Ten Big Ideas in Economics Vocab

scarcity

the limited nature of society’s resources

economics

the study of how society manages its scarce resources

• how people decide what to buy, how much to work, save, an spend

• how firms decide how much to produce, how many employees to hire

• how a country decides to allocate its resources between national defense, consumer goods, protecting the environment, and other needs

What is big idea #1?

tradeoffs are everywhere

efficiency

when society gets the most from its scarce resources

equality

when prosperity is distributed uniformly among society’s members

What is big idea #2?

the cost of something is what you give up to get it

opportunity cost

whatever must be given up to obtain it

What is big idea #3?

rational people think at the margin

rational people

purposefully do the best they can to achieve their objectives

marginal changes

incremental adjustments to an existing plan

What is big idea #4?

incentives matter

incentive

something that induces a person to act (ex: the prospect of a reward or punishment)

What is big idea #5?

trade can make everyone better off

What is big idea #6?

markets are usually a good way to organize economic activity

market

a group of buyers and sellers (need not be in a single location)

what does “organize economic activity” mean?

• what goods to produce

• how to produce them

• how much of each to produce

• who gets them

market economy

allocates resources through the decentralized decisions of many households and firms as they interact in markets

What is big idea #7?

governments can sometimes improve market outcomes

market failure

when the market fails to allocate society’s resources efficiently

externalities

when the production or consumption of a good affects bystanders (ex: pollution)

market power

a single buyer or seller has substantial influence on market price (ex: monopoly)

What is big idea #8?

productivity is the key to economic prosperity

productivity

the amount of goods and services produced per unit of labor

What is big idea #9?

prices rise when the government prints too much money

inflation

increases in the general level of prices

What is big idea #10?

booms and busts cannot be avoided but can be moderated

business cycle

refers to the irregular and unpredictable fluctuations in economic activity, such as employment and production