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circular flow diagram
a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market
command economy
an economy where economic decisions are passed down from government authority and where the government owns the resources
exports
products (goods and services) made domestically and sold abroad
globalization
the trend in which buying and selling in markets have increasingly crossed national borders
goods and services market
a market in which firms are sellers of what they produce and households are buyers
gross domestic product (GDP)
measure of the size of total production in an economy
imports
products (goods and services) made abroad and then sold domestically
labor market
the market in which households sell their labor as workers to business firms or other employers
market
interaction between potential buyers and sellers; a combination of demand and supply
market economy
an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand
model
a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation; also known as theory
private enterprise
system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)
theory
a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation
traditional economy
typically an agricultural economy where things are done the same as they have always been done
underground economy
a market where the buyers and sellers make transactions in violation of one or more government regulations
ceteris paribus
other things being equal
complements
goods that are often used together so that consumption of one good tends to enhance consumption of the other
factors of production
the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs
inferior good
a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls
inputs
the resources such as labor, materials, and machinery that are used to produce goods and services; also called factors of production
normal good
a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls
shift in demand
when a change in some economic factor (other than price) causes a different quantity to be demanded at every price
shift in supply
when a change in some economic factor (other than price) causes a different quantity to be supplied at every price
substitute
a good that can replace another to some extent, so that greater consumption of one good can mean less of the other
budget constraint
all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
law of diminishing marginal utility
as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
marginal analysis
examination of decisions on the margin, meaning a little more or a little less from the status quo
opportunity cost
measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative
opportunity set
all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
sunk costs
costs that we make in the past that we cannot recover
utility
satisfaction, usefulness, or value one obtains from consuming goods and services
allocative efficiency
when the mix of goods produced represents the mix that society most desires
comparative advantage
when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
law of diminishing returns
as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline
production possibilities frontier (PPF)
a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
productive efficiency
when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
invisible hand
Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes
normative statement
statement which describes how the world should be
positive statement
statement which describes the world as it is
demand curve
a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis
demand schedule
a table that shows a range of prices for a certain good or service and the quantity demanded at each price
demand
the relationship between price and the quantity demanded of a certain good or service
equilibrium price
the price where quantity demanded is equal to quantity supplied
equilibrium quantity
the quantity at which quantity demanded and quantity supplied are equal for a certain price level
equilibrium
the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change
excess demand
at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage
excess supply
at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus
law of demand
the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant
law of supply
the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
price
what a buyer pays for a unit of the specific good or service
quantity demanded
the total number of units of a good or service consumers are willing to purchase at a given price
quantity supplied
the total number of units of a good or service producers are willing to sell at a given price
shortage
at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
supply curve
a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
supply schedule
a table that shows a range of prices for a good or service and the quantity supplied at each price
supply
the relationship between price and the quantity supplied of a certain good or service
surplus
at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply
division of labor
the way in which different workers divide required tasks to produce a good or service
economics
the study of how humans make choices under conditions of scarcity
economies of scale
when the average cost of producing each individual unit declines as total output increases
fiscal policy
economic policies that involve government spending and taxes
macroeconomics
the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
microeconomics
the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
monetary policy
policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
scarcity
when human wants for goods and services exceed the available supply
specialization
when workers or firms focus on particular tasks for which they are well-suited within the overall production process
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