Economics

What is Economics

Economics is the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of *scarcity*

What is an Economic principle?

A widely accepted generalization about the economic behavior of individuals or institutions.

What is scarcity?

The limits placed on the amounts and types of *goods* and *services* available for consumption as the result of there being only limited *economic resources* from which to produce output; the fundamental economic constraint that creates *opportunity costs* and that necessitates the use of *marginal analysis* (*cost-benefit analysis*) to make optimal choices.

What is utility?

The want-satisfying power of a *good* or *service;* the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of *goods* and *services*).

What is Opportunity cost

The amount of other products that must be forgone or sacrificed to produce a unit of a given product.

What is Marginal analysis (cost-benefit analysis)

The comparison of *marginal* (“extra” or “additional”) *benefits* and *marginal costs,* usually for decision-making.

What is Economic perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the *marginal benefits* and *marginal costs* associated with their actions.

What is Marginal cost

The extra (additional) cost of producing 1 more unit of output

What is Marginal benefit

How much is gained by producing another unit of output

what is microeconomics

The part of economics concerned with the decision-making by individual units such as a household, a form, or an industry, individual markets, specific goods and services, and product and resource prices.

What is Macroeconomics

The part of *economics* concerned with the performance and behavior of the economy as a whole. Focuses on *economic growth*, the *business cycle*, *interest rates*, *inflation*, and the behavior of major economic *aggregates* such as the household, business, and government sectors.

What is an aggregate in economics?

A collection of specific economic units treated as if they were one unit.

What is positive economics

The analysis of facts or data to establish scientific generalizations about economic behavior. It avoids value judgments and tries to establish scientific statements about economic behavior.

What is normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

What is the economizing problem?

The choices necessitated by society’s economic wants for goods and services are unlimited but the resources available to satisfy these are scarce.

What is a budget line?

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ *prices*.

What are economic resources?

The *land*, *labor*, *capital*, and *entrepreneurial ability* that are used to produce *goods* and *services*. Also known as the *factors of production*.

What does a land resource mean?

In addition to the part of the earth’s surface not covered by water, this term refers to any and all natural resources (“free gifts of nature”) that are used to produce *goods* and *services*. Thus, it includes the oceans, sunshine, coal deposits, forests, the electromagnetic spectrum, and *fisheries*. Note that land is one of the four *economic resources*.

What does labor mean in economics?

Any mental or physical exertion on the part of a human being that is used in the production of a *good* or *service*. One of the four *economic resources*.

what is capital in economics

Man-made physical objects (factories, roads) and intangible ideas (the recipe for cement), that do not directly satisfy human wants but help to produce *goods* and *services* that do satisfy human wants. One of the four *economic resources*

What are consumer goods?

products and services that have immediate utility.

what is an investment in economics?

Expenditures that increase the volume of physical *capital* (roads, factories, wireless networks) and intangible ideas (formulas, processes, algorithms) that help to produce goods and services. Also known as *economic investment*. Not to be confused with *financial investment.*

What is entrepreneurial ability in economics?

The human resource that combines the other *economic resources* of *land, labor*, and *capital* to produce new products or make innovations in the production of existing products; provided by *entrepreneurs*.

what are the factors of production in economics?

The four *economic resources: land, labor, capital,* and *entrepreneurial ability.*

What is the production possibilities curve?

A curve showing the different combinations of two goods or *services* that can be produced in a *full-employment, full-production* economy where the available supplies of *resources* and technology are fixed.

what is the law of increasing opportunity costs?

The principle is that as the production of a specific good increases, the *opportunity cost* of producing an additional unit rises.

What is economic growth?

(1) An outward shift in the *production possibilities curve* that results from an increase in resource supplies or quality or an improvement in *technology;* (2) an increase of real output (*gross domestic product*) or real output per capita.

What is an economic system?

A particular set of institutional arrangements and a coordinating mechanism for solving the *economizing problem*; a method of organizing an economy, of which the *market system* and the *command system* are the two general types.

laissez-faire capitalism

A hypothetical *economic system* in which the government’s economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of *markets* in which only mutually agreeable transactions take place between buyers and sellers; sometimes referred to as “pure capitalism.”

What is a command system in economics?

A method of organizing an economy in which property resources are publicly owned and the government uses *central economic planning* to direct and coordinate economic activities; *socialism;* communism. Compare with the *market system*.

What is the market system in economics?

(1) An *economic* *system* in which individuals own most *economic* *resources* and in which *markets* and *prices* serve as the dominant coordinating mechanism used to allocate those resources; *capitalism*. (2) All the product and resource markets of a *market economy* and the relationships among them.

What is the market in economics?

Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular *good* or *service*.

What is private property in economics?

The right of private persons and *firms* to obtain, own, control, employ, dispose of, and bequeath *land, capital,* and other property.

What is the freedom of enterprise in economics?

The freedom of *firms* to obtain economic resources, to use those resources to produce products of the firms’ own choosing, and to sell their products in markets of their choice.

What is the freedom of choice?

The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in the manner that they prefer.

what is specialization in economics?

The use of the *resources* of an individual, a *firm*, a region, or a nation to concentrate production on one or a small number of *goods* and *services*.

what is the division of labor?

The separation of the work required to produce a product into several different tasks that are performed by different workers; *specialization* of workers. This can also be called human specialization.

What is the medium of exchange?

Any item sellers generally accept and buyers generally use to pay for a *good* or *service;* *money;* a convenient means of exchanging goods and *services* without engaging in *barter*.

What is consumer sovereignty?

The determination by consumers of the types and quantities of *goods* and *services* that will be produced with the scarce resources of the economy; consumers’ direction of production through their *dollar votes*.

What are “dollar votes” in economics?

The “votes” that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available.

What is “creative destruction” in economics?

The hypothesis is that the creation of new products and production methods destroys the market power of firms committed to existing products and older ways of doing business.

What is the “invisible hand” in economics?

The tendency of *competition* to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.

What is the “coordination problem” in economics?

The chronic failure of command economies to harmonize the economic activities of producers so as to efficiently satisfy consumer demands; is caused by command economies eschewing economic coordination via markets, prices, and profits in favor of central planning.

What is the “incentive problem” in economics?

The difficulty common to command economies is that the numerical production targets set by central planning boards cause managers to produce substandard or unwanted output.

What is “demand” in economics?

A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible *prices* during a specified period of time.

What is a “demand schedule” in economics?

A table of numbers showing the amounts of a *good* or *service* buyers are willing and able to purchase at various *prices* over a specified period of time.

What is the “law of demand” in economics?

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The principle that other things equal an increase in a product’s *price* will reduce the quantity of it demanded, and conversely a decrease in price.

What is the concept of “diminishing marginal utility” in economics?

The principle is that as a consumer increases the consumption of a *good* or *service,* the *marginal utility* obtained from each additional unit of the good or service decreases.

What is the concept of “income effect”?

A change in the quantity demanded of a product that results from the change in *real income* (*purchasing power*) caused by a change in the product’s *price*.

What is the concept of “substitution effect”?

(1) A change in the quantity demanded of a *consumer good* that results from a change in its relative expensiveness caused by a change in the good’s own *price.* (2) The reduction in the *quantity* *demanded* of the second of a pair of *substitute resources* that occurs when the price of the first resource falls and causes *firms* that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same).

What is a “demand curve”?

A curve that illustrates the *demand* for a product by showing how each possible *price* (on the *vertical axis*) is associated with a specific *quantity demanded* (on the *horizontal axis*).

What are the “determinants of demand”?

Factors other than *price* determine the quantities demanded of a *good* or *service*. Also referred to as “demand shifters” because changes in the determinants of demand will cause the *demand curve* to shift either right or left.

What is the concept of “normal good”?

A *good* or *service* whose consumption increases when *income* increases and falls when income decreases, other things equal.

What is an “inferior good”?

A *good* or *service* whose consumption declines as *income* rises, other things equal.

What are “substitute goods”?

Products or *services* that can be used in place of each other. When the *price* of one falls, the *demand* for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

What is a “complimentary good”?

Products and *services* that are used together. When the *price* of one falls, the demand for the other increases (and conversely).

What is the concept of a “change in demand”?

A movement of an entire *demand curve*(or of the numerical entries in a demand schedule) such that the *quantity demanded* changes at every particular *price;* caused by a change in one or more of the *determinants of demand.*

What is the concept of a “change in quantity demanded”?

A change in the *quantity demanded* along a fixed *demand curve* (or within a fixed demand schedule) as a result of a change in the *price* of the product.

What is “supply” in economics?

A schedule or curve that shows the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible *prices* during a specified period of time

What is a “supply schedule”?

A table of numbers showing the amounts of a *good* or *service* producers are willing and able to make available for sale at each of a series of possible *prices* during a specified period of time.

What is the “law of supply”?

The principle that, other things equal, an increase in the *price* of a product will increase the quantity of it supplied, and conversely for a price decrease.

What is a “supply curve”?

A curve that illustrates the *supply* for a product by showing how each possible *price* (on the *vertical axis*) is associated with a specific *quantity supplied* (on the *horizontal axis*)

What are “determinants of supply”?

Factors other than *price* determine the quantities supplied of a *good* or *service*. Also referred to as “supply shifters” because changes in the determinants of supply will cause the *supply curve* to shift either right or left.

What is a “change in supply” in economics?

A movement of an entire *supply curve*(or of the numerical entries in a schedule) such that the *quantity supplied* changes at every particular *price;* caused by a change in one or more of the *determinants of supply*.

What is the “change in quantity supplied”?

A change in the *quantity supplied of* a product along a fixed *supply curve* (or within a fixed supply schedule) as a result of a change in the product’s *price*.

What is an “equilibrium price”?

The *price* in a competitive market at which the *quantity demanded* and the *quantity supplied* are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.

What is the concept of “equilibrium quantity” in economics?

The *price* in a competitive market at which the *quantity demanded* and the *quantity supplied* are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.

What is a “surplus” in economics?

The amount by which the *quantity supplied* of a product exceeds the *quantity demanded* at a specific (above-equilibrium) *price*.

What is a “shortage” in economics?

The amount by which the *quantity demanded* of a product exceeds the *quantity supplied* at a particular (below-equilibrium) *price*.

What is the concept of “productive efficiency”?

The production of a *good* in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized.

What is the concept of “allocative efficiency”?

The apportionment of resources among *firms* and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its *marginal cost* and *marginal benefit* are equal, and at which the sum of *consumer surplus* and *producer surplus* is maximized.