WGU - D089 Principles of Economics

Economics

The study of how humans make decisions in the face of scarcity.

Factors of Production

Describes theninputs used in the production of goods or services to make an economic profit.

Macroeconomics

A branch of economic dealing with the performance, structure, behavior and decision making of an economy as a whole.

Microeconomics

A branch of economics that studies the behavior of individuals, and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Scarcity

The basic economic problem, the gap between limited, scarce, resources and theoretically limitless wants

Opportunity Cost

The next best alternative that is given up when a choice is made.

Think at the Margin

Thinking about what the next step or an additional action means for a person.

Marginal Benefit

The incremental increase in the benefit to a consumer caused by the consumption of one additional unit of a good or service.

1st (Principles of Economics )

Everyone faces tradeoffs

2nd (Principles of Economics )

The cost of something is determined by what you give up to get it.

3rd (Principles of Economics )

Rational people think at the margin.

4th (Principles of Economics )

People respond to incentives.

5th (Principles of Economics )

Trade can benefit everyone.

6th (Principles of Economics )

Markets are a sound method of organizing economic activity.

7th (Principles of Economics )

Government may be able to improve market outcomes.

8th (Principles of Economics )

A nation's standard of living depends on its ability to produce.

9th (Principles of Economics )

Printing too much money causes prices to rise.

10th (Principles of Economics )

There is short-run tradeoff between inflation and unemployment.

Economic Systems

A system of the production, resource allocation, and distribution of goods and services within a society or give geographic area.

Traditional Economy

A economic system that relies on customs, history. and time-honored beliefs. Guides economic decisions such as production and distribution.

Command Economy

An economic system in which production, investment, prices, and incomes are determined centrally by a government.

(Centralized)

Market Economy

An economic system in which the decisions regarding investment, production, and distribution are guided by the price signals created by the forces of supply and demand

(Decentralized)

Mixed Economy

An economic system in which both private enterprise and a degree of state monopoly (usually in public services, defense, infrastructure, and basic industries) coexist.

Positive Economics

The study of economics concerned with what is and what will happen if a course of action is taken or not taken.

Normative Economics

The study of economics with what is and what will happen if a course of action is taken or not taken.

Economic Models

A simplified version of reality that allows people to observe, understand and make predictions about economic behavior.

Economic Indicators

A statistic about an economic activity.

Circular Flow Model

An economic model that shows the flow of money and goods through the economy. The most common form of this model shows the circular flow of income between the household sector and the business sector.

Human Capital

The accumulated skills and education of workers.

Research and Development

Term commonly used to describe the activities undertaken by firms and other entities such as individual entrepreneurs to create new or improved products and processes.

Partnership

A legal form of business operation between two or more individuals who share management and profits.

Merger

Combining two companies into a single larger company

Factors of Production

Describes the inputs used in the production of goods or services to make an economic profit.

Financial Capital

Most commonly refers to assets needed by a company to provide goods or services as measured in terms of money value.

Profit (Q/A)

What is the payment of production for entrepreneurship?

Rent (Q/A)

What is the payment of production for the use of land or natural resources?

Interest (Q/A)

What is the payment for the use of capital?

Wages (Q/A)

What are the payments for the use of labor?

Efficiently

Producing the maximum amount of goods and services possible given available resources and technology.

Production Possibilities Frontier

A graphical representation used by economists to show the alternative communications of two goods or services that an economy can produce with the given resources and technology when the resources are fully and efficiently used at a given point in time.

Budget Constraint

Represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

Opportunity Set

All possible combinations of consumption that someone can afford given the prices of goods and the individuals income.

Homogeneous

A resource having one form of set of skills.

Heterogeneous

A resource having two different forms of skills.

Capital Goods

Goods that are used in producing other goods rather than being bought by consumers.

Consumer Goods

Goods bought and used by consumers.

Law of Increasing Opportunity Costs

Once all factors of production are at maximum output and efficiency, producing more of one good requires giving up an increasing amount of the other good.

Underutilizing

The condition in which economic resources are not being used to their full potential

Inefficient

The underemployment of any of the four economic resources.

Constant Opportunity Cost of Production (Q/A)

The upward (positive) slope of the production possibility frontier represents what characteristic?

Scarcity (Q/A)

The downward (Negative ) slope of the production possibility frontier represents what characteristic?

The Law of Diminishing Returns

The point where the level of profits or benefits gained is less than the amount of money or energy invested.

The Law of Diminishing Returns (Q/A)

The outward bending shape of the production possibilities frontier represents what characteristic?

Price

The amount of money expected, required or given in payment for something.

Supply

A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers.

Demand

Consumers willingness and ability to consume a given good.

Equilibrium Price

The price where the quantity demanded is equal to the quantity supplied.

Demand Elasticity

How responsive the quantity demanded is to a change in percentage terms.

Quantity Demanded

Total number of units purchased at a specific price.

Demand Schedule

A chart that shows the number of goods or services demanded at specific prices.

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.

Quantity Supplied

The quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.

Excess Supply

At the existing price the quantity supplied exceeds that quantity demanded also called a surplus.

Excess Demand

At the existing price the quantity demanded exceeds the quantity supplied also called shortage.

Elasticity

An economics concept that measures responsiveness of one variable to changes in another variable.

Price Elasticity

An economic measure of the changes in the quantity demanded or purchased of a product in relation to its price change

Price Elasticity of Demand

The responsiveness of the quantity demanded to a change in price, in percentage terms, calculated by taking the percentage change in the quantity demanded divided by the percentage change in price.

Price Elasticity of Supply

The responsiveness of the quantity supplied to a change in price, in percentage terms calculated by taking the percentage change in the quantity supplied divided by the percentage change in price.

Elastic Demand

When the elasticity of demand is greater than one indicating a high responsiveness of the quantity demanded or to change in price in percentage terms.

Elastic Supply

When the elasticity of supply is greater than one indicating a relatively high responsiveness of the quantity supplied to a change in price in percentage terms.

Inelastic Demand

When the elasticity of demand is less than one, indicating a relatively low responsiveness of the quantity demanded to a change in price in percentage terms.

Inelastic Supply

When the elasticity of supply is less than one indicating a relatively low responsiveness of the quantity supplied to a change in percentage terms.

Unitary Elasticities

When the elasticity of demand or supply is equal to one , indicating an equal response in the quantity demanded or supplied to a change in price in percentage terms.

Narrowly Defined

Markets that tend to have more elastic demand and substitutes.

Broadly Defined

Markets that tend to be fairly inelastic and have no good substitutes.

Total Revenue

The income that a company receives form its normal business activities, usually from goods and services, defined as price times quantity.

Allocative Efficiency

Producing goods and services demanded by consumers at a price that reflects the marginal cost.

Market Failure

A situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss.

Price Controls

Government mandated legal minimum or maximum prices set for specified goods they are usually implemented as a means of direct economic intervention to manage the affordability of certain goods.

Imperfect Information

A situation in which the parties to a transaction have different information, as when the seller of a used car has more information about its quality than the buyer.

Externalities

The cost or benefit that affects a party who did not choose to incur that cost or benefit.

Price Ceiling

A legal limit by the government on how high the price of a product can be.

Price Floor

The lowest legal price a commodity can be sold at. Used by governments to prevent prices from being too low.

Rent Control Law

A government mandated maximum price, or a rent ceiling, on what landlords may charge tenants.

Subsidy

A government incentive in the form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy.

Thin Market

A marke with few buying or selling offers.

Thick Market

A market with many buying or selling offers.

Adverse Selection

A process in which markets deteriorate when buyers and sellers have access to different or imperfect information also known as asymmetric information.

Moral Hazard

A situation in which a party will take risks because the costs that are incurred will not be felt by the party taking the risk.

Money Back Guarantee

A promise that the buyers money will be refunded under certain conditions.

Warranty

A promise to fix or replace the good for a certain period of time.

Service Contract

The buyer pays an extra amount and the seller agrees as specified in the contract to fix anything that goes wrong for a set time period.

Spillovers

Cost of consumption or trade that spills over onto other parties.

Negative Externality

A cost that is suffered by a third party as a result of an economic transaction.

Positive Externality

Beneficial spillovers to a third party or parties.

Production

The process of combining inputs to produce outputs, ideally of value greater than the value of the inputs.

Private Enterprise

The ownership of business by private individuals.

Profit

A financial gain, especially the difference between the amount earned and the amount spent buying. operating , or producing something.

Firm

A commercial or for profit organization, business, government or individual in the business to maximize profit. an organization that combines inputs of labor, land and raw or finished component parts to produce outputs.

Total Cost

The amount a firm pays for producing and selling its products.