Chapter Test

Production possibilities frontier (PPF)

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

opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

economic growth

the ability of the economy to increase the production of goods and services

Trade

the act of buying and selling

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

Comparative advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

market

a group of buyers and sellers of a particular good or service

Product market

a market for goods - such as computers - or services - such as medical treatment

Factor market

a market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

Factors of production

land (natural resources), labor, capital, entrepreneurship

circular flow diagram

a model that illustrates how participants in markets are linked

Free market

a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed

Entrepreneur

someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services

Property rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Ceteris Paribus ("all else equal") condition

The requirement that when analyzing the relationship between two variables -- such as price and quantity demanded -- other variables must be held constant.

Demographics

The characteristics of a population with respect to age, race, and gender.

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Substitutes

Goods and services that can be used for the same purpose.

Competitive Market Equilibrium

A market equilibrium with many buyers and sellers.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.

Normal good

A good for which the demand increases as income rises and decreases as income falls.

Substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.

Inferior good

A good for which the demand increases as income falls and decreases as income rises.

Perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Complements

Goods and services that are used together.

Law of demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Supply Schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Demand Curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Law of Supply

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Demand Schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded.

Market demand

The demand by all the consumers of a given good or service.

Quantity Supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Technological change

A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Three Key Economic Ideas

People must make choices as they try to attain their goals. People make choices because resources are scarce. Most of economics analyzes what happens in markets.

The Economic Problem That Every Society Must Solve

1. A limited amount of resources can produce a limited amount of goods and services.

2. The cost of producing more of one good is the value of what must be given up to produce it.

Economic Models

1. Economists use models—simplified versions of reality—to analyze real-world issues.

2. Economists accept a model if it leads to hypotheses that are confirmed by statistical analysis.

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Economic model

A simplified version of reality used to analyze real-world economic situations.

Economic variable

Something measurable that can have different values, such as the incomes of doctors.

Economics

The study of the choices people make to attain their goals, given their scarce resources.

Equity

The fair distribution of economic benefits.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Marginal analysis

Analysis that involves comparing marginal benefits and marginal costs.

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Normative analysis

Analysis concerned with what ought to be.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Positive analysis

Analysis concerned with what is.

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Trade-off

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Voluntary exchange

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.