Economics Unit 1 Terms – Flashcards
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What - What shall be produced with the available resources How - How shall the item be produced Who - Who shall receive the finished product
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3 Primary Questions That Must Be Asked When Considering Economics
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Primitive bartering system What shall be produced - determined by ancestry (what has always been produced) How the item shall be produced - the same way as past generations Who receives the finished product - same group as in the past Example - primitive tribes in the jungles of the Congo
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Traditional Economic System
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What shall be produced - decided by gov't How the item shall be produced - determined by gov't Who receives the finished product - determined by gov't Example - North Korea
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Command Economic System
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What shall be produced - decided by producer with input from consumers How item shall be produced - determined by the producer Who receives the finished product - whoever can afford it Example - the United States of America
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Market Economic System
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1 - Who owns the means of production? 2 - Who makes the economic decisions?
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The 2 Questions to Ask Concerning the "Isms"
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Who owns means of production - publically owned Who makes economic decisions - the gov't Example - North Korea
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Communism
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Who owns means of production - publically & privately owned Who makes economic decisions - the gov't, producers, & consumers Example - Sweden
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Socialism
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Who owns means of production - privately owned Who makes economic decisions - producers & consumers Example - USA
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Capitalism
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Everybody has the right to start up and operate a legal business Example - opening a lemonade stand
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Free Enterprise
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The amount of a good or service that a consumer is willing and able to buy at various price points during a given period of time Price is the main variable affecting demand
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Demand
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An increase in a good's price cause a decrease in the quantity demanded and that a decrease in price causes an increase in the quantity demanded
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Law of Demand
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The amount of income ppl have available to spend on goods and services
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Purchasing Power
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Any increase or decreasing in purchasing pwr caused by a change in price
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Income Effect
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The tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive
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Substitution Effect
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As more units of a product are consumed, the satisfaction received from consuming each (utility) additional unit declines Explains why demand is not limitless - consumers eventually cannot use any more of an item
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Diminishing Marginal Utility
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Consumer tastes and preferences Market size General income level Prices of related goods
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Other Things Effecting Demand
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supply of one good is often connected to the supply of another - suppliers will offer the good that offers the greatest profit ex) farmer plants a variety of crops, finds one crop is more in demand (offering greater profit possibilities) = farmer will plant more of the profitable crop
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Prices of Related Goods
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As a market expands it has more consumers than before, leading to the possibility of greater demand Affected by decisions by companies (advertising), general income level, gov't policies, technology
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Market Size
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Generally when income levels increase, ppl have more money to spend = possibly causing an increase in demand at all price points
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General Income Level
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If gov't opens friendly relations w/a country then a new market opens & increases demand
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Government Policy
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May increase demand if good advertising, lowering cost per unit and/or price, etc.
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Decisions by Companies
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New more efficient ways to produce items may lower costs & possibly price per unit can initially add to cost of production - worthwhile in long-run bc reduce costs
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Technology
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the quantity of a good or service that producers are willing and able to offer at various price points during a given period of time
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Supply
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Producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices
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Law of Supply
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The resources that can be used to produce goods and services for consumption 4 categories - natural resources, human resources, capital resources, entrepreneurship
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Factors of Production
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Anything provided by nature that can be used to produce goods Minerals, wood, farmland, etc.
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Natural Resources
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Any human effort exerted to produce goods or services Can be physical or intellectual effort
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Human Resources
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The manufactured materials used to produce goods and services Buildings, machinery, tools, money, etc.
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Capital Resources
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The combination of organizational abilities and risk taking involved in starting a new business or introducing a new product
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Entrepreneurship
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The value of the next best alternative is that is given up to obtain the preferred item
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Opportunity Cost
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Consumers have the power or freedom to have the final say Are able to determine which goods sell and thus what business stay open
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Consumer Sovereignty
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Nonprice factors that can shift the entry supply curve of a product, instead of simply changing the quantity supplied along the original supply curve Prices of resources, gov't tools, technology, competition, price of related goods, producer expectations
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Determinants of Supply
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producers make decisions based on their expectations of future income - these expectations of future price changes can affect how much of their product they supply to the market now ex) sporting goods manufacturer increases basketball production bc he believes sakes will increase once the season begins
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Producer Expectations
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any price change for a resource increases or decreases a business's production costs price of resources falls = costs fall = more supply at same cost as before - generally higher profits
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Prices of Resources
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can shift the supply curve left or right taxes, subsidies, regulation add or diminish to a producers cost - shift curve in either direction
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Government Tools
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as one more of one input is added to a fixed supply of other resources, productivity will increase up to a point - at some point the marginal product will begin to diminish rapidly - leads to a negative marginal product can be rectified by adding a diff type of input
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Law of Diminishing Returns
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the amount of goods or services produced per unit of input productivity tells usiness owners how efficiently their resources are being used in production businessmen look at total product, marginal product, & how they change as inputs change
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Productivity
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all the product a company makes in a period of time with a given amount of resources
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Total Product
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the change in output generated by adding one more unit of input ex) adding another worker bring production from 10 widgets to 20 widgets - marginal product is 10
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Marginal Product
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the total cost a company incurs in producing an item 3 categories - fixed costs, variable costs, marginal costs
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Costs of Production
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The cost that changes as the level of output changes ex) raw materials, wages of workers
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Variable Costs
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The cost that doesn't change with the amount of units increased ex) interests on loans, rent, local, state, federal taxes, depreciation, salaries of managers often known as Overhead
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Fixed Costs
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the additional costs of producing one more unit of output allows business to determine the profitability of increasing or decreasing production
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Marginal Costs
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The ownership of property by non-governmental legal entities
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Private Property
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When a resource is needed to produce two or more goods but a scarcity in resources causes one good to be sacrificed for another
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Trade Off
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The desire for profit that motivates one to engage in business ventures profit - the amount of money remaining after producers have paid all of their costs business profit when revenues are greater than costs (like wages, bills, materials) P = R - C
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Profit Motive
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show the relationship between the price of a good or service and the quantity supplied
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Supply Curves
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The rivalry among sellers in the same field for consumers' dollars Pressures of competition = business firms must constantly try to provide the best services & create the best products at the lowest possible prices Competition tends to increase supply, while a lack of competition tends to decrease supply A larger number of suppliers in a market tend to increase supply - more products available for consumers
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Competition
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The condition which arises from unlimited wants and limited resources
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Scarcity
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Personal independence or personally independent Does not require any aid, support, or interaction for survival
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Self-sufficiency/Self-sufficient
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A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas
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Specialization
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Acting in the way that is most personally beneficial
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Self Interest
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An economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws
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Laissez-faire
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The use of the smallest amount of resources to produce the greatest amount of output
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Efficiency
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Measures the amount demand changes given to an increase in price 4 subcategories - perfectly elastic, relatively elastic, relatively inelastic, perfectly inelastic
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Elasticity of Demand
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When the price increases the demand falls almost to 0
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Perfectly Elastic
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When the price increases the demand falls substantially
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Relatively Elastic
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When the price increases the demand falls slightly
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Relatively Inelastic
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When the price increases the demand stays the same
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Perfectly Inelastic
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Supplies only supply what ppl demand - thus resources are only being used to produce what ppl want producers want to produce efficiently in order to make the best profit - thus resources are not wasted
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Why Supply and Demand System is an Efficient Way to Use Resources
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The line for supply represents the Law of Supply because it shows that as the price of an item increases, the amount of the item made increases because the producers can make a larger profit. The line for demand represents the Law of Demand because it shows that as the price of an item lowers, the quantity of the item bought increases because more people are able to and want to buy the item. The Equilibrium Point is the point at which a producer can make a reasonable profit while a reasonable amount of the item will still be purchased (aka the balance or the "equilibrium").
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Supply & Demand Graph
