Econ ch 1-5

economics

the study of how individuals and societies allocate scarce resources to satisfy unlimited wants

scarcity

the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources

marginal

additional

Rationality

the assumption that individuals act in their own best interest, making decisions that maximize utility or satisfaction.

Incentives

factors that motivate individuals to make certain choices or take specific actions, influencing their behavior in the marketplace.

unintended consequences

outcomes that are not the ones foreseen or intended by a purposeful action.

microeconomics

the branch of economics that studies individual consumers and firms, focusing on their decision-making processes and interactions in specific markets.

economic models

simplified representations of economic processes or behaviors, used to analyze and predict outcomes in various economic contexts.

ceteris paribus

meaning "all other things being equal," used to isolate the effect of one variable while holding others constant.

positive economics

objective analysis of economic phenomena, relying on facts, data, and empirical evidence without making value judgments

normative economics

value judgments and prescriptive statements about what economic policies or outcomes should be

direct realtionship

two variables move in the same direction

inverse relationship

two variables move in opposite directions

production

the process of transforming inputs into outputs like goods or services

inputs

resources such as labor, capital, land, and entrepreneurship that firms combine to produce goods and service

tradeoffs

whenever choosing one option requires giving up another due to limited resources/scarcity

opportunity cost

the value of the next best alternative that is forgone when a choice is made

Production possibilities cost (PPC)

a graph showing all the maximum combinations of two goods an economy can produce with fixed resources

absolute advantage

when an individual, firm, or country can produce a good or service more efficiently than another, using fewer resources or producing more output with the same resources

comparative advantage

the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than another

Specialization and trade according to comparative advantage

when each producer focuses on goods they can make at the lowest opportunity cost, leading to higher total output and mutual gains from trade

Market

the set of all buyers and sellers interacting in a given context to exchange goods with the goal of determining prices and quantities through supply and demand

demand schedule

shows the quantity of a good or service consumers are willing and able to buy at different price levels

demand curve

the relationship between the price of a good and the quantity demanded

supply curve

the relationship between the price of a good and the quantity that producers are willing and able to supply

supply schedule

the quantity of a good or service that producers are willing and able to supply at different prices during a specific period

Change in Quantity Demanded or Quantity Supplied (movement)

the price of the good changes while all other factors remain constant

Change in demand or supply (shift)

Caused by non‑price factors. The whole curve moves left (decrease) or right (increase) at every price

equilibrium

when the quantity demanded equals the quantity supplied, resulting in a stable market price and quantity

surplus

when the quantity supplied of a good or service exceeds the quantity demanded at a given price, creating an excess of supply in the market

shortage

when the quantity demanded of a good or service exceeds the quantity supplied at a given price, leading to unfulfilled demand.

price ceiling

a legal maximum price that can be charged for a good or service, usually imposed by government to protect consumers from excessively high prices

price floor

minimum price that can legally be charged for a good, service, or labor, set to prevent prices from falling below a certain level.

voluntary trade

both parties intend to benefit from exchanging goods

market failure

a free market fails to allocate resources efficiently, leading to overproduction or underproduction

internal costs and benefits

costs and benefits that the buyer and seller themselves experience and take into account when making decisions

external costs and benefits

costs or benefits that affect third parties outside the direct market transaction, not reflected in the private cost or benefit curves

consumption externalities

a cost or benefit from consuming a good or service that affects third parties who are not directly involved in the transaction

negative consumption externalities

The consumer’s action imposes a cost on others (second‑hand smoke from smoking, noise from loud parties)

positive consumption externalities

The consumer’s action benefits others (immunity from vaccinations, knowledge spillovers from education)

production externalities

unintended side effects of industrial or production activities that impose costs on or benefit third parties who are not part of the market transaction

rivalrous goods

consumption by one person reduces its availability to others, making it scarce in use

excludable goods

the degree to which a good can be restricted so that only paying users can consume it

minimum wage

a legally mandated price floor in the labor market that sets the lowest hourly pay employers can offer, and its effects depend on market structure and the wage level relative to equilibrium.

tragedy of the commons

when individuals overuse a shared resource for personal gain, ultimately reducing the overall benefit for everyone.