VOCABULARY Flashcards from The Big Ideas of Economics (Chapter 1)

Incentives

Rewards and penalties that motivate behavior; people respond to incentives in predictable ways (e.g., fame, power, reputation, sex, love).

Invisible Hand

A metaphor for how markets coordinate individuals’ self-interested actions to promote social welfare; prices and competition guide resource allocation.

Opportunity Cost

The value of the opportunities forgone when a choice is made.

Scarcity

A situation in which resources are limited relative to wants; there isn’t enough to satisfy all desires.

Trade-offs

The concept that every choice involves gains and losses; linked to opportunity costs.

Marginal

Relating to one more (or one less) unit; used in marginal cost, marginal revenue, and marginal tax rates.

Economies of Scale

Cost advantages that come with increased production, leading to lower average costs.

Comparative Advantage

When individuals or nations specialize in goods with low opportunity costs, enabling gains from trade.

Trade

Exchange that increases overall welfare by enabling specialization and benefiting from economies of scale.

Wealth and Economic Growth

Economic growth creates wealth; wealthier economies enable richer and healthier lives.

Institutions

Rules and norms that shape incentives and behavior, fostering savings/investment, innovation, and efficient organization (e.g., property rights, political stability, honest government, dependable legal system, competitive/open markets).

Property Rights

Legal rights to own, use, and transfer resources; essential for investment and growth.

Political Stability

A reliable, predictable political environment that supports long-term economic activity.

Honest Government

Trustworthy government that reduces corruption and maintains fair policies.

Dependable Legal System

A reliable system of courts and laws that enforce contracts and protect property rights.

Competitive and Open Markets

Markets with competition and openness to trade that promote efficient allocation of resources.

Inflation

A sustained increase in the general price level; caused by increases in the money supply without a corresponding rise in goods; erodes purchasing power and can disrupt the economy.

Money Supply

The total amount of money available in an economy, typically controlled by the central bank.

Central Bank

The institution that regulates the money supply (e.g., the U.S. Federal Reserve) and uses monetary tools to stabilize the economy, acknowledging policy lags.

Monetary Policy

Actions by a central bank to influence money supply and interest rates to achieve macroeconomic goals.

Fiscal Policy

Government spending and taxation decisions used to influence economic activity.

Booms and Busts

Expansions and contractions in economic activity; cannot be avoided but can be moderated by policy.

GDP per Capita

Gross Domestic Product divided by the population; a common measure of average living standards.