have?
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rational choice
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taking the things with greater value and givng up those with lesser value
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categorizing
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entails organizing information into groups of related facts and ideas
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look for similar characteristics and use these characteristics/categories as headings on a chart
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how to categorize
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sequencing
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placing facts in the order in which they occur
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look for dates & clue words that provide you with chronological order
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how to sequence

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