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Economics |
The study of how people choose to use their limited resources to satisfy their unlimited wants. |
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Scarcity |
The condition that results because people have limited resources and unlimited wants. |
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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. |
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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. |
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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. |
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What is the difference between a shortage and scarcity? |
Shortages are temporary, scarcity is forever. |
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Why are all goods/services scarce permanently? |
All resources are scarce, and people have unlimited wants. |
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Factors of Production |
The resources used to produce goods and services. Land, Labor, Capital, and entrepeneur. |
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Goods |
Physical articles produced for sale or use (Food, clothing, cars). |
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Services |
Work done by someone else for which a consumer, business, or government is willing to pay (Teaching, gardening, child care). |
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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. |
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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. |
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Tradeoffs |
The exchange of one benefit or advantage for another that is though to be better. |
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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. |
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Economic Efficiency |
The result of using resources in a way that maximizes the production of goods and services. |
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What does a PPF show? |
It shows how an economy might use its resources to produce two goods. |
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Economic System |
A society’s way of coordinating the production and consumption of goods and services. |
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3 Fundamental Economic Questions |
What to produce, how to produce, and for whom? |
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Traditional Economy |
An economic system in which decisions about production and consumption are based on custom and tradition. |
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Command Economy |
An economic system in which decisions about production and consumption are made by a ruler or government. |
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Market Economy |
An economic system in which decisions are left up to individual producers and consumers. |
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What does Adam Smith’s "Invisible Hand" represent? |
The way markets coordinate trade. |
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Which economic goals are emphasized in a traditional economy? |
Security and Stability |
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Which economic goals are emphasized in a market economy? |
Efficiency and Freedom |
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Which economic goals are emphasized in a command economy? |
Security and Equity |
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Households |
Made up of a person or group of people living together. |
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Firms |
An organization that uses factors of production to make/sell goods and services. |
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Product Market |
Goods and services are sold by firms and purchased by households. |
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Factor Market |
Income earned when an individual sells or rents a factor or production that he/she owns. |
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Factor Payments |
The funds paid to households (rent, wages, interest, dividends) |
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What does the circular flow model show? |
A diagram of interactions in open markets. |
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What kind of transactions in a factor market? |
Household sells >>> Firms Buy Ex: Getting a paycheck |
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What kind of transactions in a product market? |
Firms sell >>> Households Buy Ex: Household buys from the market |
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Free Enterprise System |
Individuals own the factors of production and make decisions about how to use the factors legally. |
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Why might a market economy need some government intervention? |
To provide goods/services that the marketplace doesn’t address. Ex: Fire Department |
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Characteristics of a Free Enterprise System |
Economic Freedom, Competition, Equal Opportunity, Binding Contract, Property Rights, Profit Motive, and Limited Government. |
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