economics ch 1 2 key words

Economic activity

is how much buying and

selling goes on in the economy over a period

of time.

The economy

all the production and

exchange activities that take place every day

The economic problem

What goods and services should be produced?

How should it be produced using combinations of

land, labour and capital?

Who should get the goods and services produced?

Scarcity

Society has limited resources and, therefore, cannot produce all the goods and services people want

Economics

The study of how societies manages scarce resources

Efficiency

Society is getting the most it can from its scarce resources

Equality

Distributing economic prosperity uniformly among the members of society

Opportunity cost

Whatever must be given up to obtain something else

Rational people

Systematically and purposefully do the best they can to achieve their goals, given the

available opportunities

• Make decisions by evaluating costs and benefits of marginal changes

Marginal change

Small incremental adjustment to a plan of action

Take action if

• Marginal benefits > Marginal costs

Incentive

Something that induces a person to act

• Can have unintended consequences

• For example, at a higher price buyers consume less, sellers produce more

market economy

an economic system characterized by competition and free trade, where private property and minimal government interference play crucial roles

Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations,

Firms and households in competitive markets act as if they are guided by an

“invisible hand” that leads them to desirable outcomes

property rights

legally or socially recognized claims to the use, control, and ownership of a resource or economic good,

Market failure

Situation in which a market left on its own does not allocate resources efficiently

• Causes could include externality or market power

Externality

Impact of one person’s actions on the well-being of a bystander

Market

Ability to unduly influence market prices

Productivity

Quantity of goods and services produced from each unit of labor input

Inflation

An increase in the overall level of prices in the economy

Business cycle

Fluctuations in economic activity, such as employment and production

Microeconomics

The study of how households and firms make decisions and how they interact in markets

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Economic models

Are diagrams and equations

• Omit many details

• Are built with assumptions

• Simplify reality

• Are subject to revision

Positive statements

are descriptive

• Make a claim about how the world is

• Can be confirmed or refuted positive by examining evidence

Normative statements

are prescriptive

• Make a claim about how the world ought to be

• Evaluation involves values as well as facts