Economics chapters summary

Topics: Tax, Progressive tax, Economics Pages: 9 (1443 words) Published: November 30, 2014
Economics chapter 2

Economics is the efficient allocation of the scarce means of production toward the satisfaction of human wants

The central fact of economics is scarcity. Human wants are unlimited while resources are limited.

Four economics resources: land, labor, capital and entrepreneurial ability

The opportunity cost of any choice is the forgone value of the next best alternative.

The production possibilities curve is a hypothetical model of an economy that produces only two products. For example: Capital goods vs consumer goods

The curve represents the various possible combinations of goods that could be produced if the economy were operating at capacity or full employment.

The law of increasing cost states that as the output of one good expands, the opportunity cost of producing additional units of this good increases.

It is based on three concepts: the law of diminishing returns, diseconomies of scale and factor suitability.

Diseconomies of scale are a new term. As a business firm grows larger, it can usually cut its costs by taking advantage of quantity discounts, the use of expensive but highly productive equipment, and the development of a highly specialized and highly skilled workforce. We call these economies of scale. But as the firm continues to grow, these economies of scale are eventually outweighed by the inefficiencies of managing a bloated bureaucracy, which might sometimes work at cross-purposes. Most of the day could be spent writing memos, answering memos, and attending meetings. Labor and other resources be- come increasingly expensive, and not only are quantity discounts no longer available, but now suppliers charge premium prices for such huge orders. As costs begin to rise, diseconomies of scale have now overcome economies of scale.

Production of capital goods will lead to a rightward shift in the PPC. Improving technology, better and higher capital and labor will also lead to a rightward shift in the PPC.

Economics chapter 3

1. List and explain the three questions of economics.
What shall we produce? How shall these goods and services be produced and for whom shall the goods and services be produced? >>What, how and who? 2. Explain the concepts of the profit motive, the price mechanism, competition, and capital. Adam Smith coined the term invisible hand which refers to one’s self-interest, which guides a person to promote the social interest, however unintentionally. “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” 3. Describe and illustrate market failure and externalities. An external cost occurs when the production or consumption of some good or service inflicts costs on a third party without compensation. (Pollution) An external benefit occurs when some of the benefits derived from the production or consumption of some good or service are enjoyed by a third party. (Education) 4. Describe and explain government failure.

Government can intervene by taxing companies that has external costs and providing subsidies for companies that has external benefits. Public good is something whose consumption by one person does not prevent its consumption by one person does not prevent its consumption by other people. (Roads/national defense) 7. Define and describe the “isms”: capitalism, fascism, communism, and socialism. Capitalism is characterized by private ownership of most of the means of production. Individuals are moved to produce by the profit motive. Production is guided by the price system. The government’s role is kept to a minimum – legislation and production of public goods. Communism is when the government dictates exactly what is produced, how it is produced and for whom these goods are produced. The state owns and operates nearly all of the means of production and distribution. No price system Fascism can be named as corporatism since it is the merger of state...
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