Ten Principles of Macroeconomics - Key Terms (Vocabulary)

Vocabulary flashcards covering key terms from the Ten Principles of Macroeconomics (Chapter 1) notes.

Scarcity

The limited nature of society’s resources; society cannot produce all the goods and services people want.

Economics

The study of how society manages its scarce resources.

Trade-off

Choosing one goal over another; making decisions involves giving up one thing to obtain another.

Opportunity cost

Whatever must be given up to obtain something.

Marginal analysis

Evaluating costs and benefits of small incremental changes; rational decisions are made at the margin.

Marginal cost

The increase in total cost from producing one more unit.

Marginal benefit

The increase in total benefit from consuming or producing one more unit.

Incentives

Something that induces people to act; rational individuals respond to incentives, which can have unintended effects.

Trade can make everyone better off

Mutual gains from trade through specialization and exchange for both individuals and countries.

Markets

A group of buyers and sellers that determines what goods and services to produce and how to allocate them.

Market economy

An economy where resources are allocated through decentralized decisions in markets.

Prices

Determined by the interaction of buyers and sellers; reflect value and production costs and guide decisions; associated with Adam Smith’s invisible hand.

Adam Smith’s invisible hand

Prices adjust to guide market participants toward outcomes that maximize societal well-being.

Property rights

Enforced rights to own and use resources; essential for a functioning market economy.

Externality

A side effect of production or consumption that affects bystanders and can cause market failures.

Market power

When a single buyer or seller can influence prices; a source of market failure.

Productivity

The amount of output per unit of labor; the main determinant of living standards.

Inflation

An overall rise in the price level; in the long run, caused by growth in the money supply.

Short-run trade-off between inflation and unemployment

Policy actions can raise or lower inflation and unemployment in opposite directions in the short run; the trade-off exists but varies by circumstances.