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Economics
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The study of how humans make choices under conditions of scarcity
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Scarcity
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When human wants for goods and services exceed the available supply
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Division of labor
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The way in which different workers divide required tasks to produce a good or service
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Specialization
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When workers or firms focus on particular tasks for which they are well-suited within the overall production process
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Microeconomics
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The branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
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Macroeconomics
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The branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
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Traditional economy
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Typically an agricultural economy where things are done the same as they have always been done
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Command economy
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An economy where economic decisions are passed down from government authority and where the government owns the resources
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Market economy
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An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand
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Budget constraint
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All possible consumption combinations of goods that someone can afford, given the price of goods, when all income is spent
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Opportunity cost
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Measures cost by what we give up, or forfeit, in an exchange
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Marginal analysis
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Examination of decisions on the margin, meaning a little more or a little less from the status quo
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Utility
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Satisfaction, usefulness, or value one obtains from consuming goods and services
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Marginal utility
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The additional utility provided by one additional unit of consumption
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Law of diminishing marginal utility
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As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
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Sunk costs
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Costs that we make in the past that we cannot recover
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Production possibilities frontier (PPF)
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A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
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Law of diminishing returns
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As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline
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Productive efficiency
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When it is impossible to produce more of one good or service without decreasing the quantity produced of another good or service
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Allocative efficiency
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When the mix of goods produced represents the mix that society most desires
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Comparative advantage
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When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
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The Invisible Hand
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Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes
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Positive statements
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Statements that describe the world as it is
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Normative statements
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Statements that describe the world as it should be
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Demand
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The relationship between price and the quantity demanded of a certain good or service
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Quantity demanded
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The total number of units of a good or service that consumers are willing to purchase at a given price
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Demand schedule
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A table that shows a range of prices for a good or service and the quantity demanded at each price
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Demand curve
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A line that shows the relationship between price and quantity demanded on a graph, with quantity on the horizontal axis and the price on the vertical axis
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Law of demand
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The common relationship that a higher price leads to a lower quantity demanded and a lower price leads to a higher quantity demanded, while all other variables are held constant
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Supply
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The relationship between price and the quantity supplied of a certain good or service
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Quantity supplied
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The total number of units of a good or service that producers are willing to sell at a given price
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Supply schedule
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A table that shows a range of prices for a good or service and the quantity supplied at each price
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Supply curve
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A line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
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Law of supply
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The common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
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Equilibrium
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The situation where the quantity demanded is equal to the quantity supplied
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Surplus
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At the existing price, when the quantity supplied exceeds the quantity demanded
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Shortage
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At the existing price, when the quantity demanded exceeds the quantity supplied
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Ceteris paribus
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Latin for "other things being equal"
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Normal goods
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A good in which the quantity demanded rises as income rises, and in which the quantity demanded falls as income falls
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Inferior goods
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A good in which the quantity demanded falls as income rises, and in which the quantity demanded rises as income falls
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Substitutes
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Goods that can replace another to some extent, so that greater consumption of one good can mean less of the other
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Complements
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Goods that are often used together so that the consumption of one good tends to enhance consumption of the other
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Factors of production
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The resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs
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Consumer surplus
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The extra benefit that consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid
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Producer surplus
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The extra benefit that producers receive from selling a good or service, measured by the price that the producer actually received minus the price that the producer would have been willing to accept
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Price ceiling
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A legal maximum price
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Price floor
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A legal minimum price
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Total surplus
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The sum of consumer surplus and producer surplus (and government revenue in the case of taxation)
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Deadweight loss
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The loss in total surplus that occurs when a market produces an inefficient quantity
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Elasticity
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An economics concept that measures the responsiveness of one variable to changes in another variable
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elastic
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When the absolute value of the elasticity is GREATER than one, then it is...
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inelastic
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When the absolute value of the elasticity is LESS than one, then it is...
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unitary
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When the absolute value of the elasticity is EQUAL to one, then it is...
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Price elasticity
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The relationship between the percentage change in price resulting in a corresponding change in the quantity demanded or supplied
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Price elasticity of demand
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The percentage change in the quantity demanded divided by the percentage change in price
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Price elasticity of supply
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The percentage change in the quantity supplied divided by the percentage change in price
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Income elasticity of demand
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The percentage change in the quantity demanded divided by the percentage change in income
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Cross-price elasticity of demand
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The percentage change in the quantity demanded of Good A divided by the percentage change in price of Good B
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Tax incidence
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The manner in which the tax burden is divided between buyers and sellers
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Behavioral economics
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A branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation
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Consumer equilibrium
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The point on the budget line where the consumer gets the most satisfaction or utility
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Fungible
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The idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual
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Income effect
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A higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with the substitution effect
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Substitution effect
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When a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with the income effect
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Marginal utility per dollar
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The additional satisfaction gained from purchasing a good given the price of the product; formula is Mu/Price
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Total utility
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The total satisfaction derived from consumer choices
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