econ 1-3

Scarcity

The basic economic problem: people have unlimited wants, but resources are limited. Example: You may want a new phone, car, and clothes, but you have limited money.

Economics

The study of how people and society make choices about scarce resources. Example: Deciding how much money to spend, save, or invest.

Resource

Anything used to produce goods or services. Example: workers, land, machines, and natural resources.

Good

A physical item that satisfies a want or need. Example: food, shoes, or a phone.

Service

An action performed for someone that satisfies a want or need. Example: a haircut, tutoring, or car detailing.

Four Factors of Production

Land, labor, capital, and entrepreneurship.

Land

All natural resources used to produce goods and services. Example: oil, water, trees, minerals, and farmland.

Labor

The physical and mental work people provide to produce goods and services. Example: a teacher, engineer, construction worker, or cashier.

Capital

Tools, machines, buildings, and equipment used to produce goods and services. Example: a factory, computer, truck, or construction equipment.

Entrepreneurship

The ability to organize land, labor, and capital to produce goods or services while taking risks. Example: a person starting a pressure-washing business.

Tradeoff

Giving up one thing to get something else. Example: Studying for a test means giving up time to play basketball.

Opportunity Cost

The value of the next-best alternative you give up when making a choice. Example: If you study instead of working an $80 shift, the opportunity cost is $80.

Next-Best Alternative

The best option you did not choose. Example: If you choose to study instead of work for $80, working is the next-best alternative.

Opportunity Cost Formula

Opportunity cost = value of the best option given up. In your class formula: OC = Foregone Option − Chosen Option when comparing returns.

Incentive

Something that encourages or discourages a person to act. Example: A scholarship encourages students to earn good grades.

Positive Incentive

A reward or benefit that encourages an action. Example: A tax credit for buying an electric car.

Negative Incentive

A punishment or cost that discourages an action. Example: A fine for speeding.

Rational Person

A person who makes decisions by comparing costs and benefits and tries to get the best result.

Marginal Change

A small additional change to an existing plan or decision. Example: Deciding whether to study one more hour.

Marginal Benefit

The additional benefit from doing one more unit of something. Example: The extra grade improvement from studying one more hour.

Marginal Cost

The additional cost from doing one more unit of something. Example: Giving up one more hour of free time to study.

Thinking at the Margin

Comparing the additional benefit and additional cost of a decision. Example: If one more hour of studying helps your grade more than it costs you in lost free time, study.

Sunk Cost

A cost that has already happened and cannot be recovered, so it should not affect a current decision. Example: Money already spent repairing a car should not determine whether you pay for a new repair.

Efficiency

Getting the most possible benefit or output from available scarce resources.

Equality

Distributing economic prosperity more evenly among members of society.

Efficiency vs. Equality

A tradeoff where getting more equality can sometimes reduce incentives to work or produce.

Principle 1: People Face Tradeoffs

Every choice involves giving up something else. Example: Going to a party may mean less time to study.

Principle 2: Cost Is What You Give Up

The true cost of a choice includes the opportunity you give up. Example: College costs more than tuition because you also give up possible wages.

Principle 3: Rational People Think at the Margin

People compare the additional costs and benefits of a decision before making it.

Principle 4: People Respond to Incentives

People change their behavior when rewards or punishments change.

Principle 5: Trade Can Make Everyone Better Off

People and countries can specialize and trade, allowing them to get more goods and services.

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

Buyers and sellers interact in markets to decide what is produced, how much is produced, and who receives it.

Principle 7: Government Can Sometimes Improve Market Outcomes

Government can help when markets fail or when the outcome is considered unfair.

Principle 8: Standard of Living Depends on Production

A country's standard of living depends heavily on its ability to produce goods and services.

Principle 9: Prices Rise When Too Much Money Is Created

Excessive growth in the money supply can reduce money's value and cause inflation.

Principle 10: Short-Run Inflation-Unemployment Tradeoff

In the short run, policies can sometimes increase inflation while reducing unemployment, or reduce inflation while increasing unemployment.

Market

A system where buyers and sellers interact to exchange goods and services.

Market Economy

An economy where households and firms make decentralized decisions through markets.

Invisible Hand

The idea that people pursuing their own interests through markets can sometimes improve overall economic well-being.

Property Rights

The legal rights to own, use, and control property. Example: Owning a house or business.

Market Failure

A situation where a market does not allocate resources efficiently.

Externality

When an economic activity affects people who are not directly involved. Example: Factory pollution affecting nearby residents.

Market Power

The ability of one buyer or seller to strongly influence the market price. Example: A monopoly.

Monopoly

A market with one major seller that has significant control over the price.

Equity

Fairness in the distribution of economic resources or outcomes.

Productivity

The amount of goods and services produced per unit of labor. Example: A worker producing 20 items per hour is more productive than one producing 10.

Standard of Living

The level of wealth, comfort, and access to goods and services people have.

Inflation

A general increase in the prices of goods and services over time.

Unemployment

The condition of people who are willing and able to work but cannot find a job.

Short Run

A period in which some economic changes or adjustments have not fully occurred; in these principles, the inflation-unemployment tradeoff is emphasized over roughly 1–2 years.

Interdependence

When people or countries rely on each other for goods and services.

Specialization

Focusing on producing the good or service you are relatively best at producing.

Exports

Goods or services produced domestically and sold to another country. Example: The U.S. sells wheat to Japan.

Imports

Goods or services produced in another country and bought domestically. Example: The U.S. buys electronics from another country.

Economist as Scientist

An economist who studies and explains how the economy works using evidence and the scientific method.

Economist as Policy Advisor

An economist who uses economic knowledge to recommend policies that could improve economic outcomes.

Scientific Method

A process of developing, testing, and evaluating explanations using evidence.

Assumption

A condition economists assume to be true to make a complicated problem easier to study. Example: Studying trade using only two countries.

Model

A simplified representation of reality used to understand or analyze an economic situation.

Circular-Flow Diagram

A model showing how money, goods, services, and resources move between households and firms.

Households

People or groups that consume goods and services and own the factors of production.

Firms

Businesses that produce and sell goods and services and hire or purchase factors of production.

Market for Goods and Services

The market where households buy goods and services from firms.

Market for Factors of Production

The market where firms obtain labor, land, and capital from households.

Revenue

The money a firm receives from selling goods and services.

Income

Money earned by households from providing factors of production.

Wages

Payment to workers for their labor.

Rent

Payment received for the use of land or property.

Profit

The money a business has left after paying its costs.

Circular Flow: Households

Households provide factors of production to firms and receive income. They use income to buy goods and services.

Circular Flow: Firms

Firms hire or buy factors of production, produce goods and services, and sell them to households.

Circular Flow: Factors of Production

Labor, land, and capital flow from households to firms.

Circular Flow: Goods and Services

Goods and services flow from firms to households.

Circular Flow: Money

Money flows from households to firms when goods are purchased and from firms to households as income.

Production Possibilities Frontier (PPF)

A graph showing the maximum combinations of two goods an economy can produce with its available resources and technology.

PPF Axes

Usually, one good is placed on the horizontal axis and the other good on the vertical axis.

Point On the PPF

A production combination that is possible and efficient because resources are fully used.

Point Inside the PPF

A production combination that is possible but inefficient because some resources are unused.

Point Outside the PPF

A production combination that is currently impossible with available resources and technology.

PPF and Scarcity

The PPF shows scarcity because limited resources prevent an economy from producing unlimited amounts of goods.

PPF and Tradeoffs

The PPF shows that producing more of one good usually means producing less of another.

PPF and Opportunity Cost

The opportunity cost of moving along the PPF is the amount of one good sacrificed to produce more of the other.

PPF Slope

The slope of a PPF shows the opportunity cost of one good in terms of the other good.

Rise Over Run

Slope = change in vertical value divided by change in horizontal value.

Straight-Line PPF

A PPF where opportunity cost remains constant.

Bow-Shaped PPF

A PPF where opportunity cost increases as more of one good is produced.

Increasing Opportunity Cost

Producing more of one good causes the amount of the other good sacrificed to increase.

Economic Growth

An increase in an economy's ability to produce goods and services.

PPF Shift Outward

An outward shift means the economy can produce more than before, usually because of better technology, more resources, or improved productivity.

Technology and PPF

Better technology can shift the PPF outward because the economy can produce more with the same resources.

Unemployment and PPF

High unemployment can cause production to be inside the PPF because some labor is not being used.

Efficiency on the PPF

Points on the PPF are efficient because available resources are fully utilized.

Inefficiency Inside the PPF

Points inside the PPF are inefficient because the economy could produce more without giving up another good.

Microeconomics

The study of individual households, firms, and specific markets.

Macroeconomics

The study of the economy as a whole, including inflation, unemployment, and economic growth.

Micro Example

"Should Starbucks increase employee wages?" This focuses on a specific firm.

Micro Example 2

"Should Apple lower the price of iPhones?" This focuses on a specific company and product.

Macro Example

"Why is inflation rising?" This focuses on the overall economy.

Macro Example 2

"Why is unemployment increasing in Tennessee?" This focuses on the broader economy.

Positive Statement

A statement about what is or what will happen that can be tested with evidence.