Chapter One (cont ) Economics is defined as: The science that studies the choices people make in a world of scarcity

Transcription

1 Economics Review

2 Chapter One Wants exceed resources to fill wants Therefore scarcity exists Therefore we must make choices Every time we make a choice, we leave behind an opportunity cost, the most likely choice we would otherwise make

3 Chapter One (cont ) Economics is defined as: The science that studies the choices people make in a world of scarcity

4 Chapter One (cont ) Intangible Something that cannot be touched Tangible Something that can be touched

5 Chapter One (cont ) Microeconomics the study of small economic units, individuals, households, industries Macroeconomics the study of large economic units, the overall economy

6 Chapter One (cont ) The four types of resources or factors of production: Land Labor Capital Entrepreneurship

7 Chapter One (cont ) Payments to the four types of resources Rent to Land Wages to Labor Interest to Capital Profit to Entrepreneurship

8 free enterprise An economic system in which individuals (not government) own most, if not all, the resources and control their use.

9 socialism An economic system in which government controls and may own many of the resources.

10 Three Key Economic Questions What Goods Will Be Produced? How Will These Goods Be Produced? For Whom Will The Goods Be Produced?

11 Five Features of Free Enterprise

12 private property Any good that is owned by an individual or a business

13 public property Any good that is owned by the government.

14 In a free enterprise, individuals are free to own as much property as they are willing and able to purchase and sell whatever property they own.

15 Freedom to Choose Workers free to choose kind of work to do and where to work. Buyers free to choose the products they will buy. Businesses free to choose products they will produce and sell.

16 Voluntary Exchange In a free enterprise, individuals have the right to make exchanges or trades they believe will make them better off.

17 Competition In a free enterprise, individual sellers are free to compete with others. Consumers are likely to benefit from competition between sellers. Workers benefit from competition for their labor.

18 incentive Something that encourages or motivates a person toward an action.

19 Incentives In a free enterprise, money acts as an incentive to produce. If you produce goods and services people are willing and able to buy, you will receive money in return.

20 profit The amount of money left over after all the costs of production have been paid. Exists when total revenue exceeds total costs.

21 total revenue The price of a good times the number or units of a good sold.

22 total cost The average cost (or expense) of a good times the number of units of the good sold.

23 average cost The total cost divided by the quantity sold. (Also called per-unit cost)

24 loss The amount of money by which total cost exceeds total revenue.

25 At Anytime in a Free Enterprise Some companies are earning profits Other companies are experiencing losses These profits and losses are signals to the companies themselves and to other companies on the sidelines.

26 entrepreneur A person who has a special talent for searching out and taking advantage of new business opportunities, as well as for developing new products, and new ways of doing things.

27 Entrepreneurs: Risk & Profit Entrepreneurs, when successful, can earn large amounts of money, but they take great risks as well and could lose everything including investment, time, and effort. Without the potential for great profits, most entrepreneurs would not take the risk.

28 Government as an Enforcer of Contracts Without government to enforce contracts through the courts and police (law enforcement), there would be little confidence businesses and consumers to enter into any purchase agreement and the economy would be very weak.

29 Government as Provider of Nonexcludable Public Goods Goods can be categorized into two major groups: Private goods Public goods

30 private good A good of which one person s consumption takes away from another person s consumption.

31 public good A good of which one person s consumption does not take away from another person s consumption.

32 excludable public good A public good that individuals can be excluded (physically prohibited) from consuming.

33 nonexcludable public good A public good that individuals cannot be excluded (physically prohibited) from consuming.

34 free rider A person who receives the benefits of a good without paying for it.

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