Section 1.5 of Micro Economics

Marginalism

The change, incremental, or additional amount between the last unit of something and the unit before it.

Marginal Benefit

The additional benefit gained from one more unit of something, such as how much better your grade gets from one more hour of studying.

Marginal Cost

The additional cost required to obtain an additional benefit.

Theoretical Economics

Gathering and analyzing relevant facts to derive economic principles by arranging facts, interpreting facts, and making generalizations.

Generalization

An economic principle that captures common tendencies or patterns.

Inverse Relationship

A relationship in which one variable increases while the other decreases.

Ceteris Paribus

All other things being equal.

Abstractions of Reality

Simplifications used to analyze economic behavior because it is impossible to account for every factor that affects behavior.

Assumptions

The foundation or starting point of an economic analysis.

Policy Economists

Economists who apply economic principles to real-life situations, often working for the government or academic institutions.

Policy-Making Steps

State the goal, consider the options, and evaluate the results.

Economic Growth

An increase in the amount and quality of goods and services produced in an economy.

Full Employment

Providing suitable jobs for everyone who is willing and able to work.

Economic Efficiency

Producing goods and services using the least costly methods and the fewest resources without lowering quality.

Price Level Stability

Keeping prices from rising or falling too quickly.

Inflation

A general increase in the prices of goods and services.

Economic Freedom

The freedom to make economic choices, such as choosing a career, without excessive government control.

Equitable Distribution of Income

A distribution of income that allows people to contribute to and benefit from the economy without requiring everyone to receive the same amount.

Economic Security

A safety net that helps people who cannot provide for themselves.

Reasonable Balance of Trade

Maintaining a broad and balanced trading relationship rather than relying heavily on one trading partner.

Microeconomics

The study of specific products and industries, consumer behavior, and how businesses operate and remain profitable.

Macroeconomics

The study of the entire economy and large-scale economic issues that affect everyone.

Fallacy of Composition

The mistake of believing that what is true for one part of the population must also be true for the entire population.

Causation Fallacy

The mistake of believing that because one event happens before another, the first event must have caused the second.

Causation

A relationship in which one factor directly causes another factor to change.

Correlation

A relationship in which two things change together in a predictable pattern.

Positive Statement

An economic statement based on facts that can be tested or verified.

Normative Statement

An economic statement based on personal opinions, beliefs, or judgments about what should be.

Budget Line

A line showing the different combinations of goods or services someone can purchase with their income.

Economic Resources

The factors of production used to produce goods and services.

Factors of Production

The resources used to produce goods and services: land, capital, labor, and entrepreneurial ability.

Property Resources

Natural resources and physical resources used in production, including land and capital.

Land

Natural resources used in production, including minerals, wind power, and other resources found in or derived from nature.

Rent

The payment received for the use of land or other natural resources.

Capital

Goods used to produce other goods and services, such as machinery, equipment, or a laptop used for work.

Investment

Spending on capital goods that are used to produce other goods and services.

Labor

The physical or mental work people contribute to the production of goods and services.

Wages

Payment for labor based on hours worked.

Salary

A fixed amount of money paid to a worker over a set period of time.

Entrepreneurial Ability

The ability to innovate, make important business decisions, take risks, and accept the responsibilities of operating a business.

Normal Profit

The amount remaining after all business costs and expenses have been paid.

Full Employment

Using all available resources, including people who are willing and able to work and available machinery.

Productive Efficiency

Producing goods and services using the least costly production method and minimizing waste.

Allocative Efficiency

Producing the combination of goods and services that people want most.

Fixed Resources

Resources that are currently available and cannot easily be changed in the short run.

Fixed Technology

Technology that is currently available and cannot easily be changed in the short run.

Law of Increasing Opportunity Cost

As production of a particular good increases, the opportunity cost of producing each additional unit also increases.

Private Property

The right of individuals and businesses to own and control resources and property, including intellectual property.

Freedom of Enterprise and Choice

The freedom of businesses to choose what to produce and the freedom of individuals to make economic choices.

Self-Interest

The idea that people generally make economic decisions based on what they believe is best for themselves.

Markets and Prices

Markets bring buyers and sellers together, while prices help determine how much of a good or service is produced and reflect its value to society.

Technology and Capital Goods

Businesses invest in technology and capital goods to improve production and increase profitability.

Competition

A market system with many buyers and sellers in which no single person or business has too much market power.

Specialization

Focusing on a specific skill, task, or area of production and becoming highly skilled at it.

Money

A medium of exchange used to buy and sell goods and services.

Active but Limited Government

A government that generally stays out of economic decisions but intervenes when necessary to address problems or protect the economy.