Economics Units 1-3

Economics

The study of how scarce, or limited, resources are used to satisfy unlimited wants and needs; the study of decision making in a world of scarcity.

Scarcity

Too few goods and services to satisfy all wants and needs.

Trade-off

Giving up one thing for something else.

Value Judgment

The relative importance one assigns to an action or alternative.

Opportunity Cost

The cost of a purchase or decision measured in terms of a forgone alternative; what was given up to make a purchase or carry out a decision.

Efficiency

Producing a given good or service at the lowest possible cost; getting the most output from resources.

Equity

Justice or fairness in the distribution of goods and services.

Resources (Factors of production)

Persons and things used to produce goods and services; limited in amount; categorized as labor, capital, land, and entrepreneurship.

Labor

Physical and mental human effort used to produce goods and services.

Capital

Items, such as machinery and equipment, used in the production of goods and services.

Land

Productive inputs that originate in nature, such as coal and fertile soil.

Entrepreneurship

The function of organizing resources for production and taking the risk of success or failure in a productive enterprise.

Wages

Income return to labor.

Interest (Economy)

Income return to owners of capital.

Rent

Income return to owners of land resources.

Profit

Income return to those performing the entrepreneurial function.

Economic theory

A formal explanation of the relationship between economic variables.

Model

The setting within which an economic theory is presented.

Assumptions

Conditions held to be true within a model.

Econometrics

The use of statistical techniques to describe the relationships between economic variables.

Variables

Considerations of which the model focuses.

Data

Information used to describe the behavior of the variables.

Conclusion

Results of the model.

Economic policy

A guide for a course of action.

Graph

An illustration showing the relationship between two variables that are measured on the vertical and horizontal axes.

Direct relationship

Two variables move in the same direction: when one increases, so does the other; graphs as an upward-sloping line.

Inverse relationship

Two variables move in opposite directions: when one increases, the other decreases; graphs as a downward-sloping line.

Production Possibilities table (or Curve)

Gives the various amounts of two goods that an economy can produce with full employment and fixed resources and technology.

Unemployment

Resources available for production are not being used.

Economic growth

An increase in an economy's full employment level of output over time.

Capital goods

Goods, such as machinery and equipment, that are used to produce other goods adn services.

Consumer goods

Goods, such as food and household furniture, that are produced for final buyers.

Macroeconomics

The study of the operation of the economy as a whole.

Microeconomics

The study of individual decision-making units and markets within the economy.

Cost-Benefit Analysis

Weighing the costs and benefits of an action in order to maximize the net benefit from the action.

Utility

Satisfaction realized from the consuming of a good or service or taking an action.

Opportunity Cost

The cost of acquiring a good or service or taking an action measured in terms of the value of the opportunity or alternative forgone.

Marginal Benefit (Marginal Utility)

The change in total satisfaction from consuming an additional unit of a good, service, or activity.

Total Benefit (Total Utility)

The total amount of satisfaction received from consuming a specified number of units of a good, service, or activity.

Law of Diminishing Marginal Utility

As additional units of an item are consumed, beyond some point each successive unit of the item consumed will add less of total utility than was added by the unit consumed just before it.

Net Benefit

The result when total cost is subtracted from total benefit.

Net Benefit Maximizing Rules

Net benefit is maximized where total benefit exceeds total cost by the greatest amount or where marginal benefit equals marginal cost.

• Increases when marginal benefit is greater than cost

• Decreases when marginal cost is greater than benefit

Explicit Costs

Payments that a business makes to acquire factors of production, such as labor, raw materials, and machinery.

Implicit Costs

The opportunity costs to business owners from using their resources in the business rather than in an alternative opportunity; must be recovered to keep the business in operation; normal profit.

Normal Profit

Profit necessary to recover implicit costs and keep a business in operation; considered to be an economic cost of production.

Economic Cost of Production

Includes all explicit and implicit costs of producing a good or service.

Excess Profit (Economic Profit)

Profit beyond normal profit; not considered a cost of production.

Total Revenue

Revenue received from selling a certain quantity of an item; calculated by multiplying the price of an item by the quantity demanded at that price.

Marginal Revenue

The change in total revenue when one or more (or additional) unit of an item is demanded.

Profit or Loss

The results when a business subtracts is total cost from its total revenue.

Profit-Maximizing Rules

Profit is maximized at the output level where total revenue exceeds total cost by the greatest amount, or where marginal revenue equals marginal cost.

Externality

The effect of an action on a person or thing that was not one of the parties involved in the action.

Positive Externality

An externality that creates a benefit for others.

Negative Externality

An externality that creates a cost for others.

Social Benefits and costs

The total effect on society from the private benefits, private costs, and externalities of an action.

• private benefits + positive externalities = social benefits

• private costs + negative externalities = social costs

• social benefits - social costs = net benefits to society

Public Choice

The study of economic motives and attitudes of voters and public officials in collective decision making.

Rational Ignorance

Choosing to remain uninformed because the marginal cost of obtaining the information is higher than the marginal benefit from knowing it.

Special-Interest Group

People who share a common position on a particular issue and actively promote that position.

Financial Risk Tolerance

The willingness to engage in financial endeavors that have uncertain outcomes.

Financial Knowledge

The ability to understand and use personal finance information.

Feelings of Control

The amount of control you have when making financial decisions.

Human capital

The ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money and other resources.

Social capital

Represents the personal and professional connections an individual has with other people.

Asset

Something of value an individual owns.

Production Possibility Frontier (PPF)

Represents the trade-off between two goods or groups of goods.

Informal Networks

The interpersonal relationships you form with your family and close friends.

Formal Networks

Connects you with people in professional, recreational, leisure, and social communities. Advances your career and includes: clubs, organizations, and professional associations.

Educational Value

The point where returns through job placements, income, and human capital outweigh the costs of school attendance.

Payback Period

Total Costs/Increase in Annual Income

Marginal cost

The added expense associated with producing or acquiring one or more unit of something.

Marginal benefit

The additional enjoyment resulting from consuming one more unit of something.

G.I. Bill

Provides unique benefits for those who serve in the military.

Risk taking

Refers to doing something that involves the possibility of a gain or a loss.

Risk

The uncertainty associated with any physical, social, emotional, environmental, labor market, or financial activity.

Risk perception

The cognitive evaluation of the potential gains and losses associated with a course of action.

Risk preference

Wanting something else compared to the option available.

Financial objectives

Things that need to happen along the way toward reaching a financial goal.

Goal Time Horizon

The time between creating a goal and achieving the goal.

Self efficacy

The belief that you can do something.

Incentives

External factors that encourage or discourage certain behaviors.

Procrastination

Placing more value on the present at the expense of the future.

Hyperbolic Discounting

As the time to act nears, the value of future benefits from taking action is perceived to decrease relative to other immediate alternatives.

Status quo bias

A personal preference for keeping things just like they currently are.

Behavioral economists

Study how people go about making financial decisions.

Basic economic decisions

The choices that must be made in any society regarding what to produce, how to produce, and to whom production is distributed.

Economic system

The way in which an economy is organized to make the basic economic decisions. (market/planned/mixed)

Traditional Economy

An economy that relies largely on tradition, custom, or ritual when making the basic economic decisions.

Barter

The direct exchange of goods or services for other goods or services.

Market Economy

An economy in which the basic economic decisions are made by individual buyers and sellers in markets using the language of price.

Price System

A market system; one in which buyers and sellers communicate through prices in markets.

Private Property Rights

Individual rights to possess and dispose of goods, services, and resources.

Free Enterprise

The right of a business to make its own decisions and to operate with a profit motive.

Capitalism

An economic system with free enterprise and private property rights; economic decision making occurs in a market environment.