Economics Fundamentals: Scarcity, Supply & Demand, and Macroeconomic Indicators

Scarcity Principle

Resources are limited, so having more of one thing means having less of another.

Cost-Benefit Principle

An action should be taken only if its benefits are at least as great as its costs.

Economic Surplus

The benefit of an action minus its cost.

Opportunity Cost

The value of the best alternative given up when making a choice.

Implicit Cost

A non‑monetary opportunity cost of an action.

Explicit Cost

A direct monetary payment made when taking an action.

Sunk Cost

A cost that has already been incurred and cannot be recovered.

Marginal Benefit

The additional benefit from one more unit of an activity.

Marginal Cost

The additional cost from one more unit of an activity.

Incentive Principle

Actions are more likely when benefits rise and less likely when costs rise.

Positive Economics

Describes what is; focuses on factual cause‑and‑effect.

Normative Economics

Describes what should be; involves value judgments.

Demand Curve

Shows the quantity buyers will purchase at each possible price.

Reservation Price (Buyer)

The highest price a buyer is willing to pay.

Supply Curve

Shows the quantity sellers will offer at each possible price.

Reservation Price (Seller)

The lowest price a seller is willing to accept; equal to marginal cost.

Market Equilibrium

The price and quantity where supply equals demand.

Surplus

Quantity supplied exceeds quantity demanded at a given price.

Shortage

Quantity demanded exceeds quantity supplied at a given price.

Price Ceiling

A legal maximum price; creates shortages when below equilibrium.

Price Floor

A legal minimum price; creates surpluses when above equilibrium.

Complementary Goods

Goods used together; a price drop in one increases demand for the other.

Substitute Goods

Goods that replace each other; a price rise in one increases demand for the other.

Change in Demand

A shift of the entire demand curve due to non‑price factors.

Change in Quantity Demanded

Movement along the demand curve caused by a price change.

Change in Supply

A shift of the entire supply curve due to non‑price factors.

Change in Quantity Supplied

Movement along the supply curve caused by a price change.

Standard of Living

Access to goods and services that improve life quality.

Economic Growth

Long‑run increases in the quantity and quality of goods and services produced.

Productivity

Output per worker; a key driver of living standards.

Recession

A period of declining economic activity.

Expansion

A period of rising economic activity.

Unemployment Rate

Percentage of the labor force without a job.

Inflation

A sustained increase in the general price level.

Trade Deficit

When a country's imports exceed its exports.

Trade Surplus

When a country's exports exceed its imports.

Monetary Policy

Actions by the central bank to influence the money supply.

Fiscal Policy

Government decisions about spending and taxation.

Structural Policy

Policies that change the underlying institutions of the economy.

Aggregation

Combining individual data into economy‑wide totals.

Gross Domestic Product (GDP)

Market value of all final goods and services produced within a country in a given period.

Final Goods

Goods consumed by the end user; included in GDP.

Intermediate Goods

Goods used to produce final goods; excluded from GDP.

Capital Goods

Long‑lived goods used to produce other goods and services.

Value Added

The value of output minus the value of intermediate inputs.

Consumption

Household spending on goods and services.

Investment

Business spending on capital goods, new housing, and inventory changes.

Government Purchases

Government spending on final goods and services.

Net Exports

Exports minus imports.

Labor Income

Wages, salaries, and benefits paid to workers.

Capital Income

Profits, interest, rent, and royalties.

Labor Force

The sum of employed and unemployed workers.

Unemployment Spell

The period during which an individual is continuously unemployed.

Discouraged Workers

People who want a job but have stopped looking.

Involuntary Part-Time Workers

People working part‑time who want full‑time jobs.

Consumer Price Index (CPI)

A measure of the cost of a fixed basket of goods relative to a base year.

Price Index

A measure of average prices relative to a base year.

Inflation Rate

The annual percentage change in the price level.

Real Quantity

A quantity measured in physical purchasing power.

Nominal Quantity

A quantity measured in current dollars.

Real Wage

The purchasing power of the wage paid to workers.

Indexing

Automatic adjustment of nominal values for inflation.

Quality Adjustment Bias

CPI overstates inflation because it struggles to account for product improvements.

Substitution Bias

CPI overstates inflation because consumers substitute cheaper goods when prices change.

Relative Price

The price of one good compared to others.

Shoe-Leather Costs

Costs of managing cash holdings during inflation.

Bracket Creep

Movement into higher tax brackets due to inflation rather than real income increases.

Hyperinflation

Extremely high inflation that disrupts economic activity.

Fisher Effect

Nominal interest rates rise when expected inflation rises.