Ch. 1 & 2: Introduction Flashcards
(25 cards)
Economics
The study of the choices people make to attain their goals, given their scarce resources.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Economic model
A simplified version of reality used to analyze real-world economic situations. They make behavioral assumptions about the motives of consumers and firms.
The three key economic ideas
- People are rational.
- People respond to economic incentives.
- Optimal decisions are made at the margins (extra benefit vs extra cost).
The three fundamental questions in economics
- WHAT goods and services will be produced?
- HOW will the goods and services be produced?
- WHO will receive the goods and services produced?
Trade-off
The idea that because of scarcity, producing more of one good or service means producing less of another good or service.
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
Centrally-planned economy
An economy in which the government decides how economic resources will be allocated.
Market economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Productive efficiency
A situation in which a good or service is produced at the lowest possible cost.
Allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
Voluntary exchange
A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
Equity vs. Efficiency
Equity involves the fair distribution of economic benefits. There is a constant trade-off and conflict between equity and efficiency.
Normative vs. Positive analysis
Positive analysis is concerned with what is. Normative is concerned with what ought to be, whether a policy is “good” or “bad.” Economics focuses on positive analysis, measuring the costs and benefits of different courses of action.
Production possibilities frontier (PPF)
shows the maximum attainable combinations of two products that may be produced with the available resources and current technology.
Absolute advantage
ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
Comparative advantage
the ability of an individual, a firm or a country to produce a good or service at a lower opportunity cost than competitors.
Product market
markets for goods, such as computers, and services, such as medical treatment.
Factor market
markets for the factors of production, such as labor, capital natural resources and entrepreneurial ability.
The four factors of production
- Labor: includes all types of work
- Capital: physical stuff, like computers and machine tools, that are used to make other goods.
- Natural resources: includes all land, water, oil, iron ore and other raw materials that are used in producing goods
- Entrepreneurial ability: operating a business
free market
a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
Which two amendments of the U.S. constitution guarantee property rights to individuals and firms?
The 5th and 14th Amendments. The 5th declares that the fed. government shall not deprive any person “of life, liberty or property, without due process of law.” The 14th extends this to the state governments.
Why does the government grant patents to individuals and firms to protect intellectual property?
Patents encourage firms to spend money on the research and development necessary to create their new products and ideas.
