intro to microeconomics

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods
and services market and a labor market

command economy

an economy where economic decisions are passed down from government authority and where
the government owns the resources

division of labor

the way in which different workers divide required tasks to produce a good or service

economics

the study of how humans make choices under conditions of scarcity

economies of scale

when the average cost of producing each individual unit declines as total output increases

exports

products (goods and services) made domestically and sold abroad

fiscal policy

economic policies that involve government spending and taxes

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

goods and services market

a market in which firms are sellers of what they produce and households are buyers

gross domestic product (GDP)

measure of the size of total production in an economy

labor market

the market in which households sell their labor as workers to business firms or other employers

imports

products (goods and services) made abroad and then sold domestically

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and
trade balance

market

interaction between potential buyers and sellers; a combination of demand and supply

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like
households, workers, and business firms

model

see theory

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and
the extent of borrowing

private enterprise

system where private individuals or groups of private individuals own and operate the means of
production (resources and businesses)

scarcity

when human wants for goods and services exceed the available supply

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall
production process

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

traditional economy

typically an agricultural economy where things are done the same as they have always been done

underground economy

a market where the buyers and sellers make transactions in violation of one or more

allocative efficiency

when the mix of goods produced represents the mix that society most desires

budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods,
when all income is spent; the boundary of the opportunity set

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a
country has a lower opportunity cost of production

invisible hand

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units
of the good or service tends to become smaller than what we received from earlier units

law of diminishing returns

as we add additional increments of resources to producing a good or service, the marginal
benefit from those additional increments will decline

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo

normative statement

statement which describes how the world should be

opportunity cost

measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the
forgone alternative

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income

positive statement

statement which describes the world as it is

production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity
produced of another good (or service)

sunk costs

costs that we make in the past that we cannot recover

utility

satisfaction, usefulness, or value one obtains from consuming goods and services