Principles of Economics (10th Edition) by Case, Fair, Oster (Chapters 1-5)

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

opportunity cost

give up, when we make a choice or a decision.

Scarce

Limited

Marginalism

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

Sunk Costs

Costs that cannot be avoided because

they have already been incurred.

Efficient Market

A market in which profit opportunities are

eliminated almost instantaneously.

Industrial Revolution

The period in England during the

Industrial Revolution

late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.

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.

industries and the behavior of individual decision-making units—that is, firms and households.

Macroeconomics

The branch of economics that examines

the economic behavior of aggregates—income, employment, output, and so on—on a national scale.

Positive Economics

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

Normative Economics

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

Descriptive Economics

The compilation of data that describe phenomena and facts

Economic Theory

A statement or set of related

economic theory

statements about cause and effect, action and reaction

Model

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

Variable

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

Ockham's Razor

The principle that irrelevant detail should be cut away.

Ceterus Paribus

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

Post Hoc, Ergo Propter Hoc

Literally, "after this (in time), therefore because of this." A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.

Fallacy of Composition

The erroneous belief that what is true for a part is necessarily true for the whole.

Emprirical Economics

The collection and use of data to test economic theories.

Efficiency

n economics, allocative efficiency. An

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

Equity

Fairness.

Economic Growth

An increase in the total output of an economy

Stability

A condition in which national output is growing

steadily, with low inflation and full employment of resources.

Inputs or Resources

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

Outputs

Goods and services of value to households.

Opportunity Cost

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

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

A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources.

Comparative Advantage

A producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.

Consumer Goods

Goods produced for present consumption.

Investment

The process of using resources to produce new capital.

Production Possibility Frontier (ppf)

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

Marginal Rate of Transformation (MRT)

The slope of the production possibility frontier (ppf ).

Economic Growth

An increase in the total output of an economy. It occurs when a

society acquires new resources or when it learns to produce more using existing resources.

Command Economy

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

Laissez-Faire Economy

Literally from the French: "allow [them] to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.

Market

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

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).

Free Enterprise

The freedom of individuals to start and

operate private businesses in search of profits.

Firm

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Entrepreneur

A person who organizes, manages, and

assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Households

The consuming units in an economy.

Product or Output Markets

The markets in which goods and services are exchanged.

Input or Factor Markets

The markets in which the resources used to produce goods and services are exchanged.

Labor Market

The input/factor market in which households supply work

for wages to firms that demand labor.

Capital Market

capital market The input/factor market in which households supply their savings, for interest or

for claims to future profits,

to firms that demand funds to buy capital goods.

Land Market

The input/factor market in which households supply land or other real property in exchange for rent.

Factors of Production

The inputs into the production process. Land, labor, and capital are the three key factors of production.

Quantity Demanded

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Demand Schedule

A table showing how much of a given

demand schedule

product a household would be willing to buy at different prices.

Demand Curve

A graph illustrating how much of a given product a household

would be willing to buy at different prices.

Law of Demand

The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Income

The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Wealth or New Worth

The total value of what a household owns minus what it owes. It is a stock measure.

Normal Goods

Goods for which demand goes up when

income is higher and for which demand goes down when income is lower.

Inferior Goods

Goods for which demand tends to fall

when income rises.

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Perfect Substitutes

Identical Products

Compliments

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

Shift of a Demand Curve

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

Movement Along a Demand Curve

The change in quantity demanded brought about by a change in price.

Market Demand

The sum of all the quantities of a good or

service demanded per period by all the households buying in the market for that good or service.

Profit

The difference between revenues and costs.

Quantity Supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Supply Schedule

A table showing how much of a product firms will sell at alternative prices.

Law of Supply

The positive relationship between price and

quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices

Movement Along a Supply Curve

The change in quantity supplied brought about by a change in price.

Shift of a Supply Curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

Market Supply

The sum of all that is supplied each period by

all producers of a single product.

Equilibrium

The condition that exists when quantity
supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.