Principles of Microeconomics Chapters 1-5

Scarcity

the limited nature of society's resources

Economics

the study of how society manages its scarce resources

Efficiency

the property of society getting the most it can from its scarce resources

Equality

the property of distributing economic prosperity uniformly among the members of its society

opportunity cost

whatever must be given up to obtains one item

marginal change

a small incremental adjustment to a plan of action

Marginal benefits

increase in benefit from an action or purchase; increase in benefit from producing one more unit

marginal cost

increase in cost from an action or purchase; increase in cost from producing one more unit

incentive

something that induces a person to act

market economy

an economy that allocates resources through decentralized decisions of many firms and households as they interact in markets for goods and services

market failure

a situation in which a market left on its own fails to allocate resources efficiently

externality

(one possible cause of market failure) the impact of one person's actions on the well being of a bystander

market power

(another possible cause of market failure) the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Productivity

the quantity of goods and services produced from each unit of labor input

inflation

increase in the overall level of prices in the economy

Business cycle

fluctuations in economic activity, such as employment and production

Microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment and economic growth

Comparative advantage

the ability to produce a good at a lower cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

market

a group of buyers and sellers of a particular good or service

competitive market

a market in which there are many buyers and sellers so that each has a negligible impact on the market price

perfectly competitive

to reach this highest form of competition, a market must have two characteristics: (1) The goods offered for sales are all exactly the same and (2) the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

Price takers

buyers and sellers in perfectly competitive markets that must accept the price the market determines

Quantity demanded

the amount of a good that buyers are willing and able to purchase

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

demand curve

a graph of the relationship between the price of a good and the quantity demanded

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

compliments

two goods for which an increase in the price of one leads to a decrease in the demand for the other

quantity supplied

the amount of a good that sellers are willing and able to sell

law of supply

the claim that the