Unit 1: Basic Economic Concepts

economics

study of scarcity and choice

individual choice

decisions by individuals about what to do, which necessarily involve decisions about what not to do

economy

a system for coordinating a society’s productive and consumptive activities

market economy

an economy where the decisions of individual producers and consumers largely determine what, how, and for whom to produce, with little government involvement in the decisions

resource

anything that can be used to produce something else

land

refers to all resources that come from nature (minerals, timber, and petroleum)

labor

the effort of workers

capital

refers to manufactured goods used to make other goods and services

entrepreneurship

describes the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes

scarce

describes a type of resource that is not available in sufficient quantities to satisfy all the various ways a society wants to use it

opportunity cost

the real cost of an item; what you must give up in order to get it (often the second best choice)

microeconomics

the study of how people make decisions and how those decisions interact

macroeconomics

is concerned with the overall ups and downs in the economy

economics aggregates

economic measures that summarize data across many different markets

positive economics

how the economy actually works

normative economics

how the economy should work

business cycle

the short-run alternation between economic downturns, known as recessions, and economic upturns, known as expansions

depression

a very deep and prolonged downturn

recession

periods of economic downturns when output and employment are falling

expansions

aka recoveries, are periods of economic upturns when output and employment are rising

employment

number of people currently employed in the economy

unemployment

number of people who are actively looking for work but aren’t currently employed

labor force

equal to the sum of employment and unemployment

unemployment rate

percentage of the labor force that is unemployed

output

quantity of goods and services produced

aggregate output

the economy’s total production of goods and services for a given time period

inflation

a rising overall price level

deflation

a falling overall price level

price stability

occurs in the economy when the aggregate price level is changing only slowly

economic growth

an increase in the maximum amount of goods and services an economy can produce

model

a simplified representation used to better understand a real-life situation

other things equal assumption

aka ceteris paribus assumption; means that all other relevant factors remain unchanged

trade-off

occurs when you give up something in order to have something else

production possibilities curve

illustrates the trade-offs facing an economy that produces only 2 goods. it shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

efficient

describes an economy when there is no way to make anyone better off without making another person worse off

technology

the technical means for producing goods and services

trade

occurs in a market economy; when individuals provide goods and services to others and receive goods and services in return

gains from trade

people can get more of what they want through trade (and specialization) than they could if they tried to be self-suffcient

specialization

each person specializes in the task that he or she is good at performing (lower oc)

comparative advantage

when the opportunity cost for producing a certain good or service is lower for you than for others

absolute advantage

if you can make more of a good or service with a given amount of time and resources, does not take into account opportunity cost

competitive market

a market in which there are many buyers and sellers of the same (aka one) good or service, none of whom can influence the price at which the good or service is sold

supply and demand model

a model of how a competitive market works

demand schedule

shows how much of a good or service consumers will be willing and able to buy at different prices

quantity demanded

the actual amount of a good or service consumers are willing and able to buy at some specific price

demand curve

a graphical representation of the demand schedule; it shows the relationship between QD and price

law of demand

says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service

change in demand

a shift of the entire demand curve, which changes the quantity demanded at any given price

movement along the demand curve

a change in the quantity demanded of a good that is caused by a change in that good’s price

substitutes

refers to 2 goods where a rise in the price of one good leads to an increase in the demand for the other good

complements

refers to 2 goods where a rise in the price of one good leads to a decrease in the demand for the other good

normal goods

the demand increases for this good when there is a rise in income

inferior goods

the demand decreases for this good when there is a rise in income

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer

quantity supplied

the actual amount of a good or service producers are willing to sell at some specific price

supply schedule

shows how much of a good or service producers will supply at different prices

supply curve

shows the relationship between QS and price

law of supply

says that, other things being equal, the price and quantity supplied of a good are positively related

change in supply

a shift of the entire supply curve, which changes the quantity supplied at any given price

movement along the supply curve

a change in the quantity supplied of a good that is caused by a change in that good’s price

input

anything that is used to produce a good or service

individual supply curve

illustrates the relationship between quantity supplied and price for an individual producer

equilibrium

when no individual would be better off doing something different

equilibrium price

aka market-clearing price; the price at which the QD = QS;

market-clearing price

aka equilibrium price; the price at which the QD = QS

equilibrium quantity

the quantity of the good bought and sold at the equilibrium price

surplus

when the QS > QD; when the price is above its equilibrium level

shortage

when the QD > QS; when the price is below its equilibrium level

price controls

legal restrictions on how high or low a market price may go; can be either a price ceiling or price floor

price ceilings

a max price sellers are allowed to charge for a good or service

price floor

a min price buyers are required to pay for a good or service

minimum wage

a legal price floor on the wage rate (market price of labor)