Economics Foundations and Market Dynamics: Key Concepts and Theories

Economics

The study of how people coordinate their wants under scarcity

Scarcity

Not having enough of what is desirable to satisfy all wants

Opportunity Cost

The value of the next-best alternative forgone

Free Good

A good with zero opportunity cost

Three Economic Questions

What to produce, how to produce, and for whom to produce

Price

The ratio at which two goods exchange

Relative Price

The price of one good in terms of another good

Voluntary Exchange

Trade that makes both parties better off

Gains from Trade

Benefits arising from differences in marginal values

Economic Theory

A logical explanation used to predict behavior

Strongest Support for a Theory

Evidence has failed to disprove it

Positive Statement

A statement about what is

Normative Statement

A statement about what should be

Total Value

Maximum amount a consumer is willing to pay for a given quantity

Marginal Value

Maximum amount a consumer is willing to pay for one more unit

Law of Diminishing Marginal Value

Marginal value decreases as consumption increases

Optimal Purchase Rule

Consume until marginal value equals price

Consumer Surplus

Total value minus total amount paid

Demand

Quantities consumers are willing and able to buy at various prices

Quantity Demanded

Amount purchased at a specific price

Law of Demand

Quantity demanded falls as price rises

Normal Good

Demand increases as income rises

Inferior Good

Demand decreases as income rises

Substitutes

Goods where demand for one increases when the price of the other rises

Complements

Goods where demand for one decreases when the price of the other rises