Economic Concepts and Principles

Market Economy

An economic system where supply and demand determine prices and production. Decisions are made by individuals and businesses with little government intervention.

Command Economy

An economic system where the government makes all decisions regarding production and distribution of goods and services.

Incentives

Rewards or penalties that motivate individuals to take certain actions. Can be monetary or non-monetary.

Property Rights

Legal rights to use and dispose of resources. Secure property rights are crucial for efficient market functioning.

Marginal Analysis

The examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Key in decision-making.

Land

Natural resources used in production.

Labor

Human effort used in production.

Capital

Tools, equipment, and factories used in production.

Entrepreneurship

The ability to combine land, labor, and capital to create goods and services.

Scarcity

The fundamental economic problem of having limited resources to meet unlimited wants. Leads to the need for choices and trade-offs.

Opportunity Cost

The value of the next best alternative foregone when making a decision. It's the cost of the opportunity missed.

Microeconomics

The study of individual markets and the behavior of consumers and firms.

Macroeconomics

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

Economic Aggregates

Broad categories that summarize economic data, such as total output, total employment, and aggregate income.

Positive Economics

The study of 'what is' in economic relationships. It deals with facts and cause-and-effect relationships.

Normative Economics

The study of 'what ought to be.' It deals with value judgments and opinions about economic policies.

Trade-Off

The concept of giving up one thing to get something else. Closely related to opportunity cost.

Production Possibilities Curve (PPC)

A graphical representation of the maximum quantity of goods that can be produced given available resources and technology. Points on the curve represent efficient production levels, while points inside the curve represent inefficiency.

Productive Efficiency

When goods are produced at the lowest possible cost. This occurs when production is on the PPC.

Allocative Efficiency

When the mix of goods produced represents what society most desires. This occurs when marginal benefit equals marginal cost.

Technology

The body of knowledge applied to how goods and services are produced. Advances in technology can shift the PPC outward.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others.

Absolute Advantage

The ability to produce more of a good using the same amount of resources as others.

Terms of Trade

The rate at which one good is exchanged for another. It determines how much of one good a country can get in exchange for another good.

Marginal Cost (MC)

MC=Total Cost​Quantity

Marginal Benefit (MB)

MB=Total Benefit​Quantity

Opportunity Cost Formula (in PPC context)

Opportunity Cost of Good X=Quantity of Good X gained​Quantity of Good Y forgone

Comparative Advantage Formula

Opportunity Cost of Good A for Country X=Quantity of Good B forgone​Quantity of Good A gained