Economics Key Terms: Opportunity Cost, Market Systems, and International Trade

Opportunity Cost

The value of the best alternative forgone when an item or activity is chosen.

Sunk Cost

A cost that has already occurred in the past cannot be recovered and thus is irrelevant for the present and future economic decisions.

Barter

The direct exchange of one good for another without using money.

Absolute Advantage

The ability to produce something using fewer resources than other producers use.

Division of Labor

Organizing production of a good into its separate task.

Specialization of labor

Focusing work effort on a particular product or a singular task.

Law of Comparative Advantage

The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good.

Comparative Advantage

The ability to produce something at a lower opportunity cost than other producers face.

Production Possibility Frontier (PPF)

A curve showing the alternative combinations of goods that can be produced when available resources are used fully and efficiently; Boundary between inefficient and unattainable combinations.

Efficiency

The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good.

Law of Increasing Opportunity cost

To produce each additional increment of a good, a successively larger increment of an alternative good must be sacrificed if the economy's resources are already being used efficiently.

Economic Growth

An increase in the economy's ability to produce goods and services; an upwards shift in the production possibilities frontier. (Technology)

Pure Capital System

An economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets.

Private Property Rights

An Owner's right to use, rent, and sell resources or property.

Mixed System

An economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are unregulated, and others are regulated.

Pure Command System

An economic system characterized by public (government) ownership of all land, resources, and production. They decide what will be produced and how much it will cost.

Convergence Theory

As nations transition from the beginning stages of industrialization to highly industrialized nations, the same societal patterns will emerge, eventually creating a global culture.

Utility

the satisfaction or sense of wellbeing received from consumption.

Jeremy Bentham

Utilitarianism (Dickens popularized this)

Transfer payments

Cash or in-kind benefits given to individuals as outright grants from the government. (Medicare/Medicaid and other government programs)

Industrial Revolution

Developments of large-scale factory production they began in Great Britain around 1750 and spread to the rest of Europe, North America, and Australia.

Firms

formed by profit seeking entrepreneurs who used resources to produce goods and services for sale.

Sole Proprietorship

A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts. (80% of firms)

Partnership

A firm with multiple owners who share the firm's profits but also bear unlimited liability for the firm's debt. (8% of firms)

Corporation

A legal entity by stockholders whose liability is limited to the value of their stock (10% of the business in the U.S., Collects 80% of the profits)

Cooperative

An organization of people who pull their resources to buy and sell more efficiently than they could individually.

Non-Profit Institutions

Groups that do not pursue profit as a goal; they engage in charitable, educational, humanitarian, cultural, professional, or other activities, often with a social purpose.

Market Failure

A condition that rises when the unregulated operation of market yields socially undesirable results.

Antitrust Laws

Prohibits against price fixing and other anticompetitive practices.

Monopoly

A sole producer of a product for which there are no close substitutes.

Natural Monopoly

One firm that can serve the entire market at a lower per-unit cost than two or more firms.

Private good

A good that is both rival in consumption and exclusive, such as pizza.

Public Good

A good that, once produced, is available for all to consume, regardless of who pays and who doesn't such a good is nonrival and nonexclusive. (National Defense).

Externality

A cost or a benefit that falls on a third party and is therefore ignored by the two parties to the market transaction.

John Maynard Keynes

1936 (middle of the great depression) He is British.

Fiscal Policy

The use of government purchases, transfer payments, taxes, and borrowing to influence economy wide activity such as inflation, employment, and economic growth. (the government - House and president)

Monetary Policy

Regulation of the money supply to influence economy wide activity such as inflation, employment, and economic growth. (the fed)

Progressive Taxation

The tax as a percentage of income increases as income increases.

Proportional Taxation

The tax as a percentage of income remains constant as income increases; also called a flat tax.

Merchandise Trade Balance

The value of a country's exported goods minus the value of its imported goods during a given period.

Balance of Payments

A record of all economic transactions between residents of one country and residents of the rest of the world during a given period.

Foreign Exchange

Foreign money needed to carry out international transactions.

Tariff

A tax on imports.

Quota

A Legal limit on the quantity of a particular product that can be imported or exported.

Demand

A relationship between the price of a good and the quantity that consumers are willing to be able to buy during a given period.

Law of Demand

The quantity of a good demanded during a given period relates inversely to its price.

Substitution effect of a price change

When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive.

Money income

The amount of dollars a person receives during a pay period. Such as $400.

Real Income

Income measured in terms of the goods and services it can buy.

Income effect of a price change

A fall in the price of a good increases consumers' real income, making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

Demand Curve

A curve showing the relationship between the price of a good and the quantity demanded during a given period.

Quantity Demanded

The amount demanded at a particular price, as reflected by a point on a given demand curve.

Market demand

Sum of the individual demands of all consumers in a market.

Normal good

A good, such as new clothes, for which demand increases, or shifts rightward, as consumer income rises.

Inferior good

A good such as used close, for which demand decreases, or shifts leftward, as consumer income rises.

Substitutes

Goods, such as coke and Pepsi, that are related in such a way that an increase in the price of one shift the demand for the other rightward.

Complements

Goods, such as milk and cookies, that are related in such a way that an increase in the price of one shift the demand for the other leftwards.

Tastes

Consumer preferences; likes and dislikes in consumption; assumed to be constant along a given demand curve.

Movement Along a Demand Curve

Change in quantity demanded resulting from a change in the price of a good.

Shift of a Demand Curve

Movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of a good.

Supply

A relationship between the price of a good and the quantity that producers are willing and able to sell during a given period.

Law of Supply

The quantity of a good supplies during a given period is usually directed to its price.

Supply Curve

A curve showing the relationship between the price of a good and the quantity supplied during a given period of time.

Quantity supplied

The amount offered for sale at a particular price, as reflected by a point on a given supply curve.

Individual Supply

The supply of an individual producer.

Market Supply

The sum of individual supplies of all producers in the market.

Relevant Resources

Resources used to produce the good in question.

Alternative goods

Other goods that use some or all of the same good in questions.

Movement along a supply curve

Change in the quantity supplied resulting from a change in the price of a good.

Shift of a supply curve

Movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good.

Transaction cost

The cost of time and information required to carry out market exchange. (Chicago board of trade)

Surplus

At a given price, the amount by which the quantity supplied exceeds quantity demanded; a surplus usually forces the prices down.

Shortage

At a given price, the amount by which quantity demanded exceeds the quantity supplied shortage usually forces the price up.

Equilibrium

the condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears.

Disequilibrium

The condition that exists in a market when the plans of buyers do not match those of sellers; a temporary mismatched between quantity supplied and quantity demanded as the market seeks equilibrium.

Price floor

A minimum legal price below which a good or service cannot be sold; to have an impact, a price floor must be set above the equilibrium price.

Social Cost

The total cost to society. It includes private costs plus any external costs.

Rational Choice Theory

States that individuals make logical decisions make logical decisions by weighing costs and benefits to maximize their personal self-interest and utility.

Marginal social cost

the cost to society of producing/consuming one extra unit of output.

Positive externality

This occurs what the consumption or production of a good causes a benefit to a third party.