chapter 1 ECON.docx

**chapter 1 ECON** ***terms*** **Economics --** a social science concerned with man\'s problem of issuing scarce resources to satisfy unlimited wants **Basic needs --** man\'s needs required for his survival **Luxury goods** -- goods that man can do without **Economic resources** -- Inputs used...

**chapter 1 ECON** ***terms*** **Economics --** a social science concerned with man\'s problem of issuing scarce resources to satisfy unlimited wants **Basic needs --** man\'s needs required for his survival **Luxury goods** -- goods that man can do without **Economic resources** -- Inputs used in the production of goods and services **Elements** - Labor - Materials (raw materials & finished goods) - Overhead **Production** - Manual - Technical - Mechanize ***Factors of production / basic economic resources*** **Land** -- natural resources **Labor** --- human effort expended in production regarding basic economic problems **Entrepreneur** ---organizes all other factors of production to be used in the creation of goods and services **Capital** --- materials used in the production of goods and services including money **Theory/Hypothesis** -- an unproven proposition tentatively accepted to explain certain facts or to provide a basis for further investigation **Variable** --- a factor that is subject to change **Macroeconomics** -- the branch of Economics that studies the economy as a whole, also known as National Income Analysis. Also known as ECONOMIC THEORY **Microeconomics** --- the branch of Economics that deals with parts of the economy such as the household and the business firm. It is also known as PRICE THEORY. ***Characteristics*** 1. Microeconomics looks at the decisions of individual units -- households, producers, and firms. 2. Microeconomics looks at how prices are determined -- pure competition, monopoly, monopolistic competition, and oligopoly 3. Microeconomics concerned with social welfare -- examines the efficiency, relative desirability and choice of alternative methods by which resources are criticized to alleviate scarcity. Branch of economics is termed "welfare economics" 4. Microeconomics has limited focus 5. Microeconomics develop skills. Logical reasoning, construction and use of models, employs optimizing technique, and personal resource allocation decisions, such as career choices or financial investments **Normative economics** -- an analysis of economics which deals with what should be **Positive economics** -- an analysis of economics which deals with what actually is **Empirical validation** -- use of statistical evidence to prove the validity of hypothesis **Free enterprise system** -- a system in which all economic resources are privately owned. Individuals are free to engage in a business of their choice. **Right to private property** -- the right of private individuals and enterprises to own things of value **Market** -- context in which buyers and sellers buy and sell, goods, services, and resources **Economic system** --- the framework in which a society decides on its economic problems **Wants** -- the various desires and needs of consumers that have to be satisfied through the use of goods and services **Function** --- depicts the relationship between two or more variables. It shows how one variable, called the dependent variable depends on another variable or variables, called the independent variables. **ECONOMIC ACTIVITY** - Man's basic economic activity consists of efforts to satisfy humans wants with the use of goods and services. - Uses as a channel to improve the people's standards of living within the limits of available resources. 1. **Human wants**. They are unlimited, vary from the needs for survival. 2. **Use of resources**. Man has to learn to allocate them properly. 3. **Technique of production**. How resources are used. Production is described as capital-intensive or labor-intensive. ***Goals*** 1. Unemployment of labor or other resources; 2. Economic instability that causes highs and lows in production and investment levels; 3. which make it more difficult for underdeveloped and developing nations to rise from their low levels of income and employment; 4. Inequality in income distribution resulting in the concentration of the nation\'s wealth in the hands of a few; 5. Determination of the type of economic system to adopt to fit the country's peculiar conditions and needs. **Consumption --** use of goods and services. **Household** -- the basis consuming unit in the economy **Opportunity cost** -- opportunity forgone. The value of a forgone alternative of a specific resource, SACRIFICES **Business firm** -- serves as the economy's producing unit **Economic analysis** -- the process of directing economic relationships by examining economic behavior and events ***Types*** **Positive economics** - Supposed to be completely objective, concerned with the way economic relationships are **Normative economics** - Concerned with what ought to be ***Tools*** 1. Logic 2. Statistics 3. Mathematics ***Purposes*** 1. An aid in understanding how an economy operates 2. It pursuits prediction of the results of changes in the economic variables 3. It serves as basis of policy formulation **Economic analyst** -- uses statistics to quantitatively describe economic behavior **Economic policy --** consists of intervention or courses of action taken by the government or other private institutions to manipulate the results of economic activity. **Methodology** -- systematic study of economic activity **Economic theory** -- consists of sets of principles or casual relationships among the important facts or variables that surround and permeate economic activity ***Construction*** **Ist step --** specification and definition of its postulates (theory) **2nd step --** observation of facts concerning the activity about which we want to theorize **3rd step --** application of rules of logic to the observed facts in an attempt to establish casual relationship among them and to eliminate as many irrelevant facts as possible **4th step --** testing of hypothesis to determine the exact of which they are valid, that is, the extent to which they yield good explanations and predictions ***Functions*** 1. To explain the nature of economic activity 2. To predict what will happen to the economy as facts change **Supply and demand model** - Best known economic model - Could be expressed in the different forms 1. **Verbal or logical** -- expressed in words (schedule of prices and quantities) 2. **Mathematical** -- shortcut presentations of verbal explanations 3. **Graphical** ***Types of models*** 1. There are models to explain the resource allocations or choice decisions of individual household, procedures, and firms. 2. There are models to explain how prices and quantities exchanged are determined in various types of market structure 3. There are models to examine the market economy as an interrelated system (general equilibrium models) **Economic Models -** A simplified version of reality that allows us to observe, understand, and make predictions about economic behavior. ***Types*** 1. **Supply and demand model - Explains how the price and quantity of goods are determined in a market based on the interaction between supply and demand.** 2. **Production Possibility Frontier (PPF) - Visualizes how an economic actor, such as company or a nation, could make trade-offs in the production of different commodities** 3. **Circular flow model - Illustrates the flow of goods, services, and money in an economy.** 4. **Keynesian model - Developed by British economist John Maynard Keynes during the 1930s. Analyzes the role of government spending and monetary policy in influencing economic activity.** **Dynamic Analysis -- focuses on the pattern and rate of change for some variable between points intime.** **Partial Equilibrium - compared equilibrium changes for one decision unit or one market independent of related changes in the economic system.** **General Equilibrium -- recognizes the interdependence of all decisions units and all markets in the economic system.** **Ceteris paribus -- "all other things held constant or all else equal"** **Basic Economic Problems** 1. **What to produce? -- types of goods society desires** 2. **How much to produce? -- refers to the quantity of each good that will have to compose the total output.** 3. **How to produce? -- technique of production and the manner of combining resources to come up with the desired output** 4. **For whom to produce? -- refers to the market to which the producers will sell their products** **Economic System - is the set if mechanisms and institutions that solves the what, how and for whom question.** ***Types*** **Pure Market Economy -** Decisions regarding production and distribution are driven by the forces of supply and demand. ***Key features:*** - Private Ownership - Minimal Government Intervention - Profit Motive - Competition **Pure Command Economy -** The government makes all decisions about the production and distribution of goods and services. ***key features:*** - Government Ownership - Central Planning - Limited Consumer Choice - Goals **Mixed Economy -** Combines element of market and command economy. ***Key features:*** - Coexistence of Public and Private Sectors - Government Intervention - Social Welfare Programs - Flexibility **Traditional Economy** - Relies on customs, history, and time-honored practices to guide economic decisions. ***Key features:*** - **Customs and Traditions** - **Barter System** - **Subsistence Living** - **Stability**