Principles of Economics 2e - Chapter 1

Principles of Economics 2e - Chapter 1

• Economics is the study of how humans make decisions in a world of scarcity
• Scarcity means human wants for goods, services, and resources exceed what we can produce.
• The FRED website (https://openstax.org/I/FRED/) has data on near-term economic trends.
• Economics is greatly influenced by how well information travels through society, with social media giants like Twitter, Facebook, and Instagram playing a major role.
• Scarcity is evident in things like homelessness, highlighting the reality of limited resources.
• Adam Smith's Wealth of Nations (1776) introduced the concept of dividing labor (specialization).
• Division of labor is the way workers divide required tasks when producing good or services.
• Examples of division of labor is an assembly line.
• Specialization increases productivity as workers focus on specific tasks.
• This specialization allows businesses to benefit from economies of scale.
• Economies are concerned with the well-being of all people.
• Microeconomics focuses on the actions of individual economic agents.
• Macroeconomics focuses on broad issues in the economy.
• Monetary policy involves altering interest rates, regulated by a nation's central bank.
• Fiscal policy involves government spending and taxation, determined by the legislative body.
• John Maynard Keynes was a highly influential economist.
• Keynes believed economics teaches how to think rather than what to think.
• Economic theories are simplified representations of how variables interact.
• Good theories are simple but also complex enough to model reality.
• Economists use models to test theories.
• The circular flow diagram depicts the interaction between households and firms in goods and services markets, and the labor market..
• Households receive goods and services and pay for them in the goods market.
• In the labor market, households receive wages/salaries/benefits from firms in exchange for labor services.
• There are three basic ways societies organize economies: traditional, command, and market.
• Traditional economies are usually agricultural, with occupations staying in families, and what is produced is consumed.
• Command economies are centrally planned by the government, deciding what to produce, production methods, and often providing essential products like healthcare and education.
• Examples of command economies include Ancient Egypt, Medieval manor life, Communism, Cuba, and North Korea.
• Market economies are decentralized, with individuals owning resources, and businesses supplying goods/services based on demand.
• A key component of a market economy is the market itself, which is the interaction between buyers and sellers, based on supply and demand.
• This system is often seen characterized by private enterprise. In this case, individuals or groups of people own and control production means.
• Most real-world economies are mixed, combining different elements of various systems.
• The U.S. is relatively market-oriented, while other nations like China and Russia are moving more toward centralized economies.
• Regulations are vital in any economy and are vital to establishing the "rules of the game", but a fully free market does not exist.
• Economies with a market focus often have fewer regulations, while heavily regulated economies often have hidden or underground economies.
• Globalization is the trend of increasing buying and selling across markets.
• Exports are goods/services produced in one country and sold abroad.
• Imports are goods/services sold domestically produced in another country.
• Gross Domestic Product (GDP) measures a nation's total production level within its borders.
• Cargo ships are a major part of transporting goods in a global economy.