04 Introduction to Economics

Scarcity

The limited nature of society's resources, making it impossible to satisfy all wants and needs.

Trade-offs

The idea that to gain something, one must give up something else due to limited resources.

Opportunity Cost

The cost of the next best alternative that is foregone when making a decision.

Efficiency

The optimal use of resources to maximize output or benefit.

Equality

The fair distribution of economic prosperity among members of society.

Rational Decision-Making

The process of systematically making choices to achieve the best possible outcome.

Marginal Change

A small, incremental adjustment to an existing plan of action.

Incentive

A factor that motivates individuals or businesses to act in a certain way.

Market Economy

An economic system where decisions are made by firms and households interacting in markets.

Invisible Hand

A term coined by Adam Smith describing how self-interest in a free market leads to economic benefits for society.

Absolute Advantage

The ability of a country or entity to produce a good using fewer resources than another.

Comparative Advantage

The ability of a country or entity to produce a good at a lower opportunity cost than another.

Market Failure

A situation where the free market fails to allocate resources efficiently.

Externality

A consequence of an economic activity that affects third parties not directly involved in the transaction.

Market Power

The ability of a firm or group to influence market prices.

Productivity

The amount of goods and services produced per unit of labor input.

Inflation

A general increase in prices across an economy over time.

Business Cycle

Fluctuations in economic activity, including periods of expansion and contraction.

Circular-Flow Diagram

A visual model showing how money moves through the economy between households and firms.

Production Possibilities Frontier (PPF)

A graph showing the maximum combinations of goods that can be produced given available resources.

Microeconomics

The study of how individuals and businesses make decisions and interact in markets.

Macroeconomics

The study of economy-wide phenomena, such as inflation, unemployment, and growth.

Positive Statement

A factual statement that describes the world as it is.

Normative Statement

A value-based statement that describes how the world should be.

Fiscal Policy

Government decisions on taxation and spending to influence the economy.

Monetary Policy

Central bank actions that manage the money supply and interest rates to stabilize the economy.

Federal Reserve (The Fed)

The central bank of the United States responsible for regulating monetary policy.

Tariff

A tax on imported goods to protect domestic industries or raise revenue.

Subsidy

A government payment to businesses or individuals to encourage or support economic activity.

Econometrics

The application of statistical methods to economic data for analysis and forecasting.