Economics Chapters 1-3/ Weeks 1-3 Review

Chapter 1- The Study of Economics (3- 34)

Capital- Physical aids to the production process. (factories, machinery, and tools)
Ceteris Paribus- Other things being equal. Assumption that other variables remain constant.
Cost Benefit Analysis- Comparison of cost and benefits.
Economics- The study of how to use our limited resources to satisfy our unlimited wants as fully as possible.
Economic Resources- The scarce inputs used in the process of creating goods or providing a service. (Land, Labor, Capital, entrepreneurship)
Economic Theories- Generalizations about causal relationships between economic factors, and variables.
Entrepreneurship- Combining land, labor, and capital to produce cost effective ways to earn a profit. Most be willing to take risks.
Free Trade- Trade that is not hindered by artificial restrictions or trade barriers of any type.
International Economics- The study of international trade and finance. (Why nations trade and how it’s financed)
Labor- Mental and physical work of those employed in the production process.
Land- All the natural resources/ raw material used in the production process.
Law of Increasing Cost- As more of a specific product is produced the more it costs. Opportunity cost per unit will increase.
Macroeconomics- The study of economics as a whole and how to influence economy’s total performance.
Normative Judgment- Value judgments about what should be, rather then what is.
Opportunity Cost- The best/ most valued, alternative that is sacrificed when a particular action is taken.
Production Possibilities Curve- Curve that shows a combo. of goods that an economy can produce w/ its present stock of economic resources and present way of production.
Theories- Generalizations about the relationship w/ fact or variable.
Law of Increasing Cost- As a product is produced you have to use resources that are not easy for an economy to produce then it cost more to produce a unit of that product.
Three Fundamental Questions-
What to produce?
How to produce?
For whom to produce?
Five Economic Goals
1- Full Employment of Economic Resources
2- Efficiency
3- Economic Growth
4- A Far Distribution of Income
5- A Stable Price Level



Chapter 2- Economic Systems (35- 63)

Capitalism- An economic system in which the means of production are privately owned and fundamental economic choices are made by individual buyers and sellers interacting in markets.
Elements of Capitalism
1- Private Property and Freedom of Choice
2- Self- Interest
3- Markets and Price
4- Competition
5- Limited Government Intervention
Command Socialism- An economic system in which the means of production are publicly owned and the fundamental economic choices are made by a central authority.
Elements of Command Socialism
1- Public Ownership: EVERYTHING is owned by the public.
2- Centralized Decision Making: All economic decisions are made by a central authority. The central authority is also in charge of making sure that the decisions are carried out.
3- Economic Planning: Central Authority (central planning board) gathers a lot of information about various economic aspects and draws up a master plan concerning the best choices.
4- Allocation by Command: Resources and products are allocated by directive or command and the central authority used its power to enforce these decisions.
How Command Socialism Answers The Three Questions (Page 47)
- The answers to the 3 fundamental questions are decided by the central planning board. The central planners can select any output targets, any mix of products within limits set by the economy’s productions capacity.
1- What To Produce-
2- How To Produce- The central planners must try to stretch the economy’s limited resources as far as possible.
3- For Whom To Produce-

Common Property Resources- Resources that belong to society as a whole rather then to particular individuals.
Consumer Sovereignty- An economic condition in which consumers dictate which goods and service will be produced by business.
Economic Systems- The set of institutions and mechanisms by which a society provide answers to the three fundamental questions.
Household- A living unit that also functions as an economic unit. Whether it consists of a single person or a large family, each household has a source of income and responsibility for spending the income.
Invisible Hand- A doctrine introduced by Adam Smith in 1776 holding that individuals pursuing their self-interest will be guided (as in by the invisible hand) to achieve objectives that are also in the best interest of society as a whole.
Laissez Faire Economy- An economy in which the degree of government interventions is minimal.
Market- All actual or potential buyers and sellers of particular items. Markets can be international, national, regional, or local.
Means of Production- The raw materials, factories, farms, and other economic resources used to produce goods and services.
Mixed Economy- Economies that represent a blending of capitalism and socialism. All real- world economies are mixed economies. (Page 49)
Reasons For a Mixed Economy
1- Public Ownership of the Means of Production
2- Government Decision Making
Pure Competition- A situation in which a large number of relatively small buyers and sellers and interact.
The Circular Flow of Pure Capitalism- Look at page 39
How Capitalism Answers the Three Fundamental Questions-
1- What to Produce: Because consumers can spend what they want producers need to make what consumers want.
2- How to Produce: How to make the product the cheapest way. Weather it be using machines, or people whichever way costs less.
3- For Whom to Produce- You have to decide who to produce the products for and how much the money they are willing to pay.




Chapter 3- Demand and Supply: Price Determination in Competitive Markets

Change in Demand- An increase or decrease in the quantity demanded at each possible price, caused by a change in the determinants of demand; represented graphically by a shift of the entire demand curve to a new position.
Change in Quantity Demanded- An increase or decrease in the amount of a product determined as a result of a change in its price, with factors other then price held constant; represented graphically by movement along a stationary demand curve.
Change in Quantity Supplied- An increase or decrease in the amount of a product supplied at each and every price, caused by a change in its price, with factors other then price held constant; represented graphically by a shift of the entire supply curve.
Complement- A product that is normally purchased along with another good or in conjunction with another good.
Demand- A schedule showing the quantities of a good or service that consumers are willing and able to produce at various prices during a given period of time, when all factors other than the product’s price remains.
Demand Curve- A graphical representation of demand, showing schedule and determine the precise position of the demand curve: income, tastes and preferences, expectations regarding prices, the price of related goods, and the number of producers in the market.
- Price on Vertical Axis
- Quantity on the Horizontal Axis
- Each point on curve represents price and quantity that consumers would demand per year at that price.
Determinants of Demand- The factors that underline the demand schedule and determine the precise position of the demand curve: income, tastes and preferences, expectations regarding prices, the price of related goods, and the number of producers in the market.
- Any demand curve is based on assumption that these factors are held constant.
Determinants of Supply- The factors that underlie the supply schedule and determine the precise position of the supply curve: technology, resource prices, and number if consumers in the market.
Equilibrium Price- The price that brings about equality between the quantity determined and the quantity supplied.
Equilibrium Quantity- The quantity demanded and supplied at the equilibrium price.
Income Effect- Consumers ability to purchase greater quantities of a product that has a declined in price.
Inferior Good- A product for which demand decreases as income increase and increase as income decreases.
- An increase in income will cause consumers to produce less of an inferior good.
Law of Demand-The quantity demanded of a product is negatively, or inversely, related to its price. Consumers will produce more of a product at lower prices then at its higher price.
Law of Supply- The quantity supplied of a product is positively, or directly, related to its price. Producers will supply a larger quantity at a higher price then at lower price.
Motivating- The function of providing incentives to supply the proper quantities of demanded products.
Normal Good- A product for which demand increase and income increase and decrease as income decreases.
Rationing- The function of dividing up or allocating a society’s scarce items among those who want them.
Shortage- An excess of quantity demanded over quantity supplied.
Substitute- A product that can be used in place of some other product because, to a greater or lesser extent , it satisfies the same consumers wants.
Substitution Effect- Consumers’ willingness to substitute for other products the product that has declined in price.
Supply- A schedule showing the quantities of a good or service that producers are willing and able to offer for a sale at various prices during a given time period, when all factors other then the product’s price remain unchanged.
Supply Curve- A graphical representation of supply.
Surplus- An excess of quantity supplied over quantity demanded.
Technology- The state of knowledge about how to produce products.
Technological Advances- Discovery that makes it possible to produce more or better products from the same resources.