Personal Finance Chapter 1 Terms

Economics

the study of the decisions that go into making, distributing, and using goods and services

Opportunity cost

What you give up to get something else

Marginal Cost

The cost of obtaining one more of an item

Marginal Benefit

Is the benefit of purchasing the item you want

Scarcity

Requires that people decide which goods and services to use or not use due to limited resources and unlimited wants

Factors of production

are the resources needed to produce goods and services

Four factors of production

land, labor, capital, entrepreneurship

Land

Refers to natural resources that exist and were not created by people

Labor

Is the work that people do and includes all of their abilities, efforts, and skills.

Entrepreneurship

Refers to the ability of individuals to start new businesses, introduce new products, and improve business processes.

Economy

how a nation makes decisions to allocate its resources

Traditional Economy

In this economy all three economic questions are answered (What goods/services should be produced? How should the goods/services be produced? Who should get the goods and services that are produced?)

Bartering

The exchange of products without the use of money

Command economy

Is a system in which a central authority controls all economic decisions

Market economy

In this economy supply, demand, and a system of pricing allow people to make the economic decisions through free interaction.

Supply

Is how much producers are willing and able to produce at a certain price

Demand

Is how much consumers are willing and able to buy at a certain price

Four factors that influence supply

Price of inputs, number of suppliers, taxes, and technology

Inputs

Are all of the materials, wages, etc. that are necessary to produce a product

Number of Suppliers

As suppliers enter and leave the market, supply is affected.

Taxes

If the government places more taxes on a product, the cost of making that product will increase

Technology

Advancements will increase supply, allows suppliers to produce more products at a lower cost

Equilibrium point

The price at which consumers and producers agree

Surplus

Occurs when supply exceeds demand

Shortage

Occurs when demand exceeds supply

Price ceiling

Is a maximum price set by the government that can be charged for goods and services

Price floor

A minimum price set by the government that can be charged for goods and services

Demand elasticity

The degree to which demand is affected by price

Elastic demand

Is when demand for a product is affected by price

Inelastic demand

When price has little influence on demand

Financial market

is a mechanism that provides the means for purchasing and selling stocks, bonds, commodities, and other financial instruments

Depository Institutions

manage money deposited in their institution

Examples of depository institutions

commercial banks, credit unions, and savings and loan associations

Non-depository institutions

do not handle deposits, but they do act as an intermediary between savers and borrowers

Examples of non-depository institutions

insurance companies, investment bankers, mutual funds, and brokerage firms

Incentive

encourages specific behavior and helps to motivate individuals to take specific action

Fungible

A commodity that can easily be substituted for a good of equal value

derivatives

Financial instruments deriving value from underlying assets.