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Why Study Economics
To learn a way of thinking that helps us make decisions, understand global affairs, and be informed voters.
Scarcity
Refers to the limited nature of society’s resources.
Economics
The study of how individuals, businesses, and governments manage their scarce resources.
Tradeoff
The balance between efficiency (maximizing resources) and equity (fair distribution of prosperity).
Microeconomics
The study of individual households and firms; focuses on small-scale economic behavior.
Macroeconomics
The study of the overall national economy; focuses on large-scale economic factors.
Central Planned Economic System
An economic system where a central authority determines production and distribution of goods and services.
Mixed Economic System
An economic system where transactions are mainly voluntary, but the state intervenes in some areas.
Fundamental Questions of Economics
What goods and services should be produced? How are they produced? For whom are they produced?
Goods
Tangible items that satisfy wants.
Services
Intangible items that satisfy wants.
Factors of Production
Resources used to produce goods and services, including land, labor, capital, and entrepreneurship.
Income from Resources
Rent (land), wages/salaries (labor), interest (capital), and profits (entrepreneurship).
Economic Models
Simplifications of economic reality used to understand complex phenomena.
Positive Statement
A statement that can be tested against facts.
Normative Statement
A statement expressing an opinion that cannot be tested.
Opportunity Cost
The highest valued alternative that must be given up to obtain something.
Incentive
A reward or penalty that influences behavior.
Circular Flow Diagram
A model showing the flow of resources and income between firms and households.
Market
The mechanism that facilitates the exchange of resources, goods, and services.
Production Possibilities Curve (PPC)
A curve showing all possible production combinations of two goods.
Efficiency
Full utilization of resources in production.
Inefficiency
Underutilization of resources in production.
Economic Growth
An outward shift of the PPC due to increased resources or technology.
Elasticity
A measure of how sensitive buyers are to a change in price.
Law of Demand
Quantity demanded falls when the price rises, all else being equal.
Demand Curve Shifters
Factors that cause the demand curve to shift, including number of buyers, income, prices of related goods, tastes, and expectations.
Law of Supply
Quantity supplied rises when the price rises, all else being equal.
Supply Curve Shifters
Factors that cause the supply curve to shift, including input prices, technology, number of sellers, and expectations.
Market Equilibrium
The point where quantity demanded equals quantity supplied.
Surplus
When quantity supplied exceeds quantity demanded.
Shortage
When quantity demanded exceeds quantity supplied.
Price Controls
Government-imposed limits on prices, including price ceilings and price floors.
Price Ceiling
A legal maximum price, which can lead to shortages.
Price Floor
A legal minimum price, which can lead to surpluses.
Minimum Wage
A price floor for labor that can cause unemployment.
Invisible Hand
The self-regulating nature of the marketplace, as described by Adam Smith.
Total Revenue
The total income from sales, calculated as price times quantity sold.
