Define economics
The study of how people seek to satisfy their needs and
wants by making choices
Explain how scarcity relates to economics
Scarcity is that there are limited quantities of resources
to meet unlimited wants
What is opportunity costs?
The most desirable alternative given up as the result of
a decision
What are trade offs
An alternative that is sacrificed when a decision is
made
Define factors of production
Resources that are used to make all goods and services
What are the three factors of production?
Land, labor, & capital
Define consumer sovereignty
Is the power of consumers to decide what gets
produced
What is self interest?
Means that buyers and sellers are focused on personal
gain
What is competition?
The struggle among producers for the dollars of
consumers
What is incentive?
For consumers is the hope of reward or the fear of
punishment that encourages people to behave in a
certain way; incentives for business is selling more
goods for more profit
What is laissez faire?
The doctrine that states the government generally
should not intervene in the marketplace
What is consumer sovereignty?
Is that consumers decide what gets produced because
businesses want to meet the consumers desires
What are the five features of a market
economy? (capitalism)
1. Self interest
2. Competition
3. Incentive
4. Laissez faire
5. Consumer sovereignty
What are the benefits of a market
economy?
Incentives to produce,
Greater efficiency
Private ownership & innovation
What are the costs of a market economy?
More varied income,
Unemployment
Poverty/homelessness, wealth gap
Describe Adam Smith
Believed that in each transaction, the buyer and seller
consider their self interest or personal gain
Describe Karl Marx
Believed that human labor was the source of all added
value but keeps it as profit or exploiting the workers
Describe John Maynard Keynes
Believed that government intervention may be needed
in crisis situations to pull the economy out of
depression (pump money into the economy)
What is sole proprietorship?
A business owned and managed by a singled individual
What is a partnership?
Owned by two or more persons who agree on specific
responsibilities
What is a corporation?
Owned by individual stockholders and run by a board
of directors
What is the role of stockholders in
financing corporations?
Stockholders must invest money to buy shares to
finance and to part of the corporation. They are
considered the owners
What is the role of government in
regulation corporations?
To make sure the corporations follow the regulations
they set such as filing quarterly and annual reports to
the SEC and taxation
Define the law of demand
Consumers buy more of a good when its price
decreases and less when it increases
Define the law of supply
The tendency of suppliers to offer more of a good at a
higher price
Describe perfect competition
Is when a large number of firms all produce the same
product
Describe monopoly
A system that is dominated by a single seller
Describe monopolistic competition
When many companies sell products that are similar
but not identical
Describe oligopoly
Is when a fes large firms dominate a market
Define elasticity of demand
Is a measure of how consumers react to a change in
price
Define elastic demand
Very sensitive to change in price
Ex: the demand for a particular brand
Define inelastic demand
Not sensitive to change in price
Ex: goods with no substituteswater, gas, utilities
Define unitary demand
Is a demand whose elasticity is equal to 1
Ex: equilibrium
Define price floor
A government- or group-imposed limit on how low a
price can be charged for a product. For a price floor to
be effective, it must be greater than the equilibrium
price
What is price ceiling?
It’s a government-imposed limit on the price charged
for a product
What is total cost?
Fixed costs plus variable costs
Ex: materials and labor
Define fixed cost
Is a cost that does not change
Ex: rent mortgage
Define variable cost
May rise of fall depending on
the quantity produced
Ex: raw materials
Define marginal cost
It is the cost of producing one
more unity of a good
Ex: hiring a new worker
What is the golden rule of profit
maximization?
Occurs at a point where marginal costs equals marginal
revenue. Thus, the optimal level of production occurs where
marginal revenue equals marginal costs, the point of
maximum profit as dictated by the golden rule