Economics: Chapters 1 and 2 Practice Flashcards

Comprehensive vocabulary flashcards covering the basic principles of economics, types of capital, decision-making on the margin, production possibilities, and various economic systems as described in Chapters 1 and 2.

need

Something essential for survival.

want

Something that people desire but that is not necessary for survival.

goods

The physical objects that someone produces.

services

The actions or activities that one person performs for another.

scarcity

The principle that limited amounts of goods and services are available to meet unlimited wants; it is always present.

shortage

A situation in which consumers want more of a good or service than producers are willing to make available at particular prices; usually temporary.

economics

The study of how people seek to satisfy their needs and wants by making choices.

entrepreneur

A person who decides how to combine resources to create goods and services, often taking risks to make a profit.

factors of production

The resources that are used to make goods and services, including land, labor, and capital.

land

All natural resources used to produce goods and services, such as fertile land, oil, coal, and water.

labor

The effort people devote to tasks for which they are paid.

capital

Any human-made resource that is used to produce other goods and services.

physical capital

Human-made objects used to create other goods and services, such as buildings, tools, and equipment.

human capital

The knowledge and skills a worker gains through education and experience.

trade-off

The alternatives that we give up when we choose one course of action over another.

guns or butter

A phrase expressing the idea that a country that decides to produce more military goods has fewer resources to produce consumer goods and vice versa.

opportunity cost

The most desirable alternative given up as the result of a decision.

thinking at the margin

The process of deciding how much more or less to do.

cost/benefit analysis

A decision-making process in which you compare what you will sacrifice and gain by a specific action.

marginal cost

The extra cost of adding one unit.

marginal benefit

The extra benefit of adding one unit.

production possibilities curve

A graph that shows alternative ways to use an economy’s productive resources.

production possibilities frontier

The line on a production possibilities curve that shows the maximum possible output an economy can produce.

efficiency

The use of resources in such a way as to maximize the output of goods and services.

underutilization

The use of fewer resources than an economy is capable of using.

law of increasing costs

An economic principle stating that as production shifts from making one good or service to another, more and more resources are needed to increase production of the second good or service.

economic system

The structure of methods and principles that a society uses to produce and distribute goods and services.

standard of living

The level of economic prosperity within a society.

innovation

The process of bringing new methods, products, or ideas into use.

traditional economy

An economic system that relies on habit, custom, or ritual to decide the three key economic questions.

command economy

An economic system in which the government makes all decisions on the three key economic questions; also known as a centrally planned economy.

free market economy

An economic system in which decisions on the three key economic questions are based on the voluntary exchange in markets.

market

Any arrangement that allows buyers and sellers to exchange things.

specialization

The concentration of the productive efforts of individuals and businesses on a limited number of activities.

household

A person or group living in a single residence.

firm

An organization that uses resources to produce a product or service, which it then sells.

factor market

The arena of exchange in which firms purchase factors of production from households.

product market

The arena in which households buy the goods and services that firms produce.

self-interest

An individual’s own personal gain; the motivating force in the free market.

incentive

The hope of reward or fear of penalty that encourages a person to behave a certain way.

competition

The struggle among producers for the dollars of consumers; it is the regulating force of the free market.

invisible hand

A term coined by Adam Smith to describe the self-regulating nature of the marketplace.

consumer sovereignty

The power of consumers to decide what gets produced by 'voting with their dollars'.

socialism

A range of economic and political systems based on the belief that wealth should be distributed evenly throughout society.

communism

A political system in which the government owns and controls all resources and means of production and makes all economic decisions.

authoritarian

A form of government that limits individual freedoms and requires strict obedience from its citizens.

laissez faire

A French term meaning 'leave things alone,' describing the doctrine that government generally should not intervene in the marketplace.

mixed economy

A market-based economic system in which the government is involved to some extent.

privatization

The process of selling businesses or services operated by the government to individual investors and allowing them to compete.

economic transition

A period of change in which a nation moves from one economic system to another.

free enterprise system

An economic system in which investments in firms are made in a free market by private decision rather than state control.