Three Basic Questions to Understand the Functioning of the Economic System
1. What gets produced?
2. How is it produced
3. Who gets what is produced?
Starting Presumption of Economics
Human wants are unlimited but resources are not.
Capital
Things that are produced and then used in the production of other goods and services.
Factors of Production
Also known as factors, inputs, or resources. The inputs into the process of production.
Production
The process that transforms scarce resources into useful goods and services.
Three Key Factors of Production
1. Land
2. Labor
3. Capital
Inputs or Resources
Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.
Outputs
Goods and services of value to households.
Theory of Comparative Advantage
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.
Absolute Advantage
A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources.
Comparative Advantage
A producer has a comparative advantage over another in the production of a good or service if he can produce that product at a lower opportunity cost.
Consumer Goods
Goods produced for present consumption.
Investment
The process of using resources to produce new capital.
Production Possibility Frontier (PPF)
A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently (productive efficiency).
Production Efficiency
A state in which a given mix of outputs are produced at the least cost.
Allocative Efficiency
A state in which an economy is producing what people want.
Economic Growth
An increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources (develops new technology).
Command Economy
An economy in which a central government either directly or indirectly sets output targets, incomes, and prices.
Laisse-Faire Economy
Literally from the French: "allow [them] to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.
Market
The institution through which buyers and sellers interact and engage in exchange.
Free Enterprise
The freedom of individuals to start and operate private businesses in search of profits.