Economics Vocabulary

need - something that is necessary for survival

want - an item that we desire but that is not essential to survival

economics - the study of how people seek to satisfy their needs and wants by making choices

goods - physical objects such as clothes or shoes

services - actions or activities that one person performs for another

scarcity - limited quantities of resources to meet unlimited wants

shortage - a situation in which a good or service is unavailable

factors of production - land, labor, and capitol; the three groups of resources that are used to make all goods and services

land - natural resources that are used to make goods and services

labor - the effort that people devote to a task for which they are paid

capital - any human made resource that is used to create other goods and services

physical capital - all human made goods that are used to produce other goods and services, tools and buildings

human capital - the skills and knowledge gained by a worker through education or experience

entrepreneur - ambitious leader that combines land, labor and capital to create and market new goods and services

trade-off - an alternative that we sacrifice when we make a decision

guns or butter - a phrase that refers to the trade offs that nations face when choosing whether to produce more or less military or consumer goods

opportunity cost - the most desirable alternative given up as a result of a decision

thinking at the margin - deciding whether to do or use one additional unit of some source

production possibilities graph - a graph that shows alternative ways to use an economy’s resources

production possibilities frontier - the line on a production possibilities graph that shows the maximum possible output

efficiency - using resources in such a way as to maximize production of goods and services

underutilization - using fewer resources than an economy is capable of using

cost - to an economist, a cost is the alternative that is given up as a result of a decision

law of increasing cost - as we shift factors of production from one good or service to another, the cost of producing the second item increases

financial capital - the money required to run a company

economic system - the structure of methods and principles that a society uses to produce and distribute goods and services

factor payment - the income people receive in return for supplying factors of production

profit - the amount of money a business receives in excess of its expenses

safety net - a set of government programs that protect people who face unfavorable economic conditions

standard of living - level of economic prosperity

innovation - the process of bringing new methods, products, or ideas into use

traditional economy - an economic system that relies on habit, custom, or ritual to decide the three key economic questions

market - any arrangement that allows buyers and sellers to exchange things

specialization - the concentration of the productive efforts of individuals and businesses on a limited number of activities

free market economy - an economic system in which decisions on the three economic questions are based on voluntary exchange in markets

household - a person or group of people living in a single residence

firm - an organization that uses resources to produce a product or service which it then sells

factor market - the arena of exchange in which firms purchase the factors of production from households

product market - the arena of exchange in which households purchase goods and services from firms

self-interest - an individual’s own personal gain

incentive - the hope of reward or fear of penalty that encourages a certain behavior

competition - the struggle among producers for the dollars of consumers

invisible hand - a term coined by Adam Smith to describe the self-regulating nature of the market-place

consumer sovereignty - the power of the consumers to decide what gets produced

centrally-planned economy - economic system where the government makes all the decisions on the three key economic questions

command economy - another name for the centrally-planned economy

socialism - a range of economic and political systems based on belief that wealth should be evenly distributed throughout a society

communism - a political system where the government owns and controls all resources and means of production and makes all the economic decisions

authoritarian - describes a form of government that limits individual freedoms and requires string obedience from its citizens

laissez-faire - the doctrine that government should not intervene in the market place

private property - property that is owned by individuals or companies, not by government or people as a whole

mixed economy - a market based economic system where the government is involved to an extent

economic transition - a period of change where a nation moves from one economic system to another

privatization - the process of selling businesses or services operated by the government to individual investors, and then allowing them to compete in the market place

free enterprise system - an economic system characterized by private or corporate ownership of capital good