principles of economics

Economics

The study of the principles governing the allocation of scarce means among competing ends when the objective of allocation is to maximize the attainment of the ends.

Scarcity

A situation where resources are limited in comparison to human wants.

Trade-offs

A decision where choosing one option means giving up the other due to limited resources.

Explicit Costs

Direct, out-of-pocket expenses incurred to get something.

Opportunity Costs

The value of the next best alternative forgone when making a choice.

Marginal Benefit

The additional benefit gained from consuming or producing one more unit of a good or service.

Marginal Cost

The additional cost incurred from consuming or producing one more unit.

Decision-Making at the Margin

Rational people make decisions based on comparing the marginal benefit and marginal cost.

Incentives

Rewards or penalties that influence behavior, which can be financial or non-financial.

Behavioral Response

How people change their actions in reaction to incentives.

Motivation

The drive or willingness to act in response to incentives.

Specialization

Focusing on producing goods or services that one does best to increase efficiency and productivity.

Exchange

The act of trading goods or services between people or entities.

Mutual Benefit

Trade that benefits both parties by allowing them to enjoy a greater variety of goods and services.

Comparative Advantage

The principle that suggests each party should specialize in what they produce most efficiently compared to others.

Markets

Platforms or systems where buyers and sellers interact to exchange goods and services.

Prices

Determined by supply and demand, they signal how much people value different goods and services.

Competition

Drives innovation, improves quality, and reduces prices in markets.

Efficiency

Markets can efficiently allocate resources by responding to changing demands.

Efficiency

Markets can efficiently allocate resources by responding to changing demands and supplying goods where they are most valued.

Principle 7

Governments Can Sometimes Improve Market Outcomes

Market Failures

Situations where markets do not allocate resources efficiently on their own.

Government Intervention

Actions taken by the government to correct market failures and improve outcomes.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning one person's use doesn't reduce availability for others.

Externalities

Costs or benefits of a transaction that affect third parties who are not directly involved.

Regulation

Government rules and laws designed to correct market failures, protect consumers, or ensure fair competition.

Principle 8

A Country's Standard of Living Depends on Its Ability to Produce Goods and Services

Productivity

This is the measure of how efficiently goods and services are produced.

Economic Output

A higher output generally correlates with higher income and better quality of life for its citizens.

Technological Advancement

Improvements in technology can increase productivity, allowing a country to produce more goods and services more efficiently.

Human Capital

The skills, knowledge, and experience of the workforce.

Investment

Investments in infrastructure, education, and research can enhance a country's ability to produce goods and services.

Principle 9

Prices Rise When the Government Prints Too Much Money

Money Supply

The total amount of money available in an economy.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Purchasing Power

The value of money in terms of what it can buy.

Demand and Supply

When more money is in the economy, demand for goods and services increases.

Hyperinflation

An extreme case where prices rise rapidly and uncontrollably, often resulting from excessive money printing.

Principle 10

Society Faces a Short-Run Trade-off between Inflation and Unemployment

Unemployment

The percentage of people who are actively looking for work but cannot find a job.

Short-Run Trade-off

In the short term, policies that reduce inflation might lead to higher unemployment.

Phillips Curve

An economic concept that illustrates the inverse relationship between inflation and unemployment.

Policy Measures

Tools used by governments or central banks to influence inflation and unemployment.