Unit 1 Basic Economics

Economics

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

Scarcity

The economic problem stating that our needs are unlimited while resources are limited.

Macroeconomics

The branch of economics that studies the economy as a whole.

Microeconomics

The branch of economics that focuses on individual behaviors within the economy.

Factors of Production

Resources used in the production of goods and services, including labor, land, capital, and entrepreneurial ability.

Labor

Human effort and talent, both physical and mental, augmented by education and training.

Land or Natural Resources

Resources created by nature, such as arable land, minerals, oil, and water.

Physical Capital

Human-made equipment and structures used in production, such as machinery and buildings.

Entrepreneurial Ability

The capacity to organize and combine other factors of production into a productive venture.

Opportunity Cost

The value of the next best alternative foregone when making a decision.

Trade-offs

Choices that must be made as a result of scarcity.

Production Possibilities Curve (PPC)

A graph that illustrates the maximum feasible amounts of two goods that can be produced with available resources.

Increasing Opportunity Costs

A situation where the opportunity cost of a good increases as production of that good increases.

Decreasing Opportunity Costs

An increasingly rare situation where opportunity costs decrease as production increases.

Productive Efficiency

When an economy produces the maximum output for a given level of resources and technology.

Allocative Efficiency

Producing the optimal mix of goods and services to maximize society’s welfare.

Market Failure

A situation where the market does not allocate resources efficiently.

Economic Growth

The ability of an economy to produce a larger total output over time.

Economic Contraction

A decrease in economic activity as measured by GDP.

Absolute Advantage

The ability of an entity to produce more of a good or service with the same resources compared to another.

Comparative Advantage

The ability of an entity to produce a good or service at a lower opportunity cost than another.

Terms of Trade

The relative prices of a country’s exports to its imports.

Law of Demand

As the price of a good decreases, the quantity demanded for that good increases, and vice versa.

Ceteris Paribus

The assumption that all other factors remain constant when assessing the effect of one variable.

Change in Quantity Demanded

A movement along the demand curve due to a change in price.

Determinants of Demand

Factors that influence consumers to buy more or less of a product, regardless of its price.

INSECT Acronym

A mnemonic for Demand Determinants: Income, Number of consumers, Substitutes, Expectations, Complements, Tastes.

Supply

The total amount of a good or service that producers are willing to sell at various prices.

Law of Supply

Higher prices lead to a higher quantity of goods supplied.

Quantity Supplied

The amount of a good that producers are willing to sell at a specific price.

Determinants of Supply

Factors that affect the willingness and ability of suppliers to offer goods and services.

ROTTEN Acronym

A mnemonic for Supply Determinants: Resources, Other good prices, Taxes, Technology, Expectations, Number of competitors.

Market Equilibrium

The condition in which the quantity of goods supplied is equal to the quantity of goods demanded.

Market Disequilibrium

A situation where supply does not equal demand, leading to surplus or shortage.

Market Shortage

When demand exceeds supply at a given price, leading to rising prices.

Market Surplus

When supply exceeds demand at a given price, leading to falling prices.

Increase in Demand

A shift of the entire demand curve to the right, resulting in higher equilibrium price and quantity.

Decrease in Demand

A shift of the entire demand curve to the left, resulting in lower equilibrium price and quantity.

Increase in Supply

A shift of the entire supply curve to the right, resulting in lower equilibrium price and higher quantity.

Decrease in Supply

A shift of the entire supply curve to the left, resulting in higher equilibrium price and lower quantity.

Excess Demand

Another term for market shortage, when the quantity demanded exceeds the quantity supplied.

Excess Supply

Another term for market surplus, when the quantity supplied exceeds the quantity demanded.

Opportunity Cost of Studying

The next best alternative forgone, represented by the value of the best other activity.

Trade-offs for Individuals

Choices such as housing arrangements and transportation options due to limited resources.

Efficiency in Economics

The optimal use of resources to produce goods and services.

Allocative Efficiency

The state in which the distribution of resources results in the highest possible level of overall satisfaction.

Kaldor-Hicks Efficiency

An economic efficiency measure where resource allocation increases a net benefit to society.

Production Possibility Frontier

The boundary between what can be produced and what cannot be produced with given resources.

Marginal Cost

The cost of producing one more unit of a good.

Marginal Benefit

The additional benefit received from consuming one more unit of a good.

Law of Diminishing Returns

As more of a variable input is added to a fixed input, the additional output from that input will eventually decline.

Invisible Hand Theory

Friedrich Hayek's theory that individuals pursuing their own interest inadvertently benefit society.

Consumer Sovereignty

The theory that consumer preferences determine the production of goods and services.

Diminishing Marginal Utility

The decrease in satisfaction as more of a good is consumed.

Perfect Competition

A market structure where many firms offer a homogeneous product.

Monopolistic Competition

A market structure characterized by many firms producing similar but not identical products.

Oligopoly

A market structure dominated by a few large producers.

Monopoly

A market structure where a single producer controls the entire market supply.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in its price.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to changes in consumer income.

Cross-Price Elasticity of Demand

A measure of the responsiveness of the quantity demanded of one good to a change in the price of another good.

Price Elasticity of Supply

A measure of how responsive the quantity supplied of a good is to a change in price.