Unit 1 - Basic Economic Concepts

Factors of Production

Land, Labor, capital, and entrepreneurship

Capital

Man-made goods like machinery, tools, and buildings

Microeconomics

Branch of economics that studies how individual people, households, and businesses make choices to allocate limited resources

Macroeconomics

The study of an entire economy (total output, cost of living, and jobless rates)

Positive Economics

The objective, fact-based branch of economic analysis

Normative Economics

A part of economics that focuses on value judgements, opinions, and what the economy “ought to be” rather than the factual proof

Scarcity

Having more demand for something than the supply available

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen

Production possibilities

An economic graph that shows the maximum amount of two goods that can be made using limited resources and fixed technology

Absolute advantage

When a country, company, or person can make more of a product using the same amount of work or resources as rival, or same amount using fewer resources

Comparative advantage

An economy’s ability to produce a specific or service at a lower opportunity cost than its trading partners

Specialization

The process of focusing on a narrow skill, task, product, or area of knowledge instead of trying to do everything

Terms of trade

Measure the relative price of a country’s exports compared to its imports, express as an index

Law of demand

If all other factors stay the same, a higher price for a product or service leads to a lower quantity demanded by buyers

Quantity demanded

The exact amount of a good or service that people want and can buy at a single, specific price

Substitutes

A person or thing acting or serving in place of another

Complements

Products that people use together

Normal goods

Products whose demand increases when people make more money and decrease when people make less money

Inferior goods

Products whose demand decreases when people make more money and increase when people make less money

Law of supply

When the price of a good or item goes up, makers want to sell more of it

Quantity supplied

The exact amount of a good or service that producers are willing and able to sell at a specific price point

Market equilibrium

State in market where the quantity demanded by consumers matches the quantity supplied by producers

Surplus

An amount that is more than what you need or use

Shortage

A state of situation in which something needed cannot be obtained in sufficient amounts

Price ceiling

A legal maximum price set by the government or authority on a good or service

Price floor

A government-imposed limit that prevents a price from falling below a specific minimum level