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Scarcity
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Limited resources and unlimited wants
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Economics
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Study of how society manages its scarce resources
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Efficiency
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The property of society getting the most from its scarce resources
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Equality
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The property of distributing economic prosperity uniformly among society's members
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Rational
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Systematically and purposefully doing the best you can to achieve your objectives
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Opportunity Cost
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Whatever is given up to get something else
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Marginal Change
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An incremental adjustment to an existing plan
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Incentive
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Something that induces a person to act
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Market Economy
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An economic system where interaction of households and firms in markets determines the allocation of resources
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Property Rights
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The ability of an individual to own and exercise control over scarce resources
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"Invisible Hand"
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The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole
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Market Failure
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A situation in which the market fails to allocate resources efficiently
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Externality
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When one person's actions have an impact on a bystander
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Market Power
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The ability of an individual or group to substantially influence market prices
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Monopoly
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A market with only one seller
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Productivity
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The amount of goods and services produced from each unit of labor input
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Inflation
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An increase in the overall level of prices
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Business Cycle
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Fluctuations in economic activity
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Scientific Method
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Objective development and testing of theories
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Economic Models
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Simplifications of reality based on assumptions
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Circular-Flow Diagram
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A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms
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Factors of Production
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Inputs such as land, labor, and capital
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Production Possibilities Frontier
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A graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology
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Microeconomics
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The study of how households and firms make decisions and how they interact in markets
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Macroeconomics
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The study of economy-wide phenomena
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Positive Statements
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Descriptions of the world as it is
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Normative Statements
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Prescription for how the world ought to be
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Absolute Advantage
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The ability to produce a good using FEWER INPUTS than another producer
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Comparative Advantage
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The ability to produce a good at a LOWER OPPORTUNITY COST than another producer
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Gains from Trade
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The increase in total production due to specialization allowed by trade
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Imports
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Good produced abroad and sold domestically
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Exports
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Goods produced domestically and sold abroad
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Market
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A group of buyers and sellers of a particular good or service
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Competitive Market
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A market in which there are many buyers and sellers so that each had a negligible impact on the market
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Quantity Demanded
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The amount of a good that buyers are willing and able to purchase
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Law of Demand
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The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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Demand Schedule
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A table that shows the relationship between the price of a good and the quantity demanded
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Demand Curve
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A graph of the relationship between the price of a good and the quantity demanded
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Normal Good
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A good for which, other things equal, and increase in income leads to an increase in demand
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Inferior Good
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A good for which, other things equal, an increase in income leads to a decrease in demand
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Substitutes
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Two goods for which an increase in the price of one leads to an increase in the demand for the other
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Complements
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Two good for which an increase in the price of one leads to a decrease in the demand for the other
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Quantity Supplied
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The amount of a good that sellers are willing and able to sell
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Law of Supply
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The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
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Supply Schedule
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A table that shows the relationship between the price of a good and the quantity supplied
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Supply Curve
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A graph of the relationship between the price of a good and the quantity supplied
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Equilibrium
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A situation in which the price had reached the level where quantity supplied equals quantity demanded
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Equilibrium Price
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The price that balances quantity supplied and quantity demanded
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Equilibrium Quantity
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The quantity supplied and the quantity demanded at the equilibrium price
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Surplus
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A situation in which quantity supplied is greater than quantity supplied
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Shortage
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A situation in which quantity demanded is greater than quantity supplied
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Law of Supply and Demand
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The claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
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Elasticity
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A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants
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Price Elasticity of Demand
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A measure of how much the quantity demanded of one good responds to a change in the price of another good
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Elastic
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When the quantity demanded or supplied responds substantially to a change in one of its determinants
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Inelastic
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When the quantity demanded or supplied responds only slightly to a change in one of its determinants
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Total Revenue
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The amount paid by buyers and received by sellers of a good computed as P x Q
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Income Elasticity of Demand
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A measure of how much the quantity demanded of a good responds to a change in consumers' income
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Cross-Price Elasticity of Demand
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A measure of how much the quantity demanded of one good responds to a change in the price of another good
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Price Elasticity of Supply
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A measure of how much the quantity supplied of a good responds to a change in the price of that good
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Normal Good Elasticity
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Positive Income Elasticty
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Inferior Good Elasticity
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Negative Income Elasticty
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Price Ceiling
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A legal maximum on the price at which a good can be sold
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Price Floor
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A legal minimum on the price at which a good can be sold
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Tax Incidence
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The manner in which the burden of a tax is shared among participants in a market
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Tax Wedge
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The difference between what the buyer pays and the seller receives after a tax has been imposed
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