ECON CHAPTER 1-4

Scarcity

Means there is a limited supply of resources, so people cannot have everything they want.

Demand

The quantity of a product consumers are willing and able to buy at a given price.

Utility

The satisfaction or happiness a consumer gets from using a product; higher satisfaction results in higher utility.

Behavioral Economics

The study of why people sometimes make irrational decisions, influenced by emotions, habits, advertising, friends, and social media.

Trade-off

The act of choosing one thing which means giving up another.

Opportunity Cost

The next best alternative that is given up when a choice is made.

Individual Demand Curve

A curve showing the demand of one consumer; it illustrates that when price ($P$) decreases, the consumer buys more.

Market Demand Curve

A curve showing the total demand of all consumers in the market; it illustrates that when price ($P$) decreases, the market buys more.

Price (P) increments

Specific price levels shown in the demand curves including $P10$, $P20$, $P30$, $P40$, and $P50$.

Market

Any structure or system that allows buyers and sellers to interact and exchange goods, services, or information, defined by the interplay of supply and demand where prices balance quantities.

Supply

The total amount of a specific good or service that producers or sellers are willing and able to offer to the market at various price points.

Supply Schedule

A table that shows the quantities producers are willing to supply at various prices.

Demand

A consumer's willingness and ability to purchase a good or service at a specific price.

Demand Schedule

A table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices.

Individual Demand

The quantity of a specific item a single consumer is prepared to buy at a given price.

Market Demand

The sum of all individual demands for a specific good or service in a market.

Aggregate Demand

The total demand for all finished goods and services across an entire economy.

Law of Demand

Rule stating that as the price of a product increases, the quantity demanded decreases, and as the price decreases, the quantity demanded increases, assuming other factors remain constant.

Law of Supply

Rule stating that producers are willing to supply more of a good or service when its market price rises and less when its price falls, assuming all other factors remain unchanged.

Supply Curve

A graphical representation of the relationship between the price of a good or service and the quantity supplied, which typically slopes upward from left to right.

Ceteris paribus

A Latin phrase used by economists meaning "holding all other factors constant."

Market Equilibrium

The unique price point where the intentions of buyers and sellers perfectly align, occurring where quantity demanded ($Qd$) is exactly equal to quantity supplied ($Qs$).

Surplus

A market condition that occurs when the actual price is above equilibrium, putting downward pressure on prices.

Shortage

A market condition that occurs when the price is below equilibrium, driving prices up until equilibrium is restored.

Income Effect

A factor affecting demand where consumers buy more when income goes up and buy less when income goes down.

Substitute

A good that can be used in place of another good.

Complementary Goods

Products that are often sold or used together.

Cost of Production

A supply factor including labor, raw materials, or electricity; higher costs reduce supply while lower costs increase it.

Change in Demand

When consumers buy more or less at every price because of factors other than the product's current price, such as tastes, income, or number of buyers.

Change in Supply

When producers sell more or less at every price because of factors other than the product's current price, such as technology, production costs, or government policies.

Scarcity

A condition where resources are limited, while wants and needs are unlimited, forcing individuals to make choices.

Choice

The decision-making process where individuals select which needs and wants to satisfy and which to forgo due to scarcity.

Opportunity Cost

The value of the next best alternative that is forgone when making a choice; it represents what is given up by choosing one option over another.

Money Cost

The explicit, out-of-pocket expense associated with a choice, representing the actual amount of money paid for something.

Opportunity Cost Formula

$$\text{Opportunity cost} = \text{Cost of alternative outcome} - \text{cost of chosen outcome}$$

Optimal Choice

The best possible decision an individual or firm can make given constraints and objectives, maximizing utility (satisfaction) or profit.

Production Possibility Frontier (PPF)

A curve illustrating the possible quantities that can be produced of two products if both depend upon the same finite resource; it represents optimal production levels.

Principle of Increasing Cost

The concept stating that as an economy produces more of one good, the opportunity cost of producing an additional unit of that good increases.

Resource Specialization

The idea that resources are not perfectly interchangeable; as production specializes in one good, less efficient resources must be used, leading to higher opportunity costs.

Diminishing Returns

A situation where each additional unit of input produces less additional output as production of a good increases.

What to produce?

A coordination task involving the allocation of scarce resources (land, labor, capital) to different production activities based on consumer preferences and technology.

How to Produce?

A coordination task focused on determining efficient production methods and labor organization to maximize output and minimize waste.

For Whom to Produce?

A coordination task regarding the distribution of goods and services among the population, considering factors like income, wealth, and social welfare.

Economic Efficiency

A state where all goods and factors of production are allocated to their most valuable uses and waste is eliminated or minimized.

Economic Inefficiency

A situation where available factors of production are not used to their capacity, often causing wasted resources and deadweight losses.

David Ricardo

The English economist who developed the theory of comparative advantage in his 1817 book "On the Principles of Political Economy and Taxation."

Comparative Advantage

The ability of a country, firm, or individual to produce a particular good or service at a lower opportunity cost than its competitors.

Market Exchange

The process by which goods and services are voluntarily exchanged between buyers and sellers, governed by demand and supply.

Price Mechanism

A signal in market exchange that reflects the relative scarcity and value of a good or service.

Distribution of Economy’s Outputs

How the goods and services produced in an economy are allocated among different individuals, households, and groups within society.

Market-based Distribution

A system where output is distributed based on an individual's ability to pay the market price.

Government Allocation / Public Goods

A system where output, such as free public education, is distributed equally to everyone regardless of income.

Need-based Distribution

A system where output, such as relief goods, is distributed based on the specific requirements of families or individuals.

Contribution/Productivity-based Distribution

A system where income or output is distributed based on an individual's specific skills and contribution, resulting in different wage levels.

Factors of Production

The essential inputs for production: Land, Labor, Capital, and Entrepreneurship.

Primary Sector

The economic sector involved in agriculture, mining, forestry, and fishing.

Secondary Sector

The economic sector involved in manufacturing, construction, and energy production.

Tertiary Sector

The economic sector focusing on services, retail, finance, healthcare, and education.

Thomas Sowell

The economist who stated that "The first rule of economics is scarcity: there is never enough of anything to fully satisfy all those who want it."

Economics

The study of how individuals, families, businesses, and societies make critical decisions and allocate scarce resources to meet unlimited needs.

Scarcity

The fundamental economic problem where resources are structurally limited while human desires and needs are virtually limitless.

Opportunity Cost

The value of the next-best alternative sacrificed or forgone when making an economic selection.

Supply

The quantity of a good that producers are willing to offer at different prices.

Demand

The desire and ability of consumers to purchase goods and services.

Microeconomics

The branch of economics that investigates the specific decision behaviors of consumers, individual households, and distinct firms.

Economy

An entity created by the interaction of resources, people, businesses, governments, and markets working together to produce and distribute goods and services that satisfy human needs and wants.

Invisible Hand

A metaphor inspired by Adam Smith describing the incentives which free markets create for self-interested people to accidentally act in the public interest.

Law of Supply

The principle stating that, Ceteris Paribus, when the price of a good increases, the quantity supplied increases; conversely, when the price decreases, the quantity supplied decreases.

Law of Demand

The principle stating that, Ceteris Paribus, when the price of a good increases, the quantity demanded decreases; conversely, when the price decreases, the quantity demanded increases.

Price Ceilings (Cap)

External caps that keep prices below market equilibrium, which can discourage output and create shortages.

Price Floors (Floor)

External floors, such as minimum wage laws, that guarantee baseline compensation but may cause lower aggregate employment demand if set excessively high.

Comparative Advantage

The economic principle that trade remain mutually beneficial if both parties focus on what they produce relatively best, regardless of overall efficiency.

Voluntary Exchange

A transaction that increases overall welfare because both parties give up what they value less for something they value more.

Marginal Benefit (MB)

The incremental benefit of a decision, such as a higher score on an exam.

Marginal Cost (MC)

The incremental cost of a decision, such as sleep deprivation or fatigue.

Decision Rule

The rational economic choice to proceed only as long as $MB > MC$.

Externality

A cost or benefit imposed on bystanders who are not involved in a transaction.

Economic Efficiency

Maximizing total output and ensuring all available inputs are optimized to generate the maximum potential GDP and economic value.

Social Equality

Structuring resources to distribute economic welfare fairly across all citizen tiers through wealth distribution.

Macroeconomics

The branch of economics that examines overall, system-wide variables such as national inflation, unemployment figures, and interest rates.

Ceteris Paribus

A Latin term meaning "other things being equal" or "all other factors held constant" used to isolate critical variables.

Production Possibility Frontier (PPF)

An economic model that represents production boundaries for goods, where points on the curve represent efficient use of all resources.

Circular Flow of Income

An economic model representing the cycle where firms pay wages to workers, and workers purchase products from firms.