Econ midterm Flashcards
(55 cards)
What is meant by Economic Scarcity?
resources are limited and cannot meet all human needs and wants demand is higher than a supply of a good or service
What makes it the central economic problem?
it forces people to make choices about how to allocate limited resources to satisfy unlimited wants (Opportunity cost)
What is opportunity cost?
The potential benefits or losses an individual, business or investor misses out on when choosing one thing over the other.
Example… instead of working for $20 you decide to party which cost you $30 so your opportunity cost would be $30 because you chose that overworking and making money.
Another way of defining opertunity cost
The value of the next best foregoing alternative. Example: Sure! Imagine you own a bakery and you have enough resources to either bake cakes or cookies, but not both at the same time. If you decide to bake cakes, the opportunity cost is the profit you could have made from baking cookies instead. In other words, the opportunity cost is the value of the next best alternative that you give up when making a decision.
What is the relationship between scarcity, choice and opportunity cost?
Scarcity refers to the limited nature of resources, meaning there are not enough resources to satisfy all human wants and needs. Because of scarcity, individuals and businesses must make choices about how to allocate their limited resources.
When a choice is made, the opportunity cost is the value of the next best alternative that is given up. Essentially, opportunity cost represents the trade-offs involved in any decision. So, scarcity forces us to make choices, and every choice comes with an opportunity cost.
The major types of resources or means of production in land
- Natural Resources: These are resources that come from the earth, such as minerals, forests, water, and fertile land. They are often used as raw materials in the production process.
- Labor: This encompasses the human effort used in the production of goods and services. It includes both physical and intellectual efforts.
- Capital: This refers to the tools, machinery, and buildings used in the production of goods and services. Capital is crucial for increasing the efficiency of production.
- Entrepreneurship: This involves the skills and risk-taking ability of individuals to combine the other resources (land, labor, and capital) to produce goods and services. Entrepreneurs drive innovation and economic growth.
These resources are essential for the production process and contribute to the overall economic development.
The major types of resources or means of production in labor
- Human Capital: This refers to the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.
- Physical Labor: This is the physical effort exerted by workers in the production process. It includes manual tasks that require physical strength and endurance.
- Intellectual Labor: This involves mental effort and expertise, such as planning, problem-solving, and decision-making. It includes jobs that require specialized knowledge or creative thinking.
- Skilled Labor: Workers who have specialized training or skills, often gained through education or apprenticeships, fall into this category. Examples include electricians, plumbers, and IT professionals.
- Unskilled Labor: Workers who perform tasks that do not require specialized skills or training. These jobs often involve repetitive tasks and can be learned relatively quickly.
Each type of labor contributes uniquely to the production process and is essential for the functioning of various industries and the economy as a whole.
The major types of resources or means of production in capital
- Physical Capital: This includes tangible assets such as machinery, buildings, tools, and equipment used in the production of goods and services. These assets help increase productivity and efficiency.
- Financial Capital: This refers to the funds that businesses use to invest in physical capital and other resources. It includes money, stocks, bonds, and other financial instruments.
- Human Capital: Although primarily associated with labor, human capital can also be considered a form of capital in terms of the investment in education, training, and health that enhances workers’ productivity.
- Intellectual Capital: This encompasses intangible assets such as patents, trademarks, copyrights, and brand recognition. These assets can provide a competitive advantage and contribute to the production process.
- Social Capital: This refers to the networks, relationships, and social interactions that facilitate cooperation and economic transactions. Strong social capital can enhance business operations and community development.
Each of these types of capital plays a critical role in the production process and overall economic growth.
How the production possibility frontier or PPF highlights The idea of opportunity cost
The Production Possibilities Frontier (PPF) is a curve that illustrates the concept of opportunity cost by showing the maximum possible output combinations of two goods or services that an economy can achieve when all resources are fully and efficiently utilized. And by showing the slope of the curve, which indicates the cost of producing one good in relation to another.
how to interpret employment, unemployment, and underemployment using the PPF.
nterpreting employment, unemployment, and underemployment using the Production Possibilities Frontier (PPF) involves understanding how these concepts relate to the efficient use of resources:
- Employment: When an economy is operating on the PPF curve, it means that all available resources, including labor, are fully and efficiently employed. This represents a situation of full employment where the economy is producing at its maximum potential.
- Unemployment: If the economy is operating inside the PPF curve, it indicates that resources, including labor, are not being fully utilized. This situation reflects unemployment, where there are idle resources that could be used to produce more goods and services.
- Underemployment: Underemployment occurs when resources, particularly labor, are not being used to their full potential. This might mean workers are employed but not in jobs that fully utilize their skills and capabilities. In terms of the PPF, underemployment would also place the economy inside the curve, indicating inefficiency.
To summarize:
- On the PPF: Full employment and efficient use of resources.
- Inside the PPF: Unemployment or underemployment, indicating that the economy is not using all its resources efficiently.
- Outside the PPF: Currently unattainable with existing resources and technology.
Thus, the PPF helps illustrate the impact of employment levels on an economy’s production efficiency.
How does The production possibilities frontier demonstrate scarcity and trade-offs
- Scarcity: The PPF curve itself represents the limits of an economy’s productive capacity given its finite resources. Anything outside the curve is unattainable, highlighting the scarcity of resources.
- Trade-offs: The PPF shows that to produce more of one good, the economy must produce less of another. This trade-off is due to limited resources. Moving along the curve from one point to another demonstrates the opportunity cost of reallocating resources from one good to another.
For example, if an economy is producing both cars and computers, and it wants to produce more cars, it will have to produce fewer computers. The PPF visually captures this trade-off and the concept of opportunity cost.
Why is the Production possibilities frontier concave? Concave means curve inward.
The PPF is concave because not all resources are equally good at making different things. When you switch resources from making one product to another, you lose more and more of the first product. This increasing loss makes the curve bow outwards.
What language does the word economics get its name?
The word “economics” comes from the Greek language. It originates from the Greek word “oikonomia,” which means “household management.”
Who created the word economics?
Aristotle
Related subjects and sciences of economics
- Political Science: Studies the impact of government policies on economic conditions.
- Sociology: Examines how societal behaviors and structures affect economic activities.
- Psychology: Looks at how human behavior and decision-making impact economics.
- History: Provides context on how past economic events shape current economic theories and practices.
- Mathematics: Used for modeling economic theories and analyzing data.
- Geography: Studies how location and environment impact economic activities.
- Law: Examines the legal framework within which economic activities occur.
These disciplines often overlap and contribute to a deeper understanding of economic principles and practices.
What causes the production possibility, frontier to shift over time
due to several factors:
- Technological Advances: Improvements in technology can make production more efficient, allowing more goods to be produced with the same resources.
- Resource Availability: An increase in resources, such as labor or capital, can expand production capabilities.
- Education and Training: Better education and training can enhance the productivity of the workforce.
- Policy Changes: Government policies, such as tax incentives or subsidies, can encourage production and investment.
- Economic Growth: Overall economic growth can increase the production capacity of an economy.
When these factors improve, the PPF shifts outward, indicating that more of both goods can be produced.
Why did ancient or classical philosophers deal with economic questions?
Ancient or classical philosophers dealt with economic questions because they were concerned with the well-being and organization of society. They explored topics like resource allocation, wealth distribution, and the management of households and states. Philosophers like Aristotle and Plato sought to understand how economic activities could contribute to a just and prosperous society. Their inquiries laid the groundwork for later economic theories and practices.
Major characteristics of capitalism
private property, profit motive, competition, free market mechanism, consumer sovereignty, limited government intervention, self-interest, price system, capital accumulation, and economic freedom
What are the benefits of self interest?
- Economic Efficiency: Individuals and businesses strive to maximize their own benefits, leading to more efficient allocation of resources.
- Innovation and Growth: The desire for profit drives innovation, leading to new products, services, and technologies.
- Consumer Choice: Businesses compete to meet consumer needs and preferences, resulting in a greater variety of goods and services.
- Incentive for Hard Work: Self-interest motivates individuals to work harder and be more productive, contributing to overall economic growth.
- Wealth Creation: As businesses grow and succeed, they create wealth, which can lead to improved living standards.
- Investment Opportunities: Self-interest encourages individuals to invest in businesses and projects that promise good returns, leading to economic development.
- Market Regulation: Competition driven by self-interest helps regulate prices and quality, benefiting consumers.
- Job Creation: Successful businesses expand and create more job opportunities.
- Resource Utilization: Self-interest ensures that resources are used where they are most valued and needed.
- Economic Freedom: Individuals have the freedom to pursue their own economic goals, leading to a more dynamic and flexible economy.
These benefits collectively contribute to the overall dynamism and prosperity of a capitalist economy.
Benefits of private property
- Incentive for Investment: People are more likely to invest in and improve their property if they own it.
- Economic Efficiency: Private ownership encourages the efficient use of resources.
- Wealth Creation: Ownership of property can lead to wealth accumulation and economic growth.
- Innovation: Owners are motivated to innovate and improve their property.
- Personal Freedom: Private property rights support individual freedom and autonomy.
- Market Transactions: Property can be bought, sold, and traded, facilitating economic activity.
Shortly summarize the benefits of profit motive in capitalism
- Encourages Innovation: Businesses are driven to develop new products and services to attract customers.
- Increases Efficiency: Companies strive to reduce costs and improve efficiency to maximize profits.
- Drives Economic Growth: The pursuit of profit leads to business expansion and job creation.
- Improves Quality: Competition for profit motivates businesses to improve the quality of their goods and services.
- Resource Allocation: Profitable businesses attract investment, leading to better allocation of resources.
Shortly summarize the benefits of competition in capitalism
:
- Improves Quality: Businesses strive to enhance their products and services to attract customers.
- Lowers Prices: Competition drives companies to reduce costs and offer better prices.
- Encourages Innovation: Firms innovate to stand out and gain a competitive edge.
- Increases Efficiency: Companies become more efficient to survive and thrive in the market.
- Expands Consumer Choice: Competition results in a wider variety of products and services for consumers.
Shortly summarize the benefits of free market mechanism in capitalism
- Efficient Resource Allocation: Resources are directed to where they are most valued.
- Consumer Sovereignty: Consumers have the power to influence production through their purchasing choices.
- Innovation and Growth: Businesses innovate to meet consumer demands and stay competitive.
- Price Regulation: Supply and demand dynamics help regulate prices naturally.
- Economic Freedom: Individuals and businesses have the freedom to pursue their economic interests.
Shortly summarize the benefits of consumer sovereignty in capitalism
- Product Improvement: Businesses must continuously improve products to meet consumer demands.
- Market Responsiveness: Companies quickly adapt to changing consumer preferences.
- Variety of Choices: Consumers enjoy a wide range of products and services.
- Competitive Prices: Businesses compete to offer better prices to attract consumers.
- Empowerment: Consumers have the power to influence market trends and production decisions.
