Micro Units 1 and 2

Economics

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided

Opportunity Cost

The best alternative that we forgo, or give up, when we make a choice or a decision

Scarcity

Limited

Marginalism

The process of analyzing the additional or incremental costs or benefits arising from a choice or decision

Sunk Costs

A cost that has already been incurred and cannot be recovered, regardless of future events or decisions

Efficient Market

A market in which profit opportunities are eliminated almost instantaneously

Macroeconomics

The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale

Microeconomics

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, firms and households

Positive Economics

An approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works

Normative/Policy Economics

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.

Models

A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables

Variables

A measure that can change from time to time from observation to observation

Ceteris Paribus

A device used to analyze the relationship between two variables while the values of other variables are held unchanged

Allocative Efficiency

An efficient economy is one that produces what people want at the least possible cost

Equity

Fariness

The “Three Basic Economic Questions”

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

Capital

Things that are produced and then used in the production of other goods and services

Factors of Production(resources)

The inputs into the process of production

Inputs(resourses)

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

Outputs

Goods or services of value to households

Specialization

The concept of individuals, firms, or regions concentrating their productive efforts on a limited range of activities or goods, leading to increased efficiency, productivity, and a comparative advantage

Theory of Comparative Advantage

Ricardo’s theory that specialization and free trade will benefit all trading parties, even those that may be “absolutely” more efficient producers

Absolute Advantage

If a person can produce that product using fewer recources

Comparative Advantage

If a person can produce that product at a lower opportunity cost

Production Possibilities and Fronteir

A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently

Consumer Goods

Goods produced for present consumption

Investment

The process of using resources to produce new capital

Law of Increasing Opportunity Cost

As a society produces more of one good, the opportunity cost to produce each additional unit of that good rises

Marginal Benefit = Marginal Cost(cost-benefit analysis)

The optimal decision point, signifying the maximum total benefit

Diminishing Returns

When one factor of production is variable and others are fixed, adding more units of the variable input will eventually lead to smaller and smaller increases in total output

Market

The institution through which buyers and sellers interact and engage in exchange

Command Market

An economy in which a central government either directly or indirectly sets output targets, incomes, and prices

Free Market

The branch of economics that studies how the interactions of individuals and privately owned firms, with minimal government intervention, lead to the allocation of scarce resources

Consumer Sovereignty

The idea that consumers ultimately dictate what will be produced(or not produced) by choosing what to purchase(and what not to purchase)

Price Theory

The branch of microeconomics that studies how supply and demand interact to determine the prices of goods and services, and how these prices, in turn, guide economic decision-making for individuals, households, and firms.