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Economics
the study of scarcity and choice
individual choice
decisions by individuals about what to do, which necessarily involve decisions about what not to do
Economy
a system for coordinating a society's productive and consumptive activities
market economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Command Economy
An economy in which production, investment, prices, and incomes are determined centrally by a government.
Incentives
rewards or punishments that motivate particular choices
property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it, and to trade with each other
Marginal Analysis
the study of the costs and benefits of doing a little bit more of an activity versus a little bit less
resource
anything that can be used to produce something else
Land resources
materials that come from the earth
labor resources
Human effort directed toward producing goods and services
capital resources
The tools, equipment, and buildings that are used to produce goods and services
Entrepreneurship resources
People whose efforts are to organize resources for production, taking risks for new enterprises, innovating to develop new products/processes
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Macroeconomics
the study of worldwide economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
the study of how individuals, households, and firms make decisions and how those decisions interact
economic aggregates
economic measures that summarize data across different markets for goods, services, workers, and assets
positive economics
the branch of economic analysis that describes the way the economy actually works, objectively and factually
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 that are subjective and based on values
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
economic system
the structure of methods and principles that a society uses to produce and distribute goods and services
business cycle
Alternating periods of economic expansion and economic recession
recessions
periods of economic downturns when output and employment are falling
expansions
periods of economic upturns when output and employment are rising
depression
A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
employment
The number of people currently working for pay in the economy
unemployment
the number of people who are actively looking for work but aren't currently employed
labor force
the total number of workers, including both the employed and the unemployed
unemployment rate
the percentage of the labor force that is unemployed
output
quantities of goods and services produced
Aggregate output
the economy's total production of goods and services for a given time period
inflation
a general increase in prices and fall in the purchasing value of money.
deflation
a sustained drop in the price level
price stability
when the overall level of prices changes slowly or not at all
economic growth
an increase in the amount of goods and services produced per head of the population over a period of time.
model
a simplified representation of a real situation that is used to better understand real-life situations, such as the economy
Other things equal assumption
The assumption that factors other than those being considered do not change
Trade-off
the act of giving up one benefit in order to gain another, greater benefit
Production possibility curve
a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs
efficient economy
an economy in which all benefits are maximized to the point that one party cannot increase their benefits without decreasing the benefits of others
productive efficiency
when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service), producing at a point on its PPC
allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
technology
technical means for producing goods and services
trade
providing goods and services to others and receiving goods and services in return
gains from trade
people can get more of what they want through trade than they could if they tried to be self-sufficient
specialization
Each person specializes in what they are good at to increase output
comparative advantage
when the opportunity cost of producing the good or service is lower for an individual than for others
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
terms of trade
the rate at which a country can trade its exports for imports from other countries
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
supply and demand model
a model of how a competitive market behaves
elements of supply and demand model
demand curve, supply curve, and market equilibrium
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
quantity demand
the actual amount of a good or service consumers are willing and able to buy at some specific price
demand curve
a graph of demand schedule and the relationship between the price of a good and the quantity demanded
Law of Demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
change in demand
a shift of the demand curve, which changes the quantity demanded at any given price
movement along the demand curve
a change in the quantity demanded of a good that is the result of a change in that good's price
substitutes
two goods 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 other
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
Individual demand curve
A graphical representation of the relationship between quantity demanded and price for an individual consumer
quantity supplied
the actual amount of a good or service people are willing to sell at some specific price
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a good and the quantity supplied
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
change in supply
a shift of the supply curve, which changes the quantity supplied at any given price
Movement along supply curve
A change in the quantity supplied of a good arising from a change in the good's price
Factors shifting supply curve
Input prices, prices of related goods/services, producer expectations, number of producers, and technology
input
a good or service that is used to produce another good or service
individual supply curve
illustrates the relationship between quantity supplied and price for an individual producer
equilibrium
equilibrium price
the price at which the quantity demanded equals the quantity supplied
equilibrium quantity
the quantity at which quantity demanded and quantity supplied are equal for a certain price level
surplus
A situation in which quantity supplied is greater than quantity demanded
shortage
a situation in which consumers want more of a good or service than producers are willing to make available at a particular price, when the quantity demanded exceeds the quantity supplied
price controls
government-imposed limits on the prices that producers may charge in the market
price ceiling
A legal maximum on the price at which a good can be sold
Price floor
A legal minimum on the price at which a good can be sold
inefficient allocation to consumers
people who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only willing to pay a relatively low price do get it
wasted resources
Price ceilings typically lead to inefficiency in the form of wasted resources. People expend money, effort, and time to cope with the shortages caused by the price ceiling.
inefficiently low quality
sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price
Black market
a market in which buying and selling take place at prices that violate government price regulations
minimum wage
a minimum price that an employer can pay a worker for an hour of labor
inefficient allocation of sales among sellers
Sellers who are willing to sell at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price
inefficiently high quality
sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price
quantity control (quota)
An upper limit on the quantity of some good that can be bought or sold
license
A clear way to define the copyright of your creative work so people know how it can be used.
demand price
the price of a given quantity at which consumers will demand that quantity
supply price
of a given quantity is the price at which producers will supply that quantity
wedge
A device that is thick at one end and tapers to a thin edge at the other end.
deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
