Econ Unit 1

scarcity

limited nature of society’s resources

economics

study of how society manages scarce resources

efficience

property of society getting the most it can from scarce resources

equality

property of distributing economic prosperity uniformly among members of society

opportunity cost

whatever must be given up to obtain some item

rational people

people who systematically & purposefully do the best they can to achieve their objectives

marginal changes

small incremental changes/adjustments to a plan of action

incentive

something that induces a person to act

market economy

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

property rights

ability of individual to own & exercise control over scarce resources

market failure

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

externality

impact on one person’s actions on wellbeing of a bystander

market power

ability of single economic actor (small group of actors) to have substantial influence on market prices

productivity

quantity of goods & services produced from each unit of labor input

inflation

increase in overall level of prices in economy

business cycle

fluctuations in economic activity, such as employment & production

positive statements

claims that attempt to describe the world as it is

normative statements

claims that attempt to prescribe how the world should be

absolute advantage

ability to produce a good using fewer inputs than another producer

comparative advantage

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

imports

goods produced abroad and sold domesticallye

exports

goods produced domestically and sold abroad

market

group of buyers and sellers of a particular good or service

competitive market

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

quantity demanded

amount of good that buyers are willing and able to purchase

law of demand

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

demand schedule

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

demand curve

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

normal good

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

inferior good

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

substitutes

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

complements

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

quantity supplied

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

law of supply

claim that, other things equal, quantity supplied of a good rises when price rises

supply schedule

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

supply curve

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

equilibrium

situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price

price that balances quantity supplied and quantity demanded

equilibrium quantity

quantity supplied and quantity demanded at the equilibrium price

surplus

situation in which quantity supplied is greater than quantity demanded

shortage

situation in which quantity demanded is greater than quantity supplied

law of supply and demand

claim that the price of any good adjusts to bring the quantity supplied and demanded for that good into balance

price ceiling

legal maximum on the price at which a good can be sold

price floor

legal minimum price at which a good can be sold

tax incedence

manner in which burden of a tax is shared among participants in a market

microeconomics

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

macroeconomics

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

gross domestic product (GDP)

market value of all final goods and services produced within a country in a given period of time

consumption

spending by households on goods and services with exception of purchases of new housing

investment

spending on capital equipment, inventories, structures, including household purchases of new housing

government purchases

spending on goods and services by local, state, and federal governments

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

nominal GDP

production of goods and services valued at current prices

real GDP

production of goods and services valued at constant prices

GDP deflator

measure of price level calculated as ratio of nominal GDP to real GDP times 100

consumer price index (CPI)

measure of overall cost of goods and services bought by a typical consumer

inflation rate

percentage change in price index from preceding period

producer price index

measure of the cost of a basket of goods and services bought by firms

indexation

automatic correction by law or contract of a dollar amount for the effects of elimination

nominal interest rate

interest rate as usually reported without a correction for effects of inflation

real interest rate

interest rate corrected for the effects of inflation