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Principles of Economics without Economic Models... > Basic Economic Questions
Basic Economic Questions
• Production Outputs
• Production Inputs and Process
• Production Recipients
• Differences Between Centrally Planned and Market Economies
• Mixed Economies
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Principles of Economics without Economic Models... > Basic Economic Questions
Production Outputs
• The profit-maximizing amount of output occurs when the marginal cost of
producing another unit equals the marginal revenue received from selling that
unit.
• Output are the quantity of goods or services produced in a given time period, by a
firm, industry or country.
• There are four types of market scenario that a firm may encounter when making a
production decision: economic profit, normal profit, loss-minimizing condition, and
shutdown. The firm should always produce unless it encounters a shutdown
scenario.
Production Conditions
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Principles of Economics without Economic Models... > Basic Economic Questions
Production Inputs and Process
• Capital, otherwise known as capital assets, are manufactured goods that are used
in production of goods or services.
• Cash is not included in capital in terms of a production input. Homes and personal
automobiles are also not included in capital because these items are not directly
tied to the production of goods or services.
• Labor is a measure of the work done by human beings to create a manufactured
output.
Girls running warping machines in Loray Mill,
Gastonia, N.C. by Lewis Hine, 1908.
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Principles of Economics without Economic Models... > Basic Economic Questions
Production Recipients
• Supply chains vary based on industry, the resources of the manufacturer, and
market conditions.
• The purpose of a supply chain is to act as an integrating function that links major
business functions and processes into a cohesive business model.
• Typical steps in a supply chain include: extraction of raw materials; acquisition of
components; production; inventory; transportation; wholesaler; and retailer.
Supply Chain
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Principles of Economics without Economic Models... > Basic Economic Questions
Differences Between Centrally Planned and Market Economies
• A pure planned economy has one person or group who controls what is produced;
all businesses work together to produce goods and services that are planned and
distributed by the government.
• Planned economies have several advantages. Ideally, there is no unemployment,
and needs never go unfulfilled; because the government knows how much food,
medicine, and other goods is needed, it can produce enough for all.
• Realistically, these systems tend to suffer from large inefficiencies and are overall
not as successful as other types of economic systems.
• A pure market economy is one perfectly free of external control. Individuals are
left up to themselves to decide what to produce, who to work for, and how to get
V.I. Lenin
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the things they need.
• Because there is no regulation ensuring equality and fairness, market economies
are burdened with unemployment, and even those with jobs can never be certain
that they will make enough to provide for all of their needs.
• Because they do not need to wait for word from the government before changing
their output, companies under market economies can quickly keep up with
fluctuations in the economy, tending to be more efficient than regulated markets.
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Principles of Economics without Economic Models... > Basic Economic Questions
Mixed Economies
• Most of the means of production in a mixed economy are privately owned in a
mixed economy.
• The government strongly influences the economy through direct intervention in a
mixed economy, such as through subsidies and regulation of the markets.
• Most government intervention in mixed economy is limited to minimizing the
negative consequences of economic events, such as unemployment in
recessions, to promote social welfare.
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Appendix
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Principles of Economics without Economic Models...
Key terms
• autonomy Self-government; freedom to act or function independently.
• average total cost Average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity,
Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed
costs divided by Q).
• capital Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and
office buildings (structures).
• Centrally planned economy When the government is responsible for setting the amount produced.
• fixed costs A cost of business which does not vary with output or sales; overheads.
• input Something fed into a process with the intention of it shaping or affecting the outputs of that process.
• labor The workers used to manufacture the output.
• marginal cost The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with
respect to output. Additional cost associated with producing one more unit of output.
• market economy An economy in which goods and services are exchanged in a free market, as opposed to a state-controlled or
socialist economy; a capitalistic economy.
• mixed economy A system in which both the state and private sector direct the economy, reflecting characteristics of both
market economies and planned economies.
• monopoly A market where one company is the sole supplier.
• supply chain A system of organizations, people, technology, activities, information and resources involved in moving a product
or service from supplier to customer.
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Principles of Economics without Economic Models...
• variable cost A cost that changes with the change in volume of activity of an organization.
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Principles of Economics without Economic Models...
V.I. Lenin
The Soviet Union, as established by V.I. Lenin, is an example of a country that tried to establish a pure centrally planned economy.
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Principles of Economics without Economic Models...
Production Conditions
A firm will seek to produce such that its marginal cost (MC) is equal to marginal revenue (MR, which is equal to the price and demand). It is not produced
based on average total cost (ATC).
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Principles of Economics without Economic Models...
Girls running warping machines in Loray Mill, Gastonia, N.C. by Lewis Hine, 1908.
Any tool or machine that could be used to improve someone's ability to work would be included in capital.
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Wikimedia. "Girls running warping machines in Loray Mill, Gastonia, N.C.Many boys and girls much younger.Boss carefully avoided... - NARA - 523104." Public
domain
Principles of Economics without Economic Models...
Supply Chain
This represents the typical supply chain for a computer. The right half of the chart represents the steps it takes from producing the final product to the
consumers.
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Principles of Economics without Economic Models...
A firm is producing a good that has a price greater than its
variable cost but less than its average total cost. What type of
scenario does this describe?
A) Economic Profit
B) Normal Profit
C) Loss-minimizing condition
D) Shutdown
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Principles of Economics without Economic Models...
A firm is producing a good that has a price greater than its
variable cost but less than its average total cost. What type of
scenario does this describe?
A) Economic Profit
B) Normal Profit
C) Loss-minimizing condition
D) Shutdown
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Principles of Economics without Economic Models...
Which of the following is an example of the production input
capital?
A) Cash invested in the business.
B) A personal car.
C) A work force.
D) A cell phone.
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Principles of Economics without Economic Models...
Which of the following is an example of the production input
capital?
A) Cash invested in the business.
B) A personal car.
C) A work force.
D) A cell phone.
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Principles of Economics without Economic Models...
Which of the following is a market actor that is involved in
transferring a product from production to the end consumer?
A) Inventory manager.
B) Wholesaler.
C) Retailer.
D) All of these answers.
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Principles of Economics without Economic Models...
Which of the following is a market actor that is involved in
transferring a product from production to the end consumer?
A) Inventory manager.
B) Wholesaler.
C) Retailer.
D) All of these answers.
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Principles of Economics without Economic Models...
Which of the following characteristics describe a capitalist
economic system?
A) Market based coordination, private ownership, and material
compensation
B) Central planning, private ownership, and moral compensation
C) Market based coordination, public ownership, and material
compensation
D) Central planning, public ownership, and moral compensation
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Principles of Economics without Economic Models...
Which of the following characteristics describe a capitalist
economic system?
A) Market based coordination, private ownership, and material
compensation
B) Central planning, private ownership, and moral compensation
C) Market based coordination, public ownership, and material
compensation
D) Central planning, public ownership, and moral compensation
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Principles of Economics without Economic Models...
What are the two dominant forms of market coordination
mechanisms?
A) Centralized planning and de-centralized planning
B) Market based coordination and material reward incentives
C) Material reward incentives and moral reward incentives
D) Central planning and market based coordination
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Principles of Economics without Economic Models...
What are the two dominant forms of market coordination
mechanisms?
A) Centralized planning and de-centralized planning
B) Market based coordination and material reward incentives
C) Material reward incentives and moral reward incentives
D) Central planning and market based coordination
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Principles of Economics without Economic Models...
Which of the following is a characteristic of a mixed economy?
A) All of these answers.
B) The means of production are privately owned.
C) The government can grant monopolies to private businesses.
D) The government regulates the market through labor laws and other
similar regulation.
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Principles of Economics without Economic Models...
Which of the following is a characteristic of a mixed economy?
A) All of these answers.
B) The means of production are privately owned.
C) The government can grant monopolies to private businesses.
D) The government regulates the market through labor laws and other
similar regulation.
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Principles of Economics without Economic Models...
Attribution
• Wikipedia. "Economic profit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Economic_profit#Economic_profit
• Wikipedia. "Output." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Output#Economics
• Wikipedia. "Microeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Microeconomics#Modes_of_operation
• Wikibooks. "IB Economics/Microeconomics/Theory of the Firm (HL)." CC BY-SA 3.0
http://en.wikibooks.org/wiki/IB_Economics/Microeconomics/Theory_of_the_Firm_(HL)
• Wiktionary. "fixed costs." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fixed+costs
• Wiktionary. "variable cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/variable+cost
• Wiktionary. "marginal cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/marginal+cost
• Wikipedia. "average total cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/average%20total%20cost
• Wikipedia. "Labour economics." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Labour_economics#Demand_for_labour_and_wage_determination
• Wikipedia. "Capital (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_(economics)
• Wikipedia. "Factors of production." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Factors_of_production
• Wikipedia. "Production (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Production_(economics)
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/labor
• Wiktionary. "capital." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capital
• Wiktionary. "input." CC BY-SA 3.0 http://en.wiktionary.org/wiki/input
• Wikibooks. "Transportation Economics/Supply chains." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Transportation_Economics/Supply_chains#Supply_Chains
• Wikipedia. "Retailer." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retailer
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Principles of Economics without Economic Models...
• Wikipedia. "Wholesaler." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Wholesaler
• Wikipedia. "Supply chain." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Supply_chain
• Wiktionary. "supply chain." CC BY-SA 3.0 http://en.wiktionary.org/wiki/supply+chain
• Wikibooks. "Principles of Economics/Economic Systems." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Economics/Economic_Systems#Mixed_Economies
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/centrally-planned-economy
• Wiktionary. "market economy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/market+economy
• Wiktionary. "autonomy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/autonomy
• Wikipedia. "Mixed economy." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Mixed_economy
• Wikibooks. "Principles of Economics/Economic Systems." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Economics/Economic_Systems#Mixed_Economies
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//economics/definition/monopoly
• Wikipedia. "mixed economy." CC BY-SA 3.0 http://en.wikipedia.org/wiki/mixed%20economy
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