Unit 1: The Basics of Economics

Vocabulary terms and definitions from Unit 1: The Basics of Economics, covering production factors, economic systems, and fundamental decision-making principles.

Economics

The study of scarcity and choice.

Trade-off

When you give up something in order to have something else.

Individual choice

Decisions by individuals about what to do, which necessitate decisions about what not to do.

Resource/Factor of production

Anything that can be used to produce something else.

Land

All resources that come from nature, such as timber, wind, and petroleum.

Labor

The effort of workers.

Capital

Manufactured goods used to make other goods and services.

Entrepreneurship

The efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes.

Scarce

A resource that is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

Marginal analysis

The study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

Opportunity cost

The real cost of an item, representing the value of the next best alternative that you must give up in order to get that item.

Microeconomics

The study of how individuals, households, and firms make decisions and how those decisions interact.

Household

A person or group of people who share their income.

Firm

Any organization that produces goods or services for sale.

Macroeconomics

The study of the overall ups and downs of the economy.

Economy

A system for coordinating a society’s productive and consumptive activities.

Traditional economy

An economy where production and consumption decisions are based on precedent, often using methods passed down for generations.

Market economy

An economy where factors of production are privately owned and the decisions of individual producers and consumers largely determine what, how, and for whom to produce.

Command economy

An economy where the factors of production are publicly owned and a central authority makes production and consumption decisions.

Mixed economy

An economy that combines elements of traditional, market, and command economies.

Incentives

Rewards or punishments that motivate particular choices.

Other things equal (ceteris paribus) assumption

The assumption that all other relevant factors remain unchanged while studying the influence of one specific change.

Production possibilities curve

A model that illustrates the necessary trade-offs in an economy producing only two goods, showing the maximum quantity of one good that can be produced for each possible quantity of the other.

Specialization

A division of tasks where each person specializes in the task that they are good at performing, allowing for gains from trade.

Comparative advantage

When an individual's opportunity cost for producing a good or service is the lowest among the people who could produce it.

Absolute advantage

When an individual can produce more of a good or service with a given amount of time and resources.

Cost-benefit analysis

The process of comparing the costs and the benefits of an option.