Chapter 1: Limits, Alternatives, and Choices – Introductory Economics

Chapter 1 Economics Flashcards

Economics

The social science that studies how individuals and society make optimal choices under conditions of scarcity.

Scarcity

The condition that economic wants exceed productive capacity, requiring choices to be made.(Unlimited wants and limited resources)

Opportunity Cost

The value of the next-best alternative forgone when a choice is made.

Rational Self-Interest

Purposeful behavior aimed at maximizing utility for individuals or profit for firms.

Utility

The satisfaction or pleasure a consumer derives from consuming a good or service.

Marginal Analysis

Comparison of the additional (marginal) benefits and marginal costs of a decision.

Marginal Benefit (MB)

The extra benefit received from consuming or producing one more unit of a good or service.

Marginal Cost (MC)

The extra cost incurred from consuming or producing one more unit of a good or service.

Scientific Method (in economics)

A systematic procedure of observation, hypothesis formation, testing, and correction, accept or reject hypothesis which is used to develop economic principles.

Economic Principle

A widely accepted generalization about the economic behavior of individuals or institutions.

Ceteris Paribus (Other-Things-Equal) Assumption

The assumption that all other relevant factors remain constant when examining a relationship.

Microeconomics

The branch of economics that studies decision making by individual consumers, workers, and firms.

Macroeconomics

The branch of economics that examines the economy as a whole, focusing on aggregates such as GDP, inflation, and unemployment.

Positive Economics

The analysis of facts and cause-and-effect relationships; describes “what is.”

Normative Economics

Incorporates value judgments about what the economy should be like; describes “what ought to be.”

Economizing Problem (Individual)

Limited income versus unlimited wants, forcing individuals to make choices along a budget line.

Budget Line

A curve that shows the various combinations of two products a consumer can purchase with a specific income.

Trade-Off

The sacrifice of one good or activity to obtain more of another.

Land

All natural resources used in the production process.

Labor

Physical and mental talents of humans used to produce goods and services.

Capital

Manufactured aids to production such as tools, machinery, and factories.

Entrepreneurial Ability

The human resource that combines land, labor, and capital to produce goods, makes decisions, innovates, and bears risk.

Production Possibilities Curve (PPC)

A curve showing the maximum attainable combinations of two products that may be produced with available resources and technology.

Law of Increasing Opportunity Costs

As production of a good increases, the opportunity cost of producing an additional unit rises, making the PPC concave.

Optimal Allocation

The output mix where marginal benefit equals marginal cost (MB = MC).

Economic Growth

An outward shift of the PPC caused by more resources, improved resource quality, or technological advances.

Present Goods

Goods that satisfy current consumption needs.

Future Goods

Capital goods, education, and research that enhance future production capacity.

Specialization

Concentration of production on one or a few goods, leading to increased output and gains from international trade.

International trade

Nations trade with each other allowing them to focus on producing at a comparative advantage

Allocative Efficiency

Achieving the mix of goods and services most desired by society.

Productive Efficiency

Producing goods in the least costly way, using the best technology and least wasteful methods.

Full Employment

Using all available resources (land, labor, capital, entrepreneurial ability) in the production process.