2. Micro Terms Economic Perspective: The economic viewpoint which society is viewed. Scarcity: lacking the resources required to meet needs Factors of production: Basic economic resources Land: physical place, gifts from nature (oil, etc) Capitol: manmade items on land (infrastructure) Labor: physical and mental talents of people. Entrepreneurial ability: vision for opportunity COMMON SENSE = ECONOMIC SENSE
3. Micro Terms (cont’d) Choices: decisions made when unlimited wants meet limited means Full employment (of resources): using all economic resources fully Full production (of resources): using things to full efficiency; stresses efficiency Productive efficiency: make product as cheap as possible (black highlighter) Allocative efficiency: how to cheaply produce what people want (colored highlighters) Opportunity cost: value of forgone activity Law of increasing opportunity cost: as time goes on, the value of opportunity cost gets greater.
4. Micro Terms (cont’d) Production Possibilities Table (PPT): Combinations of two goods that can be produced or purchased. Production Possibilities Curve (PPC): Graphic representation of the combination of two goods that can be produced or purchased. Consumer goods: satisfy immediate need (like pizza ingredients). Capital goods: investment that benefits you down the line (like pizza oven). Absolute advantage: One country can make more of a product than another country (who makes most at full employment). Comparative Advantage: One country has a lower opportunity cost of producing a good than another country (who benefits most from trade).
5. “The Economic Way of Thinking” Everything has a cost. (Opportunity cost included) People choose for good reasons. (May not be good to you, but is to them) Incentives matter. (like a bribe) People create economic systems to influence choices and incentives. (not like controlled economies) People gain from voluntary trade. (both people win) Economic thinking is marginal thinking. (look at sections, not averages) The value of a good or service is affected by people’s choices. ( value goes down if people won’t buy) Economic actions create secondary effects. (other things result, acts as a catalyst) The test of a theory is its ability to predict (predict based on past action)
6. PPC’S *types follow opportunity cost of situation. PPC: Increasing PPC: Constant PPC: Zero Capital goods Consumer goods
8. Specialization & Trade Absolute Advantage = U.S. At full employment (when one variable is 0) the U.S. can make more of a product than Mexico. U.S. = 30 soybeans Mexico = 15 U.S. = 90 avocado Mexico = 60
14. Traditional Economy Traditional Economy- economic activity is based on precedent. No change over time; produced for years the same way Collective communitarian use of barter: -> trade something else of value; not dealing with money Examples: Native American culture (trade corn for wheat, etc.) History (traditional groups) own and direct economic activity
15. Command Economy Command economy- associated with communism; government directs essential authority, they decide what they will buy. Determine what people have access to Controls means of production, they produced what THEY felt necessary Economic freedom is replaced by economic security Example: Soviet 5 year plans (past)- all used to build them/ make them industrialized; allowed to say if you didn’t make your good, you’re sent to camp so people can get things done. Whole country works around this plan/goal. China’s (ED2) (present)- if they didn’t make changes they would cease as a government and people would rebel
16. Market Economy Market economy- people direct the economic activity People buy products, so you control it Private individuals own means of production
17. Circular Flow Diagram Produced Costs Gained resources Money income (wages, rents Labor, land, capital, entrepreneurial ability Goods and services Goods and services Consumption expenditures Revenue
18. More on Market Systems Invisible hand (Smith)- idea that if leftalone, economic activity governs itself (through incentives) Efficiency: forces businesses to produce & sell goods in the least costly way (if their price is too high, consumer will just buy it somewhere else!) Incentives: Reason for doing something (saving money, saving time, etc) Freedom: ability to make our own choices
19. Transactions Transaction- event at which a good or service is traded for money (normally between two people) Externalities- How 3rd parties are impacted in a transaction Negative externality/spillover cost: 3rd part is adversely affected & has to pay part of the cost (like people paying for pollution that don’t buy products that produce it) Positive externality/ spillover benefit: 3rd party benefits from a transaction (like person who admires a neighbor’s flowers, but doesn’t make or buy the flowers being admired)
20. Last of Micro Terms Property rights- Your ability to protect what it yours. Bargaining- Make a deal or a compromise between parties. Cost-benefit analysis- decision making process (like a pros and cons list) Marginal cost- cost of the next unit of a good or decision Marginal benefit- extra satisfaction received from the next unit of a good or decision STOPPING POINT: MARGINAL COST = MARGINAL BENEFIT
