Economics Key Terms: Scarcity, Opportunity Cost, Market Systems, and Efficiency

Scarcity

The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

Opportunity Cost

The value of the next best alternative that is forgone when making a decision.

Rational Self-Interest

The assumption that individuals act in a way that maximizes their own utility.

Marginal Analysis

The examination of the additional benefits of an activity compared to the additional costs incurred.

TINSTAAFL

An acronym for 'There Is No Such Thing As A Free Lunch,' indicating that every choice has a cost.

Ceteris Paribus

A Latin phrase meaning 'all other things being equal,' used to isolate the effect of one variable.

Positive Economics

The branch of economics that focuses on objective analysis and facts.

Normative Economics

The branch of economics that deals with subjective judgments and opinions about what ought to be.

Microeconomics

The study of individual economic units, such as consumers and firms.

Macroeconomics

The study of the economy as a whole, including inflation, unemployment, and economic growth.

Economic Growth

An increase in the production of goods and services in an economy over time.

Efficiency

The optimal use of resources to achieve the best possible outcome.

Price Stability

A situation in which prices in an economy do not change much over time.

Balance of Trade

The difference between the value of a country's exports and imports.

Tradeoffs

The alternatives that must be given up when one option is chosen over another.

CELL

An acronym for Capital, Entrepreneurship, Land, and Labor, the four factors of production.

Interest

The cost of borrowing money or the return on savings.

Profit

The financial gain obtained when revenue exceeds costs.

Investment

The allocation of resources, usually money, in order to generate income or profit.

Capital Goods

Goods that are used in the production of other goods.

Consumer Goods

Goods that are purchased for consumption by the average consumer.

Productive Efficiency

A situation where goods are produced at the lowest possible cost.

Allocative Efficiency

A state of the economy in which production represents consumer preferences.

Absolute Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity at a lower opportunity cost than another.

PPC

Production Possibility Curve, a graph that shows the maximum feasible amount of two goods that can be produced with available resources.

Market System

An economic system where decisions regarding investment, production, and distribution are guided by the price signals created by the forces of supply and demand.

Free Enterprise

An economic system where private businesses operate in competition and largely free of state control.

Capitalism

An economic system characterized by private ownership of the means of production and their operation for profit.

Command Economy

An economic system in which the government makes all economic decisions.

Laissez-Faire Capitalism

An economic system where transactions between private parties are free from government intervention.

Invisible Hand of the Marketplace

A metaphor introduced by Adam Smith to describe the self-regulating nature of the marketplace.

Resource / Factor Market

The marketplace for the factors of production, such as labor, capital, and land.

Product Market

The marketplace where final goods and services are offered to consumers.

Revenue

The total income generated from the sale of goods or services.

Consumption

The use of goods and services by households.

Expenditures

The amount of money spent on goods and services.

Public Goods and Services

Goods and services provided by the government for the benefit of the public.

Demand

The quantity of a good or service that consumers are willing and able to purchase at various prices.

Supply

The quantity of a good or service that producers are willing and able to sell at various prices.

Quantity Demanded

The total amount of a good or service that consumers are willing to purchase at a given price.

Quantity Supplied

The total amount of a good or service that producers are willing to sell at a given price.

Equilibrium

The point at which the quantity demanded equals the quantity supplied.

Disequilibrium

A situation where quantity demanded does not equal quantity supplied.

Shortages

A situation in which demand for a product exceeds its supply in the market.

Surpluses

A situation in which supply exceeds demand for a product.

Price Ceiling

A maximum price set by the government that can be charged for a good or service.

Price Floor

A minimum price set by the government that must be paid for a good or service.