Chapter 1

Scarcity

Society has unlimited wants and limited resources

Economics

The social science that studies the production, distribution, and consumption of goods and services.

Market Economy

When production and consumption of goods are the result of decentralized decisions by many firms and individuals.

Command Economy

There is a central authority making decisions about production and consumption. The type of economy in the USSR.

Invisible Hand

The way a market economy manages to harness the power of self-interest for the good of society.

Microeconomics

The study of how individuals make decisions and how these decisions interact.

Opportunity Cost

What you must give up in order to get an item you want.

Marginal Decisions

Decisions such as what you’ll do with your next hour or next dollar.

Trade-off

A comparison of the benefits and costs of two items/decisions.

Marginal Analysis

The study of decisions where one decides whether to do a bit more, or a bit less of an activity.

MC=MB

When the marginal cost is equal to the marginal benefit

Incentive

Anything that offers rewards for someone changing their behavior.

Trade

In a market economy, individuals engage in this. They provide goods and services to others and receive goods and services in return.

Specialization

Each person specializes in the task that he or she is good at.

Equilibrium

This is the case when no individual would be better off doing something else. Anytime there is change, the economy will move to a new equilibrium.

Efficient

When an economy takes all opportunities to make some people better off without making other people worse off.

Equity

Everyone gets his or her fair share