Economic Terms

Barter

When people exchange goods and services directly instead of using money.

Scarcity

When people’s wants exceed the resources available to satisfy them.

Tradeoffs

Making one choice means the other choices are no longer available (because of scarcity).

Axiom

The starting assumptions or foundations in a deductive system. Not proved, but assumed to be true in order to prove other, less obvious statements.

Economic resource

At zero price, there is greater demand than supply.

Preferences

An individual’s goals or desires. Economists interpret a person’s actions as attempts to satisfy them.

Goods

Scarce physical items that an individual values because they can help to satisfy his preferences.

Service

A person’s performance of a task that another person values because it helps to satisfy preferences. The “goods” that people create through their labor power.

Subjective

Unique to each individual; “in the eye of the beholder.”

Utility

A term common in economics textbooks to describe how much value a person gets from a good or service.

Progressive income taxation

A system that taxes individuals or corporations at higher rates based on the level of income.

Economize

The act of treating a resource with care because it is scarce and can only satisfy a limited number of goals or preferences.

Consumer goods and services

Scarce physical items or services that directly satisfy a person’s preferences.

Producer goods / factors of production / means of production

Scarce physical items or services that indirectly satisfy preferences, because they can be used to produce consumer goods and services.

Land / natural resources

Factors of production that are gifts of nature.

Labor

The contribution to production flowing from a person’s body.

Leisure

A special type of consumer good that results from using one’s body (and time) to directly satisfy preferences, as opposed to engaging in labor.

Disutility of labor

Economists’ term to describe the fact that people prefer leisure to labor. People only engage in labor because of its indirect rewards.

Capital goods

Producer goods that are produced by human beings; they are not direct gifts from nature.

Income

The flow of consumer goods and services that a person has the potential to enjoy during a specific period of time.

Saving

Consuming less than one’s income would allow; living below one’s means.

Investment

Diverting resources into projects that are expected to increase future income.

Productivity

The amount of output produced by a factor of production in a period of time, often used in reference to labor.

Equilibrium

A stable situation after all disturbances or changes have worked themselves out.

Depreciation

The wearing away or “using up” of capital goods during the course of production.

Marginal utility

A technical economics term referring to the subjective enjoyments of one additional unit of a good or service.

Benefits

The subjective enjoyments flowing from a course of action.

(Opportunity) cost

The benefits of the next-best alternative to a given action.

Expectations

An individual’s forecasts of the future, which involve his or her understanding of “how the world works” and therefore guide current actions.

Direct exchange

Trading that occurs when people swap goods that they directly value.

Indirect exchange

Trading that occurs when at least one of the parties accepts an item that he or she does not intend to use personally, but instead will trade it away in the future to get something else.

Price

The terms of a trade, meaning how many units of one item are given up to acquire a unit of a different item.

Gains from trade

A situation in which two people can both gain (subjective) benefits from swapping their property with each other.

Equilibrium position

A stable situation in which there are no further gains from trade.

Disequilibrium

An unstable situation in which at least two people stand to benefit from an additional trade.

Money

A good that is accepted by everyone in the economy on one side of every trade.

Spontaneous order

A predictable pattern that is not planned by any one person. Examples would include the rules of grammar in the English language, the style of clothing that characterized the 1970s disco clubs, and the use of money.

Arbitrage opportunity

The ability to earn a “sure profit” when the same good sells at different prices at the same time.

Medium of exchange

An object that is accepted in a trade, not because the person receiving it wants to directly use it, but because he or she wants to trade it away in the future to acquire something else. Every indirect exchange requires it. It is the good through which the ultimate trade occurs.