Introduction to Economics: Key Concepts and Market Dynamics

What is economics?

The study of how people make decisions under scarcity.

What is scarcity?

Human wants exceed available resources, leading to trade-offs.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than others.

What is specialization?

Focusing on one task to increase efficiency and quality.

What is the difference between microeconomics and macroeconomics?

Micro focuses on individuals (households, firms); macro focuses on the economy as a whole.

What is the economic way of thinking?

A method of analyzing decisions using cost-benefit analysis.

What is a model or theory in economics?

A simplified representation of how variables interact.

What is a positive statement?

Objective and testable; describes "what is."

What is a normative statement?

Subjective and opinion-based; describes "what should be."

What are the 3 economic questions every economy answers?

What is produced? How is it produced? Who gets what is produced?

What is a command economy?

Economy where decisions are made by a central authority.

What is a market economy?

Economy where decisions are made by interactions in the marketplace.

What is globalization?

Expanding global connections in culture, politics, and economics.

What is a budget constraint?

The outer boundary of a consumer's opportunity set.

What is opportunity cost?

The value of the next best alternative given up.

How do you calculate opportunity cost?

What you give up ÷ What you gain.

What is marginal analysis?

Comparing the additional cost and benefit of a small decision change.

What is utility?

The satisfaction gained from consuming a good or service.

What is diminishing marginal utility?

The additional satisfaction decreases with each extra unit consumed.

What is a sunk cost?

A past cost that cannot be recovered and should not affect current decisions.

What does the Production Possibilities Frontier (PPF) show?

Trade-offs in production using limited resources.

What do points on, inside, and outside the PPF mean?

On = efficient; Inside = inefficient; Outside = unattainable.

What causes the PPF to shift outward?

Economic growth (more resources or better technology).

What is the law of demand?

As price increases, quantity demanded decreases.

What is the law of supply?

As price increases, quantity supplied increases.

What causes a movement along the demand or supply curve?

A change in the price of the good.

What causes a shift in the demand curve?

Changes in income, tastes, expectations, number of buyers, or prices of related goods.

What causes a shift in the supply curve?

Changes in input costs, number of sellers, technology, or future expectations.

What is equilibrium?

The point where quantity demanded equals quantity supplied.

What is a surplus?

Quantity supplied > quantity demanded; leads to downward pressure on price.

What is a shortage?

Quantity demanded > quantity supplied; leads to upward pressure on price.

What is a price ceiling?

A legal maximum price, set below equilibrium → causes a shortage.

What is a price floor?

A legal minimum price, set above equilibrium → causes a surplus.

Who demands labor in the labor market?

Firms/employers.

Who supplies labor?

Households/workers.

What happens to labor demand if product demand increases?

Labor demand increases.

What is the impact of education on labor market outcomes?

Higher education increases demand for skilled workers and leads to higher wages.

How can technology affect labor demand?

Can substitute (↓ demand) or complement (↑ demand) labor depending on the job.

Who demands funds in the financial market?

Borrowers (households, firms, governments).

Who supplies funds?

Savers (households, firms, governments via banks).

What is the relationship between interest rates and quantity demanded of loans?

As interest rates increase, demand for loans decreases.

What is the relationship between interest rates and supply of savings?

As interest rates increase, supply of savings increases.