socialism
a system of economic organization where:
-Ownership and control of the means of production rest with the state
-Resource allocation is determined by centralized planning
-suffers from an information problem
capitalism
-tends to work better
-Productive resources are owned privately
-Goods and resources are allocated through market prices
-is similar to natural selection. It uses the idea of market efficiency
Collective decision making
the method of organization that relies on public sector decision making to resolve basic economic questions.
3 questions that every economy faces
What will be produced?
How will it be produced?
For whom will it be produced?
law of comparative advantage
The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost.
Production Possibilities Curve (PPC)
outlines all possible combinations of total output that could be produced, assuming a:
1. fixed amount of productive resources
2. given amount of technical knowledge
3. full and efficient use of resources
private property rights
-The right to exclusive use of the property
-Legal protection against invasion from other individuals
-The right to sell, transfer, exchange, or mortgage the property
voluntary trade
-creates value and leads to economic progress
-both parties are made better off.
creation of wealth
The process by which some people become rich will make everybody richer.
ex henry ford
Lack of property rights =
lack of economic progress
Market organization
a method of organization in which private parties make their own plans and decisions with the guidance of market prices
whoever does it the cheapest
lowest opportunity cost
Investment
-the purchase, construction, or development of resources
-However, ______ requires us to give up consumption goods
technology
the knowledge available in an economy at any given time.
-determines the amount of output we can generate with our limited resources.
Market prices
provide a strong incentive for private owners to consider the desires of others and to use and develop resources that are highly valued by others.
Time is money.
Which of the following sayings best reflects the concept of opportunity cost?
If an economy is operating at a point inside the production possibilities curve,
its resources are not being used efficiently.
The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is
a larger output resulting from a more efficient use of resources.
$10 per hour.
The price of an airline ticket from Denver to Washington, D.C. costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his
Does voluntary exchange create wealth (value)?
Yes, trade generally permits the trading partners to gain more of what they value; this is why they agree to the terms of the exchange.
the law of comparative advantage.
Now that Blake paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects
Which of the following will most likely occur under a system of clearly defined and enforced private property rights?
Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.
If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who
have a comparative advantage in the productive activity.
The economic wealth of this country is primarily the result of the profit made by some individuals at the expense of others." The person who made this statement
has failed to comprehend that mutual gains result from specialization and exchange.
When the market for a good is in equilibrium,
all units valued more highly than the opportunity cost of production will be supplied.
Which of the following events would definitely cause a decrease in the equilibrium price of cotton shirts?
A decrease in the price of wool shirts and a decrease in the price of raw cotton.
If cable TV service and satellite TV service are substitutes,
a decrease in the price of cable will decrease the demand for satellite TV.
The invisible hand principle indicates that competitive markets can help promote the efficient use of resources
even when each market participant cares only about their own self interest rather than about the overall efficiency of resource use.
Which of the following is most likely to lead to an increase in the rental price of apartments near your campus?
an unexpected increase in enrollment at your college
A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for large cars, causing their prices to rise." These statements
contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand.
The number of people willing to buy tickets to the Super Bowl is invariably greater than the number of tickets (and seats) available. This is evidence that the price of the tickets is
lower than the equilibrium price.
If Harry only pays $25,000 to purchase a new car even though he would have been willing to pay as much as $35,000 for the car, this indicates that
He reaped $10,000 of consumer surplus from the transaction.
Producers are willing to offer greater quantities for sale at higher prices because
they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses
Which of the following would most likely increase the demand for peanut butter?
a decrease in the price of jelly, a good that is often used with peanut butter
Law of demand
-There is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase
-Results in a downward sloping _____curve.
consumer surplus
-The difference between the maximum amount consumers would be willing to pay and the amount that they actually pay.
-is the area below the demand curve but above the price.
-represents the net gains to buyers from market exchange.
change in quantity demanded
a movement along the curve caused by a change in the price of the good in question
change in demand
a shift of the curve caused by anything other than the change in price of the good in question
law of supply
-There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce
- upward sloping
producer surplus
-is the difference between the lowest price a supplier will accept to produce the good (the opportunity cost of the resources) and the price they actually get (the market price)
Elastic supply
the quantity supplied is sensitive to changes in price. Thus a change in price leads to a relatively large change in quantity supplied.
quantity supplied
a movement along the curve caused by a change in the price of the good in question
change in supply
a shift of the curve caused by anything other than the change in price of the good in question.
a shift in the entire supply curve.
Inelastic supply
the quantity supplied is not very sensitive to changes in price. Thus, a change in price leads to only a relatively small change in quantity supplied.
Invisible Hand Principle
The tendency for people, while pursuing their own interests, to promote the economic well-being of society.
If there is excess supply
price will fall
If there is excess demand
price will rise
So in equilibrium
there is nor excess supply or excess demand