Foundations of Economics, Economic Systems, and Specialization

Comprehensive vocabulary flashcards covering the foundations of economics, micro vs macroeconomics, positive vs normative statements, rational decision making, capitalism vs socialism, economic systems, and gains from specialization.

Economics

The social science that studies how people make decisions in the face of scarcity and the resulting impact of such decisions on both society as a whole and on the individual members therein.

Social Science

A field of study whose central focus is how people behave and interact with each other.

Scarcity

A universal phenomenon that arises because resources (such as time, household income, and labor) are available in finite, limited amounts, forcing tradeoffs.

Microeconomics

The branch of economics that studies how individual decision-makers behave and interact with each other, often focusing on households and firms in markets.

Macroeconomics

The branch of economics that studies the functioning and performance of a society's economy as a whole, focusing on aggregate measures such as the unemployment rate, inflation rate, and Gross Domestic Product growth rate.

Positive Statement

A fact-based claim that attempts to describe how the world actually is or functions, which can be confirmed or refuted by evidence.

Normative Statement

An opinion-based claim that attempts to assess the desirability of how the world is or functions, involving value judgments on how the world should be.

Rational Decision Maker

Someone with a well-defined goal who takes actions to achieve that goal as best as possible.

Total Benefits

The sum of all gains that a person realizes from an action or outcome.

Total Costs

The sum of all burdens that a person incurs from an action or outcome.

Total Economic Surplus

The difference between total benefits ($TB$) and total costs ($TC$), defined as $\text{Total Economic Surplus} = TB - TC$.

Cost-Benefit Principle

The principle stating that a rational decision maker should undertake an action if and only if the marginal benefit ($MB$) of doing so is greater than the marginal cost ($MC$) of doing so ($MB > MC$).

Marginal Benefit

The change in the value of total benefits as more of an activity is undertaken.

Marginal Cost

The change in the value of total costs as more of an activity is undertaken.

Incentive Principle

The principle stating that if the marginal benefit of an activity increases, a rational person will engage in more of it, and if the marginal cost increases, a rational person will engage in less of it.

Self-Interested Individual

Someone who makes their own personal assessment of the benefits and costs associated with different outcomes and subsequently uses these measures as the basis for decision making.

Economic System

The rules and methods put in place by a society to determine what goods are produced, how they are produced, and for whom they are produced.

Comparative Economic Systems

The subfield of economics that compares and contrasts the structure and performance of different economic systems across societies.

Factors of Production

Scarce inputs used in the production process to produce goods and services, broadly categorized into natural assets, produced assets, and human capital (or land, labor, and capital).

Natural Assets

Natural resources used as factors of production, including minerals, fossil fuels, naturally occurring vegetation, water resources, topographical features, and available agricultural land.

Produced Assets

Currently available industrial capital (machines, factories, inventories) and social capital (transportation, communication infrastructure, educational institutions).

Human Capital

The skills, education, and training possessed by individuals in the labor force.

Contract

A legal document that specifies what different parties must do, whatever the external circumstances, and provides enforcement or compensation for non-performance.

Capitalism

An economic system in which the means of production are privately owned and operated for profit.

Socialism

An economic system in which the means of production are owned by the government, which decides how to allocate productive resources.

Feudalism

An economic system precursor to capitalism in which land ownership was restricted to an aristocratic nobility.

Property Rights

The three interlocking sets of legal rights defining private ownership: the right to control, the right to transfer, and the right to restitution.

Consumer Sovereignty

The freedom for an individual to choose to purchase (or choose not to purchase) a good or service at a price determined in a free, unfettered market.

Invisible Hand

Adam Smith's concept that under certain conditions, the behavior of self-interested decision makers interacting in free markets will lead to desirable outcomes that maximize society's total economic surplus.

Communism

A theoretical stateless, classless economic system in which all means of production are collectively owned by the workers without government intervention, and people share in production according to their needs.

New Soviet Man

Karl Marx's concept of a person motivated primarily by selfless benevolence once capitalism is destroyed.

Economic Man (Homo Economicus)

The standard assumption in mainstream economics that a person is both self-interested and rational.

Command Planning

A form of planning where the government directly controls nearly all economic activity, and almost all production takes place within state-owned enterprises.

Indicative Planning

A form of planning where the government guides economic decisions by establishing policies, subsidies, grants, and taxes that alter costs and benefits without compulsion.

Material Rewards

Economic incentives relying on monetary rewards or direct increases in consumption resulting from engaging in an activity.

Moral Suasion

Economic incentives relying on attempts to convince individuals to behave in a certain way because doing so is considered the right thing to do.

Coercion

Economic incentives relying on the use of force or intimidation to obtain compliance.

Mixed Economy

An economic system combining elements of capitalism and socialism, where some factors of production are owned and controlled privately while others are owned and controlled by the state.

Structural Measures

Metrics that attempt to gauge differences in the economic institutions, rules, or structure of an economic system across societies.

Production

The process by which inputs (factors of production) are transformed into an output (a good or service).

Households

Decision-making entities whose primary economic objective is to obtain benefits from consuming goods and services.

Firms

Decision-making entities whose primary role is to produce goods and services for consumption by households.

Three Fundamental Economic Questions

The three core questions facing every society due to scarcity: What to produce? (production decision), How to produce it? (resource use decision), and For whom to produce it? (distributional decision).

Production Possibilities Frontier (PPF)

A curve summarizing the limits of production that a society faces by illustrating the maximum amount of one good that can be produced for every possible level of production of another good.

Productive Inefficiency

A situation where a feasible combination of goods allows production of at least one good to increase without decreasing production of any other, corresponding to points below the PPF.

Productive Efficiency

A situation where an economy cannot increase production of any good without decreasing production of another good, corresponding to points on the PPF curve.

Absolute Advantage

The ability of one person or entity to produce more of a good than another using the same amount of inputs.

Opportunity Cost

The value of the next best alternative that must be forgone in order to undertake an activity.

Comparative Advantage

The ability of one person or entity to produce a good at a lower opportunity cost than another.

Law of Comparative Advantage

The principle stating that when increasing the production of a good, a society should do so by using the available productive resource with the lowest opportunity cost.