Ten Principles of Economics – Key Vocabulary

A set of vocabulary flashcards covering the key terms and principles from Gregory Mankiw’s Ten Principles of Economics lecture notes.

People Face Tradeoffs

The idea that obtaining one desirable outcome usually requires giving up another; there is no such thing as a free lunch.

Efficiency

The property of society getting the maximum benefit from its scarce resources.

Equity

The fair distribution of economic prosperity among members of society.

Efficiency–Equity Trade-off

The situation in which policies that improve fairness (equity) often reduce the total economic pie (efficiency), and vice-versa.

Opportunity Cost

Whatever must be given up in order to obtain something else.

Rational People

Individuals who systematically and purposefully do the best they can to achieve their objectives.

Thinking at the Margin

Making decisions by comparing the additional (marginal) benefits and marginal costs of small adjustments.

Marginal Benefit

The extra gain received from consuming or producing one additional unit of a good or service.

Marginal Cost

The extra cost incurred from consuming or producing one additional unit of a good or service.

Trade Can Make Everyone Better Off

Voluntary exchange allows individuals, families, or countries to specialize and enjoy a greater variety of goods and services.

Market Economy

An economic system that allocates resources through the decentralized decisions of many firms and households interacting in markets.

Invisible Hand

Adam Smith’s concept that individuals’ pursuit of self-interest unintentionally promotes the overall economic well-being of society.

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently.

Externality

The impact of one person’s actions on the well-being of a bystander (e.g., pollution).

Market Power

The ability of a single economic actor or small group to substantially influence market prices.

Productivity

The quantity of goods and services produced from each hour of a worker’s time; the key determinant of living standards.

Standard of Living

The level of prosperity and material well-being enjoyed by an individual or society, typically measured by per-person output or income.

Inflation

A sustained increase in the overall level of prices in an economy caused, in part, by excessive growth in the money supply.

Short-Run Trade-off Between Inflation and Unemployment

The tendency for lower unemployment to accompany higher inflation in the short run when money supply expands.

Business Cycle

Fluctuations in economic activity, such as employment and production, over time.

Guns and Butter

A classic example illustrating the trade-off between national defense (guns) and consumer goods (butter).

Airline Seat Marginal Analysis

Example showing that a seat priced below average cost may still be sold if its marginal cost is near zero and covers marginal benefit.

Water-Diamond Paradox

Illustrates why essentials like water are cheap and non-essentials like diamonds are expensive—marginal benefit depends on scarcity.

Government Can Sometimes Improve Market Outcomes

Principle stating that through policies addressing efficiency (market failures) and equity, governments may enhance overall welfare.

Word economy come from a greek word

oikonomos “one who manages household”

economics

the study of how individuals and societies allocate scarce resources It examines choices regarding production, consumption, and distribution of goods and services. .

Scarcity

is the limited nature of society’s resources. society has limited resources and thereof cannot produce all the goods and services people wish to have