Economics Fundamentals: Individual Choices, Market Dynamics, and Trade-offs

Resource

something that is used to produce something else

Scarce

a resources is scarce when there isn't enough to satisfy all the uses of it

Opportunity cost

what you must give up in order to get something

Trade off

comparison of the costs and benefits of a decision

Marginal decision

a decision made at the margins of an activity about whether to do a bit more or a bit less of that activity

Marginal analysis

the study of marginal decisions

Incentive

anything that offers rewards to people who change their behavior

Gains from trade

Trade allows us all to consume more than we otherwise could

Specialization

the situation in which each person specializes in the task they are good at performing

Equilibrium

an economic situation in which no individual would be better off doing something different

Equity

a condition in which everyone gets their "fair share." (There are many definitions of equity.)

Efficiency

all the opportunities to make people better off have been exploited

Economic growth

the increase in living standards over time

Market failures

the pursuit of self-interest makes society worse off when markets don't achieve efficiency

Government intervention

can improve society's welfare when markets do not lead to efficiency

Overall spending

sometimes gets out of line with the economy's productive capacity; when it does, government policy can change spending

One person's spending

is another person's income

Recessions

a drop in business spending leads to less income, less spending, further drops in business spending, layoffs, and rising unemployment

Potential

the total amount of goods and services it can produce

Model

a simplified representation of a real situation used to better understand them

The other things equal assumption

all other relevant factors remain unchanged

Production Possibilities Frontier (PPF)

a diagram that shows the combos of two goods that are possible to produce at full employment

Efficiency in production

an economy is efficient in production if it could not produce more of any one good without producing less on something else

Inefficiency in production

an economy is inefficient in production if it could produce more of some things without producing less of others

Efficiency in allocation

an economy is efficient in allocation if it allocates its resources so that consumers are as well off as possible

Theory of Comparative Advantage

It makes sense to produce the things you're especially good at producing and buy everything else from others

Comparative advantage

A country has comparative advantage in producing a good/service if its opportunity cost of production is lower than for other countries

Absolute advantage

Just because the US can produce more of both goods doesn't mean it should do so instead of trade

Supply

represents the behavior of sellers

Supply schedule

shows how much of a good or service would be supplied at different prices

Supply curve

shows the quantity supplied at various prices

Quantity supplied

the quantity producers are willing and able to sell at a particular price

Shifting the supply curve

means to increase or decrease the supply of goods without changing the price

Important supply shifters

include changes in input prices, prices of related goods/services, technology, expectations, and the number of producers

Changes in input prices

An increase in the price of an input makes the production more costly for sellers. Supply decreases.

Changes in prices of related goods

Sellers will supply less of a good if its profitability fails

Changes in expectations

A shift to the right in demand curve isn't about a change in price today, but the fear of an increase in price in the future

Change in number of consumers

More consumers entering the market changes the number of buyers and therefore its demand

Simultaneous shifts of demand/supply curve