Explain: Shortage vs. Scarcity
Shortage- Amount of a good is below the amount demanded
Scarcity- The always present fact that resources are limited
What are the factors of Production
Land, Labor, Capital, and Entrepreneurs
What does "guns or butter" mean?
Decisions governments have to make about their economy. Produce goods that support the people (butter) or goods to defend the nation (guns)
Why does every decision involve an opportunity cost?
Since resources are scare, every decision made will require giving something else up
What does making a decision at the margin mean?
Process of deciding whether to use one additional unit of a resource
What does a Production Possibilities Curve show?
The amount or combination of goods that can be produced when using all available resources
What does the Law of Increasing Costs mean?
When production shifts from producing one good over another, more resources are needed to produce the second good
What must an economy do to increase the standard of living
Grow through innovation
(Circular Flow) What do we supply in return for factor payments?
Factors of Production
What is the "Invisible Hand"
Economic theory by Adam Smith, competition and self-interest is what guides the economy
Why is the US economy mixed?
Allows for personal ownership of business and accumulation of wealth, but still allows government to regulate and support industries that want to support
What are the 3 main economic questions
What to produce?
How to produce?
For whom to produce?
What is the physical flow from households to firms
goods and services
Basic principles of American Free Enterprise
Freedom to chose our own business, right to own private property, profit motive, competition, and customer sovereignty
Governments 3 goals to promote economic strength
Stable prices, full employment, and economic growth
Critical reason for something being produced as a public good?
Some crucial services aren't logically controlled by private enterprise. Like road construction, fire departments, and police
Noise from a local football stadium is disturbing the local neighborhood, the noise is an example of what?
Negative Externality
What does the Law of Demand say will happen when price falls
Demand will increase
How does the substitution effect work when the price of an item drops?
Demand for the substitute good will decrease since price fell for the original good
How does advertising cause a shift in the demand curve?
It shifts the curve right, since it increases demand
Effect on company pricing due to elasticity of demand
Price will need to be set very near the market equilibrium
Elasticity of Supply with haircuts or cargo ships, which is more inelastic
Cargo Ships
How is Total Output set to maximize profit?
Set production at the point in which marginal revenue equals marginal cost
How do you compute total cost?
Adding fixed and variable costs
Law of supply says what will happen when the price of a product goes up
Supply will increase