Principles of Microeconomics: Scarcity, Choice, and Market Equilibrium

Scarcity

The fundamental economic problem that resources are limited relative to people's wants.

Choice

Deciding how to use scarce resources among competing alternatives.

Opportunity Cost

The best alternative that we give up when we make a choice.

Factors of Production

Inputs used in the production process: land, labor, and capital.

Inputs / Resources

Anything provided by nature or previous generations that can be used to satisfy human wants.

Outputs

Goods and services that are valuable to households.

Production

The process of transforming scarce resources into useful goods and services.

Capital

Things produced and then used to produce other goods and services.

Consumer Goods

Goods produced for present consumption.

Investment

Using resources to produce new capital.

Absolute Advantage

The ability to produce a good using fewer resources than another producer.

Comparative Advantage

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

Theory of Comparative Advantage

Ricardo's theory that specialization and free trade can benefit all trading parties, even if one party is more efficient at producing everything.

Specialization

Focusing production on goods for which you have a comparative advantage.

Production Possibility Frontier (PPF)

A graph showing all combinations of goods and services that can be produced when society's resources are used efficiently.

Marginal Rate of Transformation (MRT)

The slope of the PPF; it shows how much of one output must be given up to produce more of another.

Law of Increasing Opportunity Cost

As production of a good increases, the opportunity cost of producing additional units generally increases.

Output Efficiency

Occurs when the economy is producing the combination of goods and services that people want.

Economic Growth

An increase in the total output of an economy.

Command Economy

An economy where a central government directly or indirectly sets output targets, incomes, and prices.

Laissez-Faire Economy

An economy where individuals and firms pursue their own self-interest without central direction or regulation.

Market

An institution where buyers and sellers interact and exchange goods and services.

Consumer Sovereignty

The idea that consumers ultimately determine what will be produced by deciding what to buy and what not to buy.

Price Theory

The idea that prices coordinate the decisions of buyers and sellers in a market economy.

Mixed Economy

An economic system that combines elements of market economies and government involvement.

Firm

An organization that produces goods and services.

Household

A group of people living together who make decisions about consumption and the supply of resources.

Entrepreneur

A person who organizes resources and takes risks to create a business.

Input/Factor Market

A market where resources used for production are bought and sold.

Product/Output Market

A market where finished goods and services are bought and sold.

Labor Market

A factor market where households supply labor for wages and firms demand labor.

Capital Market

A factor market where households supply savings and firms obtain funds to purchase capital.

Land Market

A factor market where households supply land or property in exchange for rent.

Quantity Demanded

The amount of a product a household would buy during a given period at a particular price.

Demand Schedule

A table showing how much consumers would buy at different prices.

Demand Curve

A graph showing the relationship between price and quantity demanded.

Law of Demand

Ceteris paribus, as price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Ceteris Paribus

Latin for "all else equal."

Income

The sum of wages, salaries, profits, interest, rents, and other earnings received during a period.

Wealth / Net Worth

The total value of what a household owns minus what it owes.

Normal Good

A good for which demand increases when income increases and decreases when income decreases.

Inferior Good

A good for which demand tends to decrease when income increases.

Substitutes

Goods that can replace one another; when the price of one rises, demand for the other increases.

Perfect Substitutes

Identical products that can completely replace one another.

Complements

Goods that are used together; when the price of one falls, demand for the other increases.

Tastes and Preferences

Consumer preferences that influence demand.

Expectations

Beliefs about future income, wealth, and prices that can affect current demand.

Movement Along Demand Curve

A change in quantity demanded caused by a change in the product's price.

Shift of Demand Curve

A change in demand caused by something other than the good's own price.

Market Demand

The total quantity demanded by all households in a market at each price.

Profit

The difference between a firm's revenues and its costs.

Quantity Supplied

The amount of a product a firm is willing and able to sell at a particular price during a given period.

Supply Schedule

A table showing how much firms will sell at different prices.

Supply Curve

A graph showing how much firms will sell at different prices.

Law of Supply

Ceteris paribus, as price rises, quantity supplied increases; as price falls, quantity supplied decreases.

Movement Along Supply Curve

A change in quantity supplied caused by a change in the product's price.

Shift of Supply Curve

A change in supply caused by factors other than the product's own price.

Market Supply

The total amount supplied by all producers in a market.

Equilibrium

The condition where quantity supplied equals quantity demanded.

Excess Demand / Shortage

A situation where quantity demanded is greater than quantity supplied.

Excess Supply / Surplus

A situation where quantity supplied is greater than quantity demanded.

Equilibrium Price

The price at which quantity demanded equals quantity supplied.

Equilibrium Quantity

The quantity bought and sold at the equilibrium price.