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economic systems, incentives and opportunity cost, supply & demand, equilibrium, and micro and macro economics

Profit

income received for entrepeneurial skills and risk taking, calculated by subtracting all of a firm's explicit and implicit costs from its total revenues

Borrow

To receive and use something belonging to somebody else, with the intention of returning or repaying it- often with interest in the case of borrowed money

Interest Rate

The price paid for using someone else's money, expressed as a percentage of the amount borrowed

Workers

People employed to do work, producing goods and services

Wage

Payments for labor services that are direcly tied to time worked, or to the number of units of output produced

Incentive

Any reward or benefit, such as money, advantage or good feeling, that motivates people to do something

Price

The amount of money that people pay when they buy a good or service; the amount they recieve when they sell a good or service

Firms

Economic units that demand productive resources from households and supply goods and services to households & government agencies

Consumers

People who use goods and services to satisfy their personal needs and not for resale or in the production of other goods and services

Benefits

Monetary or non-monetary gain received because of an action taken or a decision made

Costs

An amount that must be paid or spent to buy or obtain something. The effort, loss or sacrifice necessary to achieve or obtain something

Business

Any activity or organization that produces or exchanges goods or services for a profit

Income

Payments earned by households for selling or renting their productive resources. May include salaries, wages, interest and dividends

Opportunity Cost

The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another

Taxes

Compulsory payments to governments by households and businesses

Choice

Decision made or course of action taken when faced with a set of alternatives

Services

Activities performed by people, firms or government agencies to satisfy economic wants

Money

Anything that is generally accepted as final payment for goods and services; serve as a medium of exchange, a store of value and a standard of value. Characteristics of money are portability, stability in value, uniformity, durability, and acceptance

Alternative

One of many choices or courses of action that might be taken in a given situation

Regulation

Economic regulation is the prescription of price and output for a specific industry, often a natural monopoly. Social regulation is the prescription of health, safety, performance, environmental, output and job standards across several industries

Economic Systems

The institutional framework of formal and informal rules that a society uses to determine what to produce, how to produce and how to distribute goods and services

Command Economy

An economy in which most economic issues of production and distribution are resolved through central planning and control

Market Economy

An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them pursuing their own self-interest

Private Property

Private individuals and groups are the owners of the means of production - including factories, farms, and their own labor. Market Economy

Free Enterprise

Businesses are free to decide what products to produce, and they may purchase what they need from suppliers of their choice. Consumers are free to spend or save their income in ways they choose. Market Economy

Self-interest

People make choices they judge to be in their own interest. Adam Smith argued that in making such decisions people are led by an 'invisible hand' to promote the good of society as a whole. Market Economy

Profit Motive

Businesses are free to earn profits. Profits are viewed as rewards earned by those who take the risks invoved in producing goods and services for consumers. Market Economy

Markets and Prices

Most exchanges are handled through markets - local, regional, national, or international. Market prices are established through the interaction of buyers and seller. Prices are used to allocate goods and services in the economy. Market Economy

Competition

Markets systems depend on competition to restrain participants as they engage in self-interested behavior. In competative systems, no one business can control market prices. Market Economy

Limited Gov.

Markets systems require a limited role of the government. The government's role is restricted by constitutional or other legal limits. Defining and enforcing property rights, however, is an important obligation of government in a market system. Market Economy

Public Ownership

The government is the owner of the means of production, including factories, farms, and so forth. Command Economy

Centralized Decision Making

A central authority such as a bureau, legislature, or government official makes the fundamental decisions about what and how much will be produced. Command Economy

Economic Planning

A central authority such as a bureau, legislature, or government official makes the fundamental decisions about how goods and services will be produced. National economic goals are often an important focus. Objectives are established for each sector of the economy. Objectives are fine-tuned to provide instructions for each farm, factory, or mine

Allocaion by Command

A central authority such as a bureau, legislature, or government official makes the fundamental decisions about how goods and services are distributed. Raw maerials and labor are assigned to factories, farms and other units of production according to priorities established by the government

Competitive Market

Market in which there are many buyers and sellers of the same good or service

5 Key elements of a Supply and Demand Model

Demand curve, supply curve, the set of factors that cause the demand curve to shift, and the set of factors that cause the supply curve to shift, equilibrium price, the way the equilibrium prive changes when the supply or demand curves shift

Supply and Demand Model

Model of how a competitive market works

Demand Schedule

Shows how much of a good or service consumers will want to buy at different prices

Demand Curve

Graphical representation of the demand schedule. It shows how much of a good or service consumers want to buy at any given price

Quantity Demanded

actual amount consumers are willing to buy at some specific price

Law of Demand

Says that higher price for a good, other things equal, leads people to demand a smaller quantity of the good

Shift of the Demand Curve

Change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve

Movement Along the Demand Curve

Change in the quantity demanded of a good that is the result of a change in that good's price

Substitutes

Two goods if a fall of the price of one of the goods makes consumers less willing to buy the other good

Complements

Two goods if a fall in the price of one good makes people more willing to buy the other good

Normal good

When a rise in income increases the demand for the good- the normal case

Inferior good

When a rise in income decreases the demand for a good

Quantity supplied

Actual amount of a good or service people are willing to sell at some specific price

Supply schedule

Shows how much of a good or service would be supplied at different prices

Supply curve

Shows graphically how much of a good or service people are willing to sell at any given price

Shift of the supply curve

Change in the quantity supplied of a good or service at any given price. It is represented by the change of the original supply curve to a new position

Movement along the supply curve

Change in the quantity supplied of a good that is the result of a change in that good's price

Input

Good that is used to produce another good

Equilibrium

An economic balance in which no individual would be better off doing something different; an equality of supply and demand

Equilibrium price

The price at which the market is in equilibrium, that is, the quantity of a good demanded equals the quantity supplied; also referred to as the market-clearing price

Equilibrium quantity

The quantity of a good bought and sold at the equilibrium price

Market-clearing price

The price at which the market is in equilibrium, that is, the quantity of a good demanded equals the quantity supplied; also referred to as the equilibrium price

Surplus

The excess of a good that occurs when the quantity supplied is greater than the quantity demanded; surpluses occur when the price is above the equilibrium price

Shortage

The insufficiency of a good when the quantity supplied is less than the quantity demanded; shortages occur when the price is below the equilibrium price

Price controls

Legal restrictions on how high or low a market price may go

Price ceilings

A government-set maximum price that sellers are allowed to charge for a good; a form of price control

Price floors

A government-set minimum price that buyers are required to pay for a good; a form of price control

Inefficient

Describes a market or economy in which there are missed opportunities for making some individuals better off without making others worse off

Inefficient allocation to consumers

A form of inefficiency in which consumers who are willing to pay a high price for a good do not get it, and those willing to pay only a low price do; often a result of a price ceiling

Wasted resources

A form of inefficiency; consumers waste resources when they must spend money and expend effort to deal with shortages caused by a price ceiling

Inefficiently low quality

A form of inefficiency in which sellers offer low-quality goods at a low price even though buyers would prefer a high quality at a higher price; often a result of a price ceiling

Black market

A market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling

Minimum wage

A legal floor on the wage rate; the wage rate is the market price of labor

Inefficient allocation of sales among sellers

A form of inefficiency in which sellers who are willing to sell a good at a lower price are not always those who actually manage to sell it; often the result of a price floor

Inefficiently high quality

A form of inefficiency in which sellers offer high-quality goods at a high price even though buyers would prefer a lower quality at a lower price; often the result of a price floor

Aggregate output

The economy's total production of final goods and services for a given time period, usually a year. Real GDP is the numerical measure of aggregate output typically used by economists

Aggregate spending

The sum of consumer spending, investment spending, government purchases, and exports minus imports. It is the total spending on domestically produced final goods and services in the economy

Business cycle

The short-run alternation between economic downturns, known as recessions, and economic upturns, known as expansions

Circular flow diagram

A model that represents the transactions in an economy by two kinds of flows around a circle: a flow of physical things such as goods or labor and the flow of money to pay for these physical things

Closed economy

An economy that does not trade goods, services, or assets with other countries

Consumer price index (CPI)

A measure of the cost of a market basket intended to represent the consumption of a typical urban American family of four

Deflation

A falling aggregate price level

Depression

A very deep and prolonged downturn

Discouraged workers

nonworking people who are capable of working but have given up looking for a job because they believe no jobs are available

Economic aggregates

An economic measure that summarizes data across different markets for goods, services, workers and assets

Employment

The number of people currently employed for pay in the economy

Exchange rate

The price of one currency in terms of another, determined by the foreign exchange market

Expansion

A period when output and employment are rising; also referred to as a recovery

Exports

Goods and services sold to residents of other countries

Final goods and services

Goods and services sold to the final, or end, user

Gross domestic product (GDP)

The total value of all final goods and services produced in the economy during a given year

GDP deflator

For a given year, 100 times the ratio of nominal GDP to real GDP in that year

GDP per capita

GDP divided by the size of the population; equivalent to the average GDP per person

Imports

Goods and services purchased from residents of other countries

Inflation

A rising aggregate price level

Inflation rate

The percent change per year in a price index - typically the consumer price index. The inflation rate is positive when the aggregate price level is rising (inflation) and negative when the aggregate price level is falling (deflation)

Intermediate goods and services

Goods and services, bought from one firm by another firm, that are inputs for production of final goods and services

Labor force

The number of people who are either actively employed for pay or unemployed and actively looking for work; the sum of employment and unemployment

Long-run growth

The sustained upward trend in aggregate output over several decades

Market basket

A hypothetical set of consumer purchases of goods and services, used to measure changes in the overall price level

Microeconomics

The branch of economics that studies how individuals make decisions and how those decisions interact

Macroeconomics

The branch of economics concerned with the overall ups and downs in the economy

Net exports

The difference between the value of exports and the value of imports. A positive value for net exports indicates that a country is a net exporter of goods and services; a negative value indicates that a country is a net importer of goods and services

Nominal

Refers to a measure or quantity that has not been adjusted for changes in prices over time

Nominal GDP

The value of all final goods and services produced in the economy during the year, calculated using the prices current in the year in which output is produced

Open economy

An economy that trades goods, services, and assets with other countries

Price index

A measure of the overall price level; it measures the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year

Price stability

A low but positive rate of inflation targeted by most central banks

Real (measure)

Refers to a measure or quantity that has been adjusted for changes in prices over time

Real GDP

The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

Recession

A period when output and employment are falling

Trade balance

The difference between the value of the goods and services a country sells to other countries and the value of the goods and services it buys from other countries

Underemployment

The number of people who work during a recession but receive lower than they would during an expansion due to fewer numbers of hours worked, lower-paying jobs, or both

Unemployment

The number of people who are actively looking for work but aren't currently employed

Unemployment rate

The percentage of the total number of people in the labor force who are unemployed. It is calculated as: unemployment rate = unemployment / (unemployment + employment)

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