Economics Unit 1- Fundamental Concepts

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Economics

The study of how people choose to use their limited resources to satisfy their unlimited wants.

Scarcity

The condition that results because people have limited resources and unlimited wants.

Shortage

A lack of something that is desired, occurs when there is less of a good available than people want at the current price. Ex: Sold out of a product.

Why is scarcity the basic problem of economics?

People want unlimited goods and services, and there isn’t resources available to handle those wants. Therefore, wants exceed resources.

If all resources are scarce, what can we conclude about final goods and services?

Those goods/services will be more valuable, and prices will go up.

What is the difference between a shortage and scarcity?

Shortages are temporary, scarcity is forever.

Why are all goods/services scarce permanently?

All resources are scarce, and people have unlimited wants.

Factors of Production

The resources used to produce goods and services. Land, Labor, Capital, and entrepeneur.

Goods

Physical articles produced for sale or use (Food, clothing, cars).

Services

Work done by someone else for which a consumer, business, or government is willing to pay (Teaching, gardening, child care).

What is the difference between human capital and physical capital?

Human: Knowledge and skill from education, training, and other aspects. Physical: Tools, machines, and buildings.

Opportunity Cost

The value of the next best alternative that is given up when making a choice. This is the measure of what you must give up to get what you want.

Tradeoffs

The exchange of one benefit or advantage for another that is though to be better.

Production Possibilities Frontier

A simple model of an economy that shows all the combinations of two goods that can be produced with the resources and technology available.

Economic Efficiency

The result of using resources in a way that maximizes the production of goods and services.

What does a PPF show?

It shows how an economy might use its resources to produce two goods.

Economic System

A society’s way of coordinating the production and consumption of goods and services.

3 Fundamental Economic Questions

What to produce, how to produce, and for whom?

Traditional Economy

An economic system in which decisions about production and consumption are based on custom and tradition.

Command Economy

An economic system in which decisions about production and consumption are made by a ruler or government.

Market Economy

An economic system in which decisions are left up to individual producers and consumers.

What does Adam Smith’s "Invisible Hand" represent?

The way markets coordinate trade.

Which economic goals are emphasized in a traditional economy?

Security and Stability

Which economic goals are emphasized in a market economy?

Efficiency and Freedom

Which economic goals are emphasized in a command economy?

Security and Equity

Households

Made up of a person or group of people living together.

Firms

An organization that uses factors of production to make/sell goods and services.

Product Market

Goods and services are sold by firms and purchased by households.

Factor Market

Income earned when an individual sells or rents a factor or production that he/she owns.

Factor Payments

The funds paid to households (rent, wages, interest, dividends)

What does the circular flow model show?

A diagram of interactions in open markets.

What kind of transactions in a factor market?

Household sells >>> Firms Buy Ex: Getting a paycheck

What kind of transactions in a product market?

Firms sell >>> Households Buy Ex: Household buys from the market

Free Enterprise System

Individuals own the factors of production and make decisions about how to use the factors legally.

Why might a market economy need some government intervention?

To provide goods/services that the marketplace doesn’t address. Ex: Fire Department

Characteristics of a Free Enterprise System

Economic Freedom, Competition, Equal Opportunity, Binding Contract, Property Rights, Profit Motive, and Limited Government.

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