Economics Exam 1 Vocab

economics

solving the problem of scarcity

scarcity

using limited resources to fulfill unlimited wants

scarcity forces tradeoffs

• resources are scarce

• desires are unlimited

• people must make trade-offs instead of getting everything they want

Costs vs. Benefits

people will choose something if the benefits of doing it out weight the costs

thinking at the margin

• most decisions making happens at the margin

• or people make economic decisions based on the marginal benefit and the marginal cost of add a little more or subtracting a little less. they rarely make decisions to change everything

incentives matter

• people act in predictable ways because of incentives

• incentives can be positive or negative

trade makes people better off

• people are better off if they focus on doing a few things very well instead of trying to do everything for themselves ‘

• by trading goods and services, everyone ends up with better results

markets coordinate trade

• when people trade in a market, they all (usually) end up with positive results

• the invisible hand of the market naturally creates prices and situation that (usually) make everyone happy

• markets (usually) do a better job at creating these situations that people or governments

future consequences count

• choices and decisions that people make today always have consequences in the future

• despite this, many people don’t consider these consequences when making decisions

  • the law of unintended consequences

opportunity cost

when making a choice, the opportunity cost is the value of the NEXT BEST option that you had to give up

utility

a measure of the satisfaction we gain from consuming something

marginal utility

the utility gained from consuming one more unit of something

The Law of Diminishing Marginal Utility

the more you consumer something, the less utility you gain from consuming one more unit of it

Adam Smith

• scottish philosopher and professor

• lived from 1723-1790

• often dubbed the “father of modern economics”

• odd, absent-minded, known for walking and talking funny

• lived with his mother until she died

• wrote the wealth of nations

entrepreneurship

the willingness and ability to take the risks involved in starting and managing a business

factors of production

the resources used to produce goods and services. economists define these resources as land, labor, and capital(human + physical)

production possibilities frontier

the line representing every possible combination of two choices that can be produced if every available resource is used

economic system

a description of how a society or country decides to use its limited resources

6 Primary Economic Goals

• Economic Freedom

• Economic Efficiency

• Economic Equity

• Economic Growth

• Economic Security

• Economic Stability

Command Economy

• government answers the questions

• government makes all major economic decisions

• priority goals are security and equity

• not priority goals are freedom and efficiency

Market Economy

• invisible hand answers the questions

• government has very little economic role

• priority goals freedom and efficiency

• non priority goals are security and equity

Laisses Faire

no government intervention in the market

Transition

period of change in which a nation moves from one economic system to another

privatization

process of selling businesses or services operated by the government to individuals and allowing them to compete in the market

Free Enterprise

a system characterized by the private or corporate ownership of capital goods

Trade

voluntary exchange between two parties

barter

exchange one good/service for another (no money involved)

wealth

total value of everything owned (not just money)

productivity

how much you can make at max efficiency

specialization

becoming high skilled at a specific job or task

division or labor

dividing the tasks of production

absolute advantage

the ability to produce something more productively than someone else

comparative advantage

the ability to produce something with a lower opportunity cost tahan someone else

demand

the amount of a good or service tar people are able willing to buy at all prices

quantity demanded

the amount of a good or service that people are able and willing to buy at one specific price

the law of demand

as price increases, quantity demanded decreases

supply

the amount of a good or service that producers are able and willing to sell at all prices

quantity supplied

the amount of a good or service that producers are able and willing to sell at one specific price

the law of supply

as price increases, quantity supplied increases

price ceiling

prices cannot go above an established price

price floor

prices cannot go below an established price

resource monopolies

when there is only one producers with access to a particular natural resource

government-created monopolies

when the government creates a monopoly through providing and restricting patents, copyrights, licenses, or contracts

natural monopolies

when the cost of production (and therefore the prices that consumers pay) are lowest when there are no competitors

Medium of Exchange

a valuable item that everyone is willing to trade for

Durability

it has to last a long time

Unifromity

every piece of money has to be identical

divisibility

it has to be easy to break into parts

portability

it has to be easy to carry

acceptability

it has to valuable to everyone

scarcity

it has to be hard to find/create (difficult to counterfeit)

wages

the price of labor

wage discrimintation

paying someone a different wage based on race, gender, sexuality, age, religion, or other personal characteristics

affirmative action

increasing the representation of women and other minority groups in employment and college admissions

labor force

all individuals over 16 years old who have jobs or are actively looking for work

oursourcing

paying outside contractors to do work for a company that would otherwise be done by company employees

offshoring

relocating jobs (but not necessarily employees) to other countries

temporary workers

someone who is employed for a limited amount for time, usually to work on a specific project or fulfill a short-term need

telecommuting

working from home, connecting to the workplace through phones, computers, and the internet

labor union

an organization of workers that promotes workers interests both in the workplace and politically

collective bargaining

negotiating contracts, working conditions, and wages for the entire workforce instead of as individuals

striking

refusing to work until demands are met

US Patent + Trademark Office

issues patents, copyrights, and trademarks to protect intellectual property

eminent domain

the power of the government to take private property in for a public good with fair compensation

federal trade commission

enforces anti-monopoly laws passed by Congress

Food and Drug Administration

makes sure food and drugs are safe for consumers to use

federal deposit insurance corporation

insures bank accounts to protect investors

securities exchange commission

regulates companies to make sure they are giving correct information to investors

occupational safety and health administration

regulates business practices to protect the safety of workers

externalities

extra costs or benefits of production that are not paid for by the producer or consumer

environmental protection agency

uses incentives and punishments to limit economic damage to the environment

public goods

goods/services that nonrival in consumption and nonexcludable

nonrival in consumption

more than one person can consume them

nonexcludable

difficult to prevent someone from using them (or to make them pay for it)

department of defense

coordinates and supervises all agencies directly related to national security and the US armed forces

federal reserve

central bank of the United States; helps to create and enforce policies to maintain and regulate the U.S. banks

social security administration

determines eligibility and administers retirement, disability, survivor, and family benefits, and enrolls individuals in Medicare

earned income tax credit

extra low tax rates for workers that do not make much money

unemployment insurance

money given to recently unemployed workers

tax

money that individuals are required to give a government

tax base

what, exactly is being taxed

tax incidence

who has the burden of paying the tax; not necessarily who hands the money over

tax structure

how a tax is applied differently to groups of individuals, based on their income

tax code

the set of laws that establish and govern taxes at all levels of government

withholding

a system of tax collection in which employed deduct a certain amount of a tax from workers paycheck to be sent directly to the government

internal revenue service

government agency responsible for collecting federal income taxes

deadweight loss

a situation in which the overall costs of a tax (including lost productivity or sales) outweighs the monetary revenue raised by the tax

ability-to-pay principle

the more that you are able to pay taxes, the more taxes you should have to pay

benefits-received principle

the more you use government services the more taxes you should have to pay

proportional taxes

tax takes the same percentage of income from everyone

progressive taxes

tax takes a larger percentage of income from the wealthy

regressive taxes

tax takes a larger percentage of income from the poor

gross domestic product

a dollar amount that represents the total value of everything produced within an economy during a given set of time (usually a year)

unemployment rate

a percent that represents how many workers within an economy are unable to find a job

unemployed

someone who is in the labor force, is actively looking for work, but does not have a paying job

frictional unemployment

individuals who are not working because they are “between jobs”

structural unemployment

individuals who are not working because technological advances have made their jobs unnecesary

seasonal unemployment

individuals who are not working because their job is not needed during a specific time of year

cyclical unemployment

individuals who are not working because the economy is in decline and their former employer cannot afford to pay them

inflation rate

a percent that indicates how much overall prices are changing within a set time period (usually a year)