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Economics
the study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants
Resources
called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability
Scarcity
the imbalance between limited productive resources and unlimited human wants. Because economic reserves are scarce, the goods and services a society can produce are also scarce.
Trade-offs
scarce resources imply that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs
Opportunity cost
the amount of one good that must be sacrificed to obtain an alternative good.
Marginal
the next unit or increment of an action
Marginal benefit
the additional benefit received from the consumption of the next unit of a good or service
Marginal cost
the additional cost incurred from the consumption of the next unit of a good or service
Marginal analysis
making decisions based upon weighing the marginal benefits and costs of that action
Production possibilities
different quantities of goods that an economy can produce with a given amount of scarce resources
Production possibility frontier
a graphical illusion that shows the maximum quantity of one good that can be produced, given the quantity of the other good being produced
Law of increasing costs
the more of a good that is produced, the greater the opportunity cost of producing the next unit of that good
Absolute advantage
exists if a producer can produce more of a good than all other producers
Comparative advantage
a producer has a comparative advantage if he can produce a good at a lower opportunity costs than all other producers
Specialization
when firms focus their resouces on production of goods for which they have comparative advantage, they are said to be specializing
Productive efficiency
production of maximum output for a given level of technology and resouces
Allocative efficiency
production of the combination of goods and services that provides the most net benefit to society
Economic growth
occurs when an economy's production possibilities increase
Economic Systems
Capitalism, Socialism, Command and Traditional economies
Price Ceiling
An artificial limit placed by government on what can be charged for a good or service.
Price Floor
An artificial price set by government, above the market equilibrium price.
Production Possibilities Curve (PPC)
The graphical representation of the combinations of two goods and/or services that can be produced by an economy when using resources efficiently.
Supply
How much of a good or service producers are willing and able to supply at every price. When supply changes, the entire line shifts right or left. Supply is changed by producer input costs, producer expectations, number of sellers, taxes and technology.
Demand
What consumers are willing and able to buy at every price level.
Capital
The man-made tools used in the production process that are not used up during production.
Capitalism
a free-market system built on private ownership
Ceteris Paribus
"All other things equal"; It means we only look at one change at a time
Command economy
An economy where government makes all of the decisions concerning what to produce, how much to produce and whom to produce the goods and services for.
Entrepreneurship
Risk taking by business firms and individuals.
Labor
Human effort in the production process.
Labor Force
All individuals 16 years and older who are currently employed or not unemployed.
Labor Productivity
How much one person can do in a specific time period
Land
Naturally occurring resources.
Macroeconomics
The study of the economy as a whole
Market economy
An economic system where most decisions on what to produce, how to produce and whom will get what is produced is decided by free individuals and business firms; based upon the fundamentals of private property, freedom, self-interest
Microeconomics
The study of the economic decisions of individual firms
Mixed economy
An economy where private individuals, business firms and government actively determine what is produced, how it is produced for whom the goods and services will be produced.
Shortage
A situation where quantity demanded is greater than quantity supplied because the price is below the market equilibrium.
Socialism
An economic system that places severe limits on the pursuit of profit and private property rights and where government makes many of the decisions on what to produce, how to produce and for whom goods and services will be produced.
Law of Demand
The law that states that as the price of any good or service increases, the quantity of that good or service demanded will fall and vice versa.
Law of Supply
The law that states that as the price of any good or service increases, the quantity of that good or service will increase and vice versa.
Quantity Demanded
The amount of a good or service buyers are willing and able to buy at one price.
Quantity Supplied
The amount of a good or service sellers are willing and able to sell at one price.
Absolute (or money) prices
the price of a good measured in units of currency
Relative Prices
The number of units of any other good Y that must be sacrificed to acquire good X. Only relative prices matter
Substitution effect
The change in the quantity demanded resulting from a change in the price in one good relative to the price of other goods
Income effect
The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power(or real income)
Demand Schedule
A list or table showing how much of a good or service consumers will want to buy at different prices.
Demand Curve
A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price. It is downward sloping, reflecting the law of demand.
Determinants of demand
The external factors that shift demand to the left or right.
Normal goods
A good for which higher income increases demand.
Inferior goods
A good for which higher income decreases demand.
Substitute goods
Two goods are consumer substitutes if they provide essentially the same utility to the consumers.
Complementary goods
Two goods are consumer complements if they provide more utility when consumed together than when consumed separately.
Supply schedule
A table showing the quantity supplied for a good at various prices.
Supply curve
A graph showing the various quantities supplied at each and every price that might prevail in the market. It is upward sloping reflecting the law of supply.
Determinants of supply
One of the external factors that influence supply. When these variables change, the entire supply curve shifts to the left or right.
Market equilibrium
Exists at the only point where the quantity supplied equals the quantity demanded. Or, it is the only quantity where the price consumers are willing to pay is exactly the producers are willing to accept.
Disequilibrium
Any price where quantity demanded is not equal to quantity supplied.
Surplus
A situation in which quantity supplied is greater than quantity demanded.
Total welfare
The sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society.
Consumer welfare
The difference between what consumers are willing to pay and what they actually pay. It is the area below th e demand curve and above the price.
Producer surplus
The difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price.
Factors of Production
Land, labor, capital and entrepreneurship.
Economic Equilibrium
the point where supply equals demand for a product
