Key Concepts in Economics and Market Structures

Opportunity cost

The next best alternative given up when making a choice.

Scarcity

Limited resources relative to unlimited wants and needs.

Marginal cost

The change in total cost from producing one additional unit.

Human capital

Knowledge, skills, and experience of workers.

Command economy

The government makes the major economic decisions.

Marginal benefit

The additional satisfaction from consuming one more unit.

Physical capital

Machinery and equipment.

Free market economy

Prices are determined by supply and demand.

Circular flow model

The relationship between households and firms.

Marginal analysis

Comparing additional costs and benefits.

Free market economy characteristics

Central planning is NOT a characteristic.

Infrastructure capital

Physical capital.

Households in circular flow model

Provide land, labor, and capital.

Law of scarcity

Choices must be made.

Marginal thinking

Evaluating additional costs and benefits.

Prices in command economy

Typically set by the government.

Opportunity cost of attending college

The salary you could have earned working.

Characteristic of physical capital

Includes machinery and equipment.

Characteristic of physical capital

It can be used repeatedly in production.

Circular flow model - firms provide

Goods and services.

Primary goal of marginal analysis

To make optimal decisions.

Law of demand

As price increases, quantity demanded decreases.

Rightward shift in the supply curve

New technology that reduces manufacturing costs.

Phase of business cycle where unemployment peaks

Trough.

Primary tool of monetary policy used by the Federal Reserve

Open market operations.

Year the Federal Reserve was established

1913

Example of expansionary fiscal policy

Increasing government spending.

Interest rates during periods of inflation

They increase.

Multiplier effect in economics

The amplified effect of changes in spending on total output.

Statement about elastic demand

Quantity demanded changes significantly with price changes.

Primary function of commercial banks

Taking deposits and making loans.

Federal Reserve action during a recession

Lower interest rates.

Supply-side economics emphasizes

Tax cuts and deregulation.

Characterization of stagflation

High inflation and high unemployment.

Function of money

Medium of exchange.

Function of money

Store of value.

Function of money

Unit of account.

NOT a function of money

Source of inflation.

Source of inflation

Unit of account

Bank reserves

Total deposits minus loans

Bank reserves

Total assets minus liabilities

Bank reserves

Money banks must keep on hand

Bank reserves

Bank profits from interest

Policy to combat inflation

Lowering interest rates

Policy to combat inflation

Increasing government spending

Policy to combat inflation

Reducing taxes

Economic system with private ownership

Market economy

Tax on imported goods

Tariff

Globalization

The increasing interconnectedness of the world's economies

Negative effect of high tariffs

Reduced trade between nations

Decision maker in a command economy

The government

Characteristic of free trade

Minimal trade barriers

Advantage of international trade

Increased competition

Economic system combining market and command

Mixed economy

Primary purpose of an import quota

To limit the quantity of imported goods

Factor contributing to economic globalization

Advances in technology and communication

Market structure with many sellers and differentiated products

Monopolistic Competition

Response in an oligopolistic market to price change

Competing firms usually match the price change

Characteristic of a perfectly competitive market

Homogeneous products

Natural monopoly

A market where average costs decrease as output increases