Understanding Economics: Principles and Applications

What is Economics?

Economics is the study of choices that people make to satisfy their needs and wants.

Factors of Production

• Land
• Labor
• Capital
• Entrepreneurship

Goal of Entrepreneurship

The goal of entrepreneurship is to be successful and maximize profit.

Why is Scarcity a Basic Problem of Economics?

Scarcity is a basic problem because wants are unlimited, even when resources are limited. Therefore, it's crucial to use resources effectively.

What Issues Must Producers Address to Distribute/Allocate Resources?

1. What to produce?
2. How to produce?
3. For whom to produce?

Why Do Producers Study Productivity?

Producers study productivity to determine if resources are being used wisely.

Why is Sacrifice an Important Element of Economic Choice?

Sacrifice forces people to make trade-offs and results in opportunity costs.

What Assumptions are Involved in Creating a PPC (Production Possibilities Curve)?

1. The amount of available resources and technology won't change during the time being studied.
2. All resources being used are utilized as efficiently as possible.

Why Might Future Production Possibilities Differ from Current Production Possibilities?

1. Changes in technology.
2. Changes in the factors of production.

What are the Difficulties Associated with Barter?

1. It relies on bargaining.
2. It results in complicated transactions.

Why is True Self-Sufficiency Rare?

1. It requires a large supply of tools, equipment, and raw materials.
2. It demands extensive skills and knowledge in a variety of fields.

What are the Economic Pros and Cons of Interdependence?

Pros: Individuals are not required to have all skills; they have access to the skills of others.

Cons: There is a cost to sharing skills.

What are the Roles of Self-Interest and Incentives in a Market Economy?

1. Individuals promote their own self-interest.
2. This directly benefits themselves and indirectly benefits others.
3. An individual's job provides them with money, and others get a product or service.

What are Two Markets of the Circular Flow Model?

Resource markets and product markets.

The Circular Flow Model

Product Markets:

• Households provide money payments to Businesses.
• Businesses provide goods and services to Households.

Resource Markets:

• Households provide productive resources to Businesses.
• Businesses provide money income payments to Households.

What is Marginal Benefit and Diminishing Marginal Benefit?

1. Marginal Benefit is the willingness to pay for one more unit of a good.
2. Diminishing Marginal Benefit is the resistance to paying for one more unit of a good.

How Does the Circular Flow Model Reflect Exchange?

Households give productive resources to businesses in exchange for money payments, and businesses provide goods and services to households in exchange for money payments.

How Do Nations Decide How to Use Scarce Resources?

Through interdependence, nations decide which nation has the most available resources.

Determinants of Supply and Demand

Supply: Changes in technology, weather, price of inputs, number of firms, expectations of future prices, and government taxes/subsidies/regulations.

Demand: Changes in customer preferences, income, information, number of customers, and expectations.

Definitions

• Barter: Trading goods/services for other goods/services.
• Law of Supply: As price increases, supply increases (and vice versa).
• Law of Demand: As price increases, demand decreases.
• Law of Supply and Demand: If supply decreases and demand increases, price increases. If supply increases and demand decreases, price decreases.