Basic Economic Concepts Notes

Economics

The study of how society allocates its scarce resources.

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.

Scarcity

The limited nature of society's resources.

Trade-offs

Choices individuals, firms, and governments face due to scarce resources, involving benefits and costs.

Opportunity Costs

The value of the sacrifice made to pursue a course of action.

Factors of Production

Inputs used to produce goods and services.

Land

Natural resources or 'gifts of nature' not created by human effort.

Labor

People with all their abilities and efforts.

Capital

Equipment and structures used to produce goods and services.

Entrepreneur

A risk-taking individual in search of profit who coordinates the other factors of production.

Marginal Analysis

The process of making decisions based on comparing marginal benefits and costs.

Marginal Cost

The additional cost of producing one more unit.

Marginal Benefit

The additional benefit received from consuming the next unit of a good or service.

Specialization

Production of goods or performance of tasks based on comparative advantage.

Voluntary Exchange

The act of buyers and sellers freely and willingly engaging in market transactions.

Division of Labor

The division of work into separate tasks performed by different workers.

Command Economy

An economic system where a central authority makes most of the major economic decisions.

Market Economy

An economy that allocates resources through decentralized decisions of many firms and households.

Traditional Economy

An economic system where allocation of resources is the result of ritual, habit, or custom.

Mixed Economy

An economic system where people carry on their affairs with some government involvement.

Consumer Sovereignty

The belief that consumers determine the types of goods and services produced.

Profit Motive

The driving force that encourages improvement of material well-being.

Economic Freedom

The broad goal that promotes individuals' ability to make their own economic decisions.

Economic Security

Protection from adverse economic events.

Economic Equity

The concept of fairness in the economy.

Economic Growth

The ability of an economy to increase production capabilities.

Economic Efficiency

Insuring that decisions are made so that benefits exceed costs.

Economic Stability

Absence of excessive fluctuations in the macroeconomy.

Standard of Living

Quality of life based on ownership of necessities and luxuries.

Human Capital

Accumulation of investments in people, such as education and training.

Absolute Advantage

The ability to produce more of a good than all other producers.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than all other producers.

Free Trade

Unrestricted trade between people and nations.

Trade Barrier

An impediment to the flow of goods/services/capital across boundaries.

Tariff

A tax on goods produced abroad and sold domestically.

Quota

A maximum amount of a good that can be imported into the domestic market.

Embargo

The prohibition on the export or import of a product.

Exchange Rate

The amount of one currency you must give up to get one unit of another currency.

Factor Market

The market in which the factors of production are bought and sold.

Product Market

The market in which finished goods and services are bought and sold.

Circular Flow Model

A model that shows how households and firms circulate resources, goods, and income through the economy.