Unit 1.1 - What Is Economics? Scarcity, Choice, and Economic Models

All 104 cards in this deck

Every term and definition, free to read. Hit study above to practice them as flashcards.

A location within the curve indicates inefficiency, while one outside the curve cannot be achieved with existing resources.

Points inside and beyond the PPC

A phenomenon where larger amounts of one good must be sacrificed to gain additional units of another as production continues in a specific direction.

Increasing opportunity cost

A situation where each additional unit of a good requires giving up the same amount of another good, regardless of the production level.

Constant opportunity cost

basic economic problem

The fundamental issue of scarcity, where limited resources must be allocated to meet unlimited human needs and wants, prompting economic choices.

change

Economic change refers to the continual evolution of the economic world, necessitating that economic agents adapt their thinking. It can be influenced by various factors, including institutional, structural, technological, economic, and social changes, making it essential to understand this concept in economics.

choice

The act of selecting among alternatives in economics, driven by the necessity to make decisions due to finite resources and infinite wants, leading to opportunity costs.

A macroeconomic tool explaining how economic activity is determined.

The circular flow of income model

A segment of the circular flow model that includes only domestic economic participants like households, firms, and government.

closed economy

Businesses use factors of production to generate or supply output of goods and services, traditionally aiming to maximize profit.

Firms

Individual consumers provide their labour services to firms, in return for income. With this, they aim to maximize their utility from purchases.

Households

The institution that aims to enhance societal welfare through taxation and public spending, irrespective of political views.

Government

The version of the circular flow model that adds the foreign sector, so households and firms also trade with the rest of the world through exports and imports.

open economy

State the formula: income

income = rent + wages and salaries + interest + profit National income equals the sum of returns to the four factors of production: rent (land), wages and salaries (labour), interest (capital) and profit (enterprise).

Injections

Additions to the circular flow of income, such as government spending, investments, and exports, which increase the total money available in the economy.

Leakages

Withdrawals from the circular flow of income, which include savings, taxes, and imports, reducing the total money available in the economy.

circular flow of income

A macroeconomic model illustrating how economic activity and national income are determined through the interactions of economic agents, such as households and firms, showing the flow of income and expenditure.

The roles and responsibilities of governments in regulating market behaviors.

intervention

The scenario where the market does not allocate resources in a manner that optimizes overall societal welfare.

Market failure

The way an economy is organized and run, including how scarce resources are allocated between competing uses.

An economic system

Allocation

The process of distributing scarce resources among various uses to satisfy the needs and wants of economic agents in an economy.

Economic agents

Decision makers in the economy, including consumers, firms, and governments, whose choices impact the allocation of scarce resources and overall economic outcomes.

Economics

The study of how resources are allocated to meet the unlimited needs and wants of individuals, governments, and firms, examining social behaviors and interactions in the economy.

Needs and wants

Needs are essential requirements for survival, while wants are desires for goods and services that enhance quality of life; both drive economic decision-making.

Scarce resources

Resources that are limited in availability, requiring economic agents to make choices about their allocation to satisfy endless needs and wants.

behavioral economics

A branch of economics that studies how psychological factors influence the decisions of economic agents. It recognizes that individuals do not always act rationally and that their choices can be affected by biases and social influences, impacting overall economic outcomes.

resource allocation

The process through which economic agents make decisions about how to distribute scarce resources among competing uses. This involves making choices that can affect the well-being of individuals, firms, and governments, and is central to understanding economic activity.

social science

A field of study that examines how individuals and societies allocate scarce resources to satisfy their unlimited needs and wants. Economics, as a social science, focuses on the behaviors and interactions of economic agents, including consumers, firms, and governments, and how their choices impact overall well-being.

Compensation for labor, including hourly pay and fixed monthly amounts.

Wages and salaries

Desires or things people would like to have to satisfy more of.

wants

Factors of production that can be replenished naturally, such as air and solar energy.

renewable resources

Income paid to workers on an hourly basis, rather than as a fixed amount each month.

Wages

Intangible offerings provided by individuals and firms that customers pay for.

services

Resources that cannot be replaced once used, like fossil fuels.

Non-renewable resources

Tangible products that can be physically touched, such as furniture and cars.

goods

The financial gain obtained from entrepreneurial activities.

Profit

The four categories of resource required to make any good or service: land, labour, capital and enterprise.

factors of production

The human resources necessary for the production process.

Labour

The natural resources utilized in the production process.

Land

The necessities that individuals must possess to survive.

needs

The non-natural products used in the production process.

Capital

The reward associated with the use of land in production.

Rent

The reward given for the use of capital in production.

Interest

The skills, creativity, and risk-taking ability needed to manage production factors.

Enterprise

The total amount received from utilizing the four key resources in production.

income

Capital (physical capital)

Capital, or physical capital, includes manufactured products used in production, such as machinery, tools, and equipment. This type of capital is essential for facilitating production processes and enhancing efficiency in various industries.

Enterprise (entrepreneurship)

Enterprise, or entrepreneurship, refers to the skills, creativity, and risk-taking abilities needed to successfully manage and combine the other factors of production. Entrepreneurs play a crucial role in driving innovation and economic growth by organizing resources effectively.

Labour (human capital)

Labour, or human capital, refers to the human resources required in production, including both physical effort and intellectual input. Examples include the work of professionals like doctors and chefs, highlighting the importance of skills and education in the workforce.

Land (natural capital)

Land, or natural capital, encompasses the natural resources utilized in production processes. This includes renewable resources, which can be replenished, and non-renewable resources, which cannot be replaced once used, such as fossil fuels and minerals.

entrepreneurship

The skills, creativity and risk-taking a businessperson needs to combine and manage the other three factors of production. The entrepreneur has two functions: running the production process, and bearing responsibility for the firm's profits or losses.

A condition where it is impossible to improve one individual's situation without worsening another's, indicating optimal resource allocation.

Pareto efficiency

A situation where resources are not used efficiently or are underutilized, represented on a production possibilities curve.

Unemployment of resources

Indicates the opportunity cost of one good for another.

The gradient of the PPC

Two conditions must be met: efficiency and full resource use.

For a country to be operating on its PPC

Actual growth

An increase in the economy's output, represented by an outward shift of the production possibility curve (PPC), resulting from improvements in productive capacity.

Growth in production possibilities

An outward shift of the production possibility curve (PPC) due to enhancements in the quantity or quality of productive resources, indicating potential for increased output.

PPC

The curve showing the maximum combinations of two products an economy can make when all its resources are fully and efficiently employed. Points inside it mean resources are unemployed or underused; points beyond it are unattainable.

A type of leakage that refers to money spent on goods and services from abroad.

import expenditure

An injection into the circular flow that comes from selling goods and services to other countries.

export earnings

State the formula: J

J = G + I + X Total injections (J) equal government spending plus investment plus export earnings.

State the formula: S + T + M (S + T + M)

S + T + M = G + I + X National income equilibrium requires total withdrawals to equal total injections.

State the formula: Total withdrawals (W) equal savings plus taxes plus imports

W = S + T + M Total withdrawals (W) equal savings plus taxes plus imports.

export earnings (X)

An injection into the circular flow of income that occurs when domestic goods and services are sold to foreign markets, bringing money into the economy. It is one of the three types of injections.

government spending (G)

An injection into the circular flow of income that increases the total money available in the economy, stimulating economic activity. It is one of the three types of injections, alongside investment and export earnings.

import expenditure (M)

A leakage from the circular flow of income that occurs when money is spent on goods and services from abroad, reducing the funds circulating within the domestic economy. It is one of the three categories of leakages.

injections (J)

The total amount of money added to the circular flow of income through government spending, investment, and export earnings. Injections stimulate economic activity and can counteract the effects of withdrawals.

investment (I)

An injection into the circular flow of income that occurs when businesses spend money on capital goods, which can enhance production capacity and stimulate economic growth. It is one of the three types of injections.

national income equilibrium

A condition in which the total withdrawals from the circular flow of income equal total injections, ensuring stable economic activity. It is represented by the equation W = S + T + M = G + I + X.

savings (S)

A form of leakage in the circular flow of income, representing money that is set aside rather than spent, affecting overall economic activity.

taxation / taxes (T)

A withdrawal from the circular flow of income that reduces the amount of money available in the economy, impacting overall economic activity. It is one of the three categories of leakages, along with savings and import expenditure.

withdrawals (W)

The total amount of money taken out of the circular flow of income, which includes savings, taxation, and import expenditure. Withdrawals reduce the overall economic activity if they exceed injections.

A rise in the overall price level of goods and services.

Inflation

A three-dimensional model that integrates facts and skills with concepts.

Concept-based learning (CBL)

Individuals who are willing to work but cannot find employment.

Unemployment

The area of study that examines the behavior of individuals and firms in specific markets.

microeconomics

The branch of economics that analyzes the overall functioning and performance of an economy.

macroeconomics

The concept that resources are limited relative to infinite needs and wants.

scarcity

The growing interaction and reliance on others in order to achieve economic goals.

interdependence

The level of economic prosperity and quality of life in an economy.

Well-being

The state of economic prosperity and quality of life within an economy.

economic well-being

WISE ChoICES

The concept of making informed and rational decisions in economics, particularly regarding resource allocation and the trade-offs involved.

A product that is not scarce and carries no opportunity cost, being so abundant that one person consuming more leaves no less for anyone else.

free goods

Products that are scarce relative to demand and have an opportunity cost.

economic goods

The value of the next best alternative that is forgone when making a choice.

opportunity cost

Resources (land, labour, capital, enterprise)

Resources in economics include land, labour, capital, and enterprise, all of which are essential for producing goods and services. Each resource type plays a distinct role in the production process, contributing to the overall economic output.

Trade-off

A situation where choosing one option requires giving up another due to limited resources. Each decision individuals, firms, or governments make reflects a trade-off, emphasizing the importance of evaluating alternative options and their opportunity costs.

A diagram showing the maximum combinations of two products an economy can make in a given time period when all its resources are used efficiently.

Production Possibilities Curve (PPC)

An economic system combining elements of both planned and market systems.

A mixed economy

An economic system relying on demand and supply to allocate resources.

The free market economy

An economic system where the government allocates resources.

A planned economy

The assumption that production methods and technologies remain unchanged over time.

Constant State of Technology

The part of the economy made up of privately owned firms and individuals.

The private sector

The segment of the economy where the government provides goods and services.

The public sector

The slope of a specific curve that indicates the opportunity cost of switching from one product to another.

Marginal Rate of Transformation (MRT)

State the formula: MRT

MRT = ΔY / ΔX The marginal rate of transformation (MRT) equals the gradient of the PPC and measures the opportunity cost of one product (change in Y) in terms of the other product (change in X).

Market Forces

The economic factors that influence the price and availability of goods and services, primarily through the interaction of supply and demand. Market forces can operate independently or in conjunction with government intervention.

Production Possibility Frontier (PPF)

A graphical representation that illustrates the maximum possible output combinations of two goods that an economy can achieve when all resources are used efficiently. It shows the trade-offs and opportunity costs involved in production.

Unattainable output

A level of production that cannot be achieved with the current resources and technology, represented by points beyond the production possibility curve (PPC).

Unemployment (inside the PPC)

A situation where resources are not fully utilized, indicated by points inside the production possibility curve (PPC), leading to inefficiency in the economy.

State the formula: Opportunity cost

Opportunity cost = units of best alternative forgone / units gained A way to calculate the opportunity cost when switching production between two goods: the amount of the alternative good given up divided by the increase in the chosen good.

depletion

The reduction of the world's limited resources, such as fish stocks and forests, which raises concerns about sustainable economic growth and environmental preservation.

economic activity

The production, distribution and consumption of goods and services. All of it carries costs, including opportunity cost, and it can make resources scarcer — clean air being the book's example.

natural replenishment

The process by which renewable resources are naturally restored over time. However, if the rate of usage exceeds the rate of replenishment, these resources can become depleted, highlighting the importance of sustainable management.

pollution

The introduction of harmful substances or products into the environment, which can lead to negative health effects and reduce the quality of life. Economic activities often contribute to pollution, necessitating government intervention to promote sustainability.

resources

Inputs used in the production of goods and services, which can be divided into renewable and non-renewable types. Understanding the availability and scarcity of these resources is essential for achieving sustainable economic growth and managing environmental impacts.