Introduction to Economics and Market Systems

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Scarce resources

Limited time, limited money, limited materials.

Economics

The study of the choices people make to attain their goals, given their scarce resources.

Economic models

A simplified version of reality used to analyze real-world economic situations.

Market

A group of buyers and sellers of a good or service and the institutions or arrangements by which they come together to trade.

Marginal

Means extra or additional.

Marginal Benefit

Extra benefit one gains from doing X thing.

Marginal Cost

Extra cost one receives from doing X thing.

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

Trade-offs

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Centrally Planned Economy

An economy in which the government decides how economic resources will be allocated.

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Mixed economies

An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.

Productive Efficiency

The situation in which a good or service is produced at the lowest possible cost.

Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences.

Voluntary Exchange

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.

Equity

The fair distribution of economic benefits.

Economic variable

Something measurable that can have different values, such as the price of coffee.

Positive Analysis

Analysis concerned with what is.

Normative Analysis

Analysis concerned with what ought to be.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

The study of the economy, including topics such as inflation, unemployment, and economic growth.

Production

The process of making goods and services, often undertaken by entrepreneurs.

Entrepreneur

Someone who operates a business.

Innovation

The development of a new good or a new process for making a good.

Technology

The processes a firm uses to turn inputs into outputs.

Firm

An organization that produces a good or service.

Goods

Tangible items that people want, such as books, computers, and clothing.

Services

Activities done for others, such as cutting hair, cleaning houses, or conducting banking transactions.

Revenue

All the money a firm receives when it sells goods or services.

Profit

The difference between a firm's revenue and its costs.

Household

All the people occupying a home that make decisions together.

Factors of production

Resources used by firms to produce goods and services, including labor, capital, natural resources, and entrepreneurial ability.

Capital

Refers to physical capital, which is any manufactured good that is used to make other goods.

Human Capital

The accumulated training, skills, and knowledge that a person has.

Factors of Production

Inputs used to produce goods and services.

Production Possibilities Frontier (PPF)

Curve showing maximum combinations of two products.

Economic Growth

Increase in an economy's production capacity.

Trade

The act of buying and selling goods/services.

Absolute Advantage

Ability to produce more than competitors with same resources.

Comparative Advantage

Lower opportunity cost in producing a good/service.

Product Markets

Markets for goods and services like computers.

Factor Markets

Markets for factors of production like labor.

Circular-Flow Diagram

Model illustrating market participant interactions.

Free Market

Market with minimal government restrictions.

Property Rights

Rights to exclusive use of owned property.

Quantity Supplied

Amount producers are willing to sell at a price.

Law of Supply

Higher prices increase quantity supplied.

Quantity Demanded

Amount consumers are willing to buy at a price.

Law of Demand

Higher prices decrease quantity demanded.

Substitution Effect

Consumers switch to alternatives when prices rise.

Income Effect

Purchasing power decreases as prices rise.

Market Equilibrium

Point where supply equals demand.

Shortage

Quantity demanded exceeds quantity supplied.

Surplus

Quantity supplied exceeds quantity demanded.

Demand Shift Factors

Factors causing demand curve to shift.

Increased Income

Causes outward shift in demand curve.

Decreased Income

Causes inward shift in demand curve.

Population Increase

Increases demand for products at all prices.

Interest Rates

Lower rates can increase demand for goods.

Decrease in Population

Reduction in the number of consumers in a market.

Increase in Interest Rates

Higher cost of borrowing affecting consumer spending.

Decreased Desire for a Good

Lower consumer demand for a specific product.

Worsening Expectations

Negative outlook affecting consumer and producer behavior.

Supply Curve Shift Outward

Increase in supply at all price levels.

Input Prices Decrease

Lower costs for production inputs enhancing supply.

Production Technology Improves

Advancements that increase efficiency in production.

Alternative Inputs Available

Cheaper substitutes that reduce production costs.

Interest Rates Decline

Lower borrowing costs encouraging investment and spending.

Number of Firms Increase

More competitors entering the market boosting supply.

Expectations Improve

Positive outlook encouraging production and investment.

Supply Curve Shift Inward

Decrease in supply at all price levels.

Input Prices Increase

Higher costs for production inputs reducing supply.

Interest Rates Rise

Increased borrowing costs discouraging investment.

Number of Firms Decrease

Fewer competitors leading to reduced market supply.

Consumer Surplus

Difference between willingness to pay and actual price.

Consumer Expenditure

Total amount spent by consumers on goods.

Producer Surplus

Difference between price received and minimum acceptable price.

Economic Surplus

Total welfare from consumer and producer surplus combined.

Market Efficiency

Optimal allocation of resources maximizing total surplus.

Sales Tax

Tax added to the price consumers pay for goods.

Tax Incidence

Distribution of tax burden between buyers and sellers.

Deadweight Loss

Loss of economic efficiency due to market distortions.

Market Subsidy

Government payment to lower production costs for firms.

Equilibrium Price

Price where supply equals demand in a market.

Equilibrium Quantity

Quantity supplied and demanded at equilibrium price.

Price Ceiling

Maximum legal price a seller can charge.

Price Floor

Minimum legal price a seller can receive.