Economics – Unit 1 Economics Fundamentals

economics
1. the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants

2. Social science that deals with the study of the production, consumption, distribution of goods and services and the transfer of wealth to obtain those goods and services.

scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants

trade-offs
giving up one thing in favor of another

opportunity costs
the highest-valued alternative that must be forgone when a choice is made

rational decisions
choice in which you weigh the costs and benefits of each option

marginal benefit
the additional satisfaction or benefit received when one more unit is produced

marginal cost
the cost of producing one more unit of a good.

marginal benefit-marginal cost analysis
Rational decision making involves marginal benefits that equal or exceed the marginal costs

resources
anything that is used to produce goods or services

allocation of resources
decision on how to divide scarce resources among different uses

goods
tangible products that we use to satisfy our wants and needs

services
actions or activities that one person performs for another

factors of production
land, labor, capital, entrepreneurship

capital goods
Buildings, machines, technology, and tools needed to produce goods and services.

human capital
the skills and knowledge gained by a worker through education and experience

producers
individuals and organizations that determine what products and services will be available for sale.

consumers
people who buy goods and services

entrepreneur
(n.) a person who starts up and takes on the risk of a business

barter
To exchange goods or services without the use of money

production possibilities curve
A graphical representation that shows the possible combinations of two products that an economy can produce, given that its productive resources are fully employed and efficiently used.

division of labor
the process of dividing work into specialized jobs that are performed by separate individuals

assembly line
Production method that breaks down a complex job into a series of smaller tasks

imports
goods and services purchased from other countries

exports
Goods and services sold to other countries.

voluntary exchange
the act of buyers and sellers freely and willingly engaging in non-fraudulent market transactions. Both parties should benefit from the exchange.

non-fraudulent exchange
without fraud/without deceiving; honest, voluntary exchange

economic systems
The ways in which a society answers the three basic economic questions to organize production, distribution, and consumption of goods and services to solve the economic problem of scarcity

3 basic economic questions
Every economic system must answer the three basic economic questions: What to produce; How to produce it? For whom to produce?

command economy
a system in which the central government makes all economic decisions

traditional economy
An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next–usually subsistence agriculture

market economy
a system based on private ownership, free trade between buyers and sellers, and competition

mixed economy
market-based economic system with limited government involvement.

invisible hand
a term coined by Adam Smith to describe the self-regulating nature of the marketplace

laissez faire
the doctrine that states that government generally should have little or no involvement in the marketplace

comparative advantage
the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

absolute advantage
the ability to produce more of a given product using a given amount of resources

free enterprise
The freedom of private businesses to operate competitively for profit with minimal government regulation.

capitalism
economic system in which the means of production are privately owned and operated for profit

incentives
Used to change behavior in order to persuade people to take certain economic actions. Ex. profit and the ownership of private property are incentives to start a business

consumer sovereignty
the role of consumer as the ruler of the market, determining what products will be produced

profit motive
To be motivated by the desire to make money.

private ownership
property/resources that individuals own and control; a core principle of capitalism

role of government
To maintain legal and social framework, overcome market failure by providing public goods and services, maintain competition, redistribute income, correct for externalities, to protect individuals and their property rights, stabilize the economy

government regulation
a rule that a government establishes and enforces to protect the public or provide equal access to specific goods, and services.

deregulation
the removal of some government controls over a market

privatization
To change from government or public ownership or control to private ownership or control.

income redistribution
Transfer payments paid by government that take income from some people through taxation and uses it to help citizens in need–Ex. Social Security, Medicare, WIC, disability, etc.

public goods and services
Goods and services provided by the government that are non-rivalrous and non-excludable and cannot be withheld from those who don’t pay for them. Benefits that may be “consumed” by one person without reducing the amount of the product available for others. Government provides public goods and services because of market failure–which means that the market has no incentive to provide these goods.

Public goods and services are paid for with taxes received from businesses and individuals.

Examples include national defense, streetlights, and roads and highways. Public services include welfare programs, law enforcement, and monitoring and regulating trade and the economy.

private goods
Goods that are both excludable and rival in consumption, Goods that, when consumed by one individual, cannot be consumed by another

externalities
costs that are not calculated into the price; spillovers–Ex. Pollution

standard of living
a measure of quality of life based on the amounts and kinds of goods and services a person can buy

inputs
labor, technology, machinery, buildings, and other resources used to produce output

outputs
goods and services that firms produce; productivity

productivity
the quantity of goods and services produced from each unit of labor input; ratio of output to input

economic goals
economic growth, full employment, economic efficiency, price level stability, economic freedom, an equitable distribution of income, economic security, balance of trade

redistribution of income
The transfer of income through government taxation, spending and assistance programs targeted at particular income groups. The goal is to transfer money from higher-income groups to lower-income groups.

capital investments
firms purchase of new machines and buildings. firms invest in capital goods to increase their capacity to produce more goods and services in order to maximize profits

market failures
when free market doesn’t provide needed good/services or when free market hurts people

property rights
The rights of an individual or business to own, use, rent, invest in, buy, and sell property.

Six Broad economic goals
Economic efficiency – refers to how well scarce productive resources are allocated to produce the goods and services people want and how well inputs are used in the production process to keep production costs as low as possible.

Economic security This refers to protecting consumers, producers, and resource owners from risks that exist in society. Each society must decide from which uncertainties individuals can and should be protected, and whether individuals, employers, or the government should provide or pay for this protection…(health care for elderly; Social Security, disability; unemployment compensation, etc.)

Economic equity – This means what is “fair”. Economic actions and policies have to be evaluated in terms of what people think is right or wrong. Equity issues often arise in questions dealing with the distributions of income and wealth.

Economic stability – This refers to maintaining stable prices and full employment and keeping economic growth reasonably smooth and steady. Price stability means avoiding inflation or deflation. Full employment occurs when an economy’s scarce resources, especially labor, are fully utilized.

Economic freedom – refers to such things as the freedom for consumers to decide how to spend or save their incomes, the freedom of workers to change jobs and join unions, and the freedom of individuals to establish new businesses or close old ones.

Economic Growth This refers to increasing the production of goods and services over time. Economic growth is measured by changes in the level of real gross domestic product (GDP). A target annual growth rate of 3 to 4 percent in real GDP is generally considered to be reasonable and sustainable.

caveat emptor
“let the buyer beware”

ceteris paribus
All else equal – with other conditions remaining the same:
Ex. shorter hours of labor will, ceteris paribus, reduce the volume of output

Federal Trade Commission
A government agency established in 1914 to prevent unfair business practices and help maintain a competitive economy.

free rider
a person who receives the benefit of a good but avoids paying for it

Two main types of economics
Microeconomics focuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders–small segments of the economy

Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.

Adam Smith
Adam Smith is often described as the ” father of economics”; the theory about markets was developed by Adam Smith…wrote An Inquiry into the Nature and Causes of the Wealth of Nations

Karl Marx
19th century philosopher, political economist, sociologist, humanist, political theorist, and revolutionary. Often recognized as the father of communism. Marx believed that communism would replace capitalism. Believed in a classless society.

David Ricardo
English political economist, David Ricardo formulated the idea of comparative advantage—the main basis for support of free trade today. It is based on the idea that a nation produces those goods and services that it has the lowest opportunity cost of producing and trades with other nations for goods and services they can produce at a lower opportunity cost.

John Maynard Keynes
English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946)

non-rivalrous and non-excludable
Public goods and services afre non-rivalrous and non excludable

Non-rivalrous – Additional consumption does not add to the cost of production

non-excludable – Regardless of who pays for it, one person consuming it; does not deny another person of the right to consume it–streetlights; sidewalks, etc..

distribution of income
way in which the nation’s income is divided among families, individuals, or other designated groups–Wealth inequality in the U.S. is at its highest levels ever. The top 0.1% own about the same share of wealth as the bottom 90%.

anti-trust laws
laws to control monopolies and preserve and promote competition

tinstaafl
There is no such thing as a free lunch–Everything has a cost–nothing is free.

Adam Smith
Wrote “wealth of nations” advocated free trade and market economy along with the idea of laissez faire; or government not involving themselves in the economy.

externalities
A “spillover” effect of an action that affects a third party other than the buyer or seller–can be negative (cigarette smoke/pollution) or positive (benefiting from someone’s security system)

intellectual property
A work or invention that is the result of creativity, such as a manuscript or a design, to which one has rights and for which one may apply for a patent, copyright, trademark, etc.

labor
Work

marginal utility
an additional amount of satisfaction or usefulness

thinking at the margin
deciding whether to do or use one additional unit of some resource–time, money, energy, effort, etc.

specialization
Goods and services are produced in better quality, quantity and speed when business focus on producing a few things (mass production and assembly line).

natural monopoly
a market that runs most efficiently when one large firm supplies all of the output–utility companies–electric, gas, nuclear power plants, water, etc.

economies of scale
Lower production costs as a result of larger volume of production–monopolies and oligopolies have economies of scale

competition
Occurs when two or more sellers offering the same goods and services–competitions keeps prices low and quality high