Honors Econ Mr. T Ch 1-2

Why do we study economics?

We don't have unlimited money

What are the top two items that have the most percentage of income spent on?

Transportation and Food (both 14%)

What is economics?

It's the study of how people spend their money

What is a need?

What one must have in order to survive (food, shelter, etc)

What is a want?

Something that is nice to have but not essential

What are goods?

Physical objects such as clothes or shoes

What are services?

Actions that one person performs for another such as a haircut, doctors visit, etc.

What is a scarcity?

Producers cannot meet the demand. It's not a choice

What is a shortage?

Producers will not meet the demand at least at current prices. They can meet it but choose not to

What is an example of a shortage and why is it a shortage?

There will be a shortage of doctors because there's a lower supply and a higher demand of them. It is a shortage because we could educate more, but we CHOOSE not to

What are the four factors of production?

Capital, entrepreneur, land, and labor (CELL)

What is an entrepreneur?

A risk taker who uses the three other factors of production

What is capital? (Not money)

Any human made resource (not land or labor)that is not used to create other goods or services such as factories and equipment

What is land?

Natural resources that are used to make goods and services such as fertile land, coal, water, forces, etc.

What is labor?

The effort that people devote to a task for which they are paid such as Doctors, TV repairman, etc.

What are the two types of capital? (Again, not money)

Human capital and physical capital

What is human capital?

the skills and knowledge gained by a worker through education and experience, the "know how

What is physical capital?

all human-made goods that are used to produce other goods and services; tools and buildings

True or false. Gains in either physical or human capital can improve efficiency?

TRUE, for example dishwashers cut down time spent washing dishes

What are trade-offs?

All of the alternatives sacrificed when we make a decision

What is an opportunity cost?

the most desirable alternative given up as the result of a decision; the most valuable tradeoff

What do you opportunity costs that involves adding or subtracting one more unit of something ($, time, etc) involve?

Marginal decisions ("thinking at the margins")

What does "thinking at the margins" mean?

Deciding what to do with one more unit of resource

What is cost/benefit analysis?

Decision makers have to compare what they will sacrifice to what they will gain

What are examples of diminishing marginal returns?

Drilling for oil (We'll never run out, because the cost of extracting the last gallons will exceed their worth)
Automobile Safety (We could just outlaw cars, but we won't. Or maybe go with self driving cars
Clean air/water (There is an acceptable amount o

What is a production possibility curve (PPC)?

It's a graph that shows the trade-offs society makes and using its resources

What does the PPC measure?

Maximum efficiency like using resources in the most productive way possible

What do points inside the PPC mean?

They are in efficient and resources are being underutilized

Are points outside the PPC possible?

They are impossible unless there is some change, such as better technology, discovery of new source of energy, influx of immigrants, etc. (improving the quality and quantity)

What does a PPC reflect?

Increasingly expensive trade-offs

What is the law of increasing opportunity cost?

As we shift factors of production from making one good or service to another, the opportunity cost of producing the second item increases

What is an economic system?

A system that determines how a society produces and distributes goods and services

What are the three big questions of an economic society?

WHAT goods and services should we produce?
HOW should we produce them?
WHO gets to consume them?

What are the three basic types of economies?

Traditional, market, and centrally planned

What is a traditional economy?

Economic decisions are made by customs
hunting/ gathering/farming
no technology
no global trade
small societies that revolve around families
Ex: Australian Aborigines

What is a market and why do they exist?

A market is just an arrangement that allows buyers and sellers to exchange goods and services. They exist because no one is self-sufficient and they allow for specialization and therefore a more efficient use of resources

True or false. The more you know about your good or service, the more efficiently you can provide it


What makes the markets necessary and why?

Specialization makes it necessary because if we were all making the same things there would be no need to exchange anything

What is a free market economy?

Decisions are made by market forces of supply and demand
emphasizes individual freedoms

What type of economy do we have today?

Capitalist, free enterprise system

What is capitalism?

Private citizens own the means of production

What is free enterprise?

Businesses are free to compete with minimal government interference

What type of flow of money and good and services is in a free market economy?

Circular (pic he sent us)

What are the five characteristics of a free market economy?

consumer sovereignty
private property rights
profit motive

What are exchanges?

Places where goods and services are so that determine prices

What does consumer sovereignty mean?

consumers determine what products will be produced and the prices of goods and services

What are private property rights?

We get to keep what we have a legal claim to, subject to taxes and eminent domain

What is competition?

The best wins - - best ideas, best marketing, best execution, etc. Need fair competition for best results in society overall

What is profit motive?

You get to eat what you kill. It gives people incentive to take risks

What is Adam Smith's invisible hand theory?

Smith championed a laissez-faire economy which said that it was better to let individuals decide what was best for them with minimal government intrusion. It was a combination of self interest and competition

What are 4 advantages of a free market?

1. Choice, Markets present a wide range of options from which to choose
2. Efficiency, Markets respond to what the consumer chooses
3. Freedom, Make a living however you want
4. Growth, Markets encourage innovation, because entrepreneurs are always on the

What are some limits to the invisible hand and free market risk?

Human nature sometimes needs to be checked. People can be greedy and cheat. You need good infrastructure to ensure fair competition. Some suicidal needs maybe too big for a free market to answer efficiently

True or false. Most people already know what they want before coming to a market

FALSE, Most people don't know what they want unless they see it in context

What does behavioral economics suggest?

We aren't really all that rational

What are examples of centrally planned economies?

Socialism and communism

What is a centrally planned economy?

Government owns land and capital
it also tells laborers where to work and what they'll be paid
Says what will be produced and in what amount
Consumers have no choice and the productivity will not likely meets the wants and needs

True or false. We are a mix of free market and centrally planned


What is socialism?

Arrange of political/economic systems that are designed to distribute wealth evenly. Some have public and or ship; some have really high taxes. It can be democratic and it is vague

What is communism?

Government and the resources and makes all economic decisions

What were the beliefs of Karl Marx?

Labor is a source of all value
It's only fair for workers to benefit from their labors
Capitalism is bad because it benefits the wealthy owners of labor the most
It will be authoritarian, dominated by a person or party

Who owns all the property in communism?

The state

Is private property possible for socialism?

YES But most property is held in common

What are theoretical advantages of centrally planned economies?

Easy way to jump start an economy
Can achieve explicitly stated goals
Provide security: jobs and incomes are guaranteed
Seen buy some as a equitable, more humane than capitalism

What are disadvantages of centrally planned economies?

How does the government credibly make all those decisions?
Leads to poor quality of goods and services as well as shortages
No incentive to work hard
Change is discouraged because it requires massive retooling. Thus, economy becomes inefficient

True or false. Most economies are mixed because laissez-faire economies have their limits


True or false. The government does not have a big influence on our economy

FALSE, The government heavily influences the economy

How is the government a big influence on the economy?

The government spends about 63% of the budget on the social safety net
The government earns 1/3 of the land in the US
The government regulates extensively (preventing monopolies and requiring clean air, water, food, etc.)

True or false. The government should do only what the private sector cannot do efficiently or will not do


What needs cannot be met by private sector?

Interstate highways
Protection of private property
Fair dealings