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Economics
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study of how humans make decisions in the face of scarcity
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Scarcity
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human wants for goods, services, and resources that exceed what is available
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Adam Smith
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Wrote "Wealth of Nations" in 1776. It introduced the idea of division of labor and specialization
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Division of Labor
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the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.
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Specialization
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allows workers to focus on the parts of the production process where they have an advantage. Those advantages can be based on education , interests and talents.
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Economies of Scale
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for many goods, as the level of production increases, the average cost of producing each individual unit declines.
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Microeconomics
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focuses on the actions of individual agents within the economy, like households, workers, and businesses
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Macroeconomics
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the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
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monetary policy
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policies that affect bank lending, interest rates, and financial capital markets
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fiscal policy
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involves government spending and taxes.
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John Maynard Keynes
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English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation (1883-1946). Famous for his ideas regarding the economy during the Great Depression.
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Theory
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a simplified representation of how two or more variables interact with each other. The purpose is to take complex, real-world issues and simplify them down to essentials. More abstract than a model.
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Model
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an applied or empirical representation of a scenario or concept. They are used to test theories.
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Circular flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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goods and services market
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firms sell and households buy
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labor market
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households sell labor to business firms or other employees
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traditional economy
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the oldest economic system used in parts of Asia, Africa, and South America. Organize economic affairs they have always done; occupations stay in the family, produce what you consume, with little progress/development
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command economy
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economic effort is devoted to goals passed down from a ruler or ruling class. Have a very centralized structure
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market
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an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses.
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market economy
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Based on private enterprise where decision-making is decentralized.
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private enterprise
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the private individuals or groups of private individuals own and operate the means of production (resources and businesses).
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underground economies
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markets where the buyers and sellers make transactions without the government's approval
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globalization
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the expanding cultural, political and economic connections between people around the world.
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exports
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the goods and services that one produces domestically and sells abroad
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imports
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the goods and services that one produces abroad and then sells domestically.
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Gross Domestic Product (GDP)
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measures the size of total production in an economy.
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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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budget constraint
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all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
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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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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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law of diminishing marginal unity
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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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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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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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normative statement
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statement which describes how the world should be
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opportunity cost
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measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative.
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opportunity set
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all possible combinations of consumption that someone can afford given the prices of goods and the individual's income.
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positive statement
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statement which describes the world as it is
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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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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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sunk costs
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costs that we make in the past that we cannot recover
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utility
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satisfaction, usefulness, or value one obtains from consuming goods and services.
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