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production possibilities frontier (PPF)
a line or curve that shows all the possible combinations of two outputs that can be produced using all available resources
efficient points
combinations of production possibilities that squeeze the most output from all available resources
absolute advantage
the ability to produce more of a good or service than others can with a given amount of resources
comparative advantage
the ability to produce a good or service at a lower opportunity cost than others
specialization
spending all of your time producing a particular good
gains from trade
the improvement in outcomes that occurs when producers specialize and exchange goods and services
economics
the study of how people, individually and collectively, manage resources
microeconomics
the study of how individuals and firms manage resources
macroeconomics
the study of the economy on a regional, national, or international scale
rational behavior
making choices to achieve goals in the most effective way possible
scarcity
the condition of wanting more than we can get with available resources
opportunity cost
the value of what you have to give up in order to get something; the value of your next-best alternative
marginal decision making
comparison of additional benefits of a choice against the additional cost it would bring, without considering related benefits and costs of past choices
sunk cost
costs that have already been incurred and cannot be recovered or refunded
incentive
something that causes people to behave in a certain way by changing the trade-offs they face
efficiency
use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
correlation
a consistently observed relationship between two events or variables
causation
a relationship between two events in which one brings about the other
model
a simplified representation of the important parts of a complicated situation
circular flow model
a simplified representation of how the economy's transactions work together
positive statement
a factual claim about how the world actually works
normative statement
a claim about how the world should be
market economy
an economy in which private individuals, rather than a centralized planning authority, make the decisions
market
buyers and sellers who trade a particular good or service
competitive market
a market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service
standardized good
a good for which any two units have the same features and are interchangeable
transaction costs
the costs incurred by buyer and seller in agreeing to and executing a sale of goods or services
price taker
a buyer or seller who cannot affect the market price
quantity demanded
the amount of a particular good that buyers will purchase at a given price during a specified period
law of demand
a fundamental characteristic of demand which states that, all else equal, quantity demanded rises as price falls
demand schedule
a table that shows the quantities of a particular good or service that consumers will purchase (demand) at various prices
demand curve
a graph that shows the quantities of a particular good or service that consumers will demand at various prices
substitutes
goods that serve a similar enough purpose that a consumer might purchase one in place of the other
complements
goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other
normal goods
goods for which demand increases as income increases
inferior goods
goods for which demand decreases as income increases
quantity supplied
the amount of a particular good or service that producers will offer for sale at a given price during a specified period
law of supply
a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises
supply schedule
a table that shows the quantities of a particular good or service that producers will supply at various prices
supply curve
a graph that shows the quantities of a particular good or service that producers will supply at various prices
equilibrium
the situation in a market when the quantity supplied equals the quantity demanded; graphically, this convergence happens where the demand curve intersects the supply curve
equilibrium price
the price at which the quantity supplied equals the quantity demanded
equilibrium quantity
the quantity that is supplied and demanded at the equilibrium price
surplus (excess supply)
a situation in which the quantity of a good that is supplied is higher than the quantity demanded
shortage (excess demand)
a situation in which the quantity of a good that is demanded is higher than the quantity supplied
mid-point method
method that measures percentage change in demand (or supply) relative to a point midway between two points on a curve; used to estimate elasticity
perfectly elastic demand
demand for which the demand curve is horizontal, in a way such that demand could be any quantity at the given price, but drops to zero if the price increases
perfectly inelastic demand
demand for which the demand curve is vertical, in a way such that the quantity demanded is always the same no matter what the price
elastic
demand that has an absolute value of elasticity greater than 1
inelastic
demand that has an absolute value of elasticity less than 1
unit-elastic
demand that has an absolute value of elasticity exactly equal to 1
total revenue
the amount that a firm receives from the sale of goods and services, calculated as the quantity sold multiplied by the price paid for each unit
price elasticity of supply
the size of the change in the quantity supplied of a good or service when its price changes
cross-price elasticity of demand
a measure of how the quantity demanded of one good changes when the price of a different good changes
income elasticity of demand
a measure of how much the quantity demanded changes in response to a change in consumers' incomes
elasticity
a measure of how much consumers and producers will respond to a change in market conditions
price elasticity of demand
the size of the change in the quantity demanded of a good or services when its price changes
willingness to pay (reservation price)
the maximum price that a buyer would be willing to pay for a good or service
willingness to sell
the minimum price that a seller is willing to accept in exchange for a good or service
surplus
a way of measuring who benefits from transactions and by how much
consumer surplus
the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price
producer surplus
the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price
total surplus
a measure of the combined benefits that everyone receives from participating in an exchange of goods and services
zero-sum game
a situation in which whenever one person gains, another loses an equal amount. such that the net value of any transaction is zero
efficient market
an arrangement such that no exchange can make anyone better off without someone becoming worse off
deadweight loss
a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
market failures
situations in which the assumption of efficient, competitive markets fails to hold
price control
a regulation that sets a maximum or minimum legal price for a particular good
price ceiling
a maximum legal price at which a good can be sold
price floor
a minimum legal price at which a good can be sold
tax incidence
the relative tax burden borne by buyers and sellers
subsidy
a requirement that the government pay an extra amount to producers or consumers of a good
tax wedge
the difference between the price paid by buyers and the price received by sellers in the presence of a tax
