 | Term | Definition |
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scarcity |
the situation in which unlimited wants exceed the limited resources available to fulfill those wants. |
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economics |
the study of choices people make to attain their goals, given their scarce resources. |
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economic models |
simplified versions of reality used to analyze real-world economic situations. |
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market |
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. |
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marginal analysis |
analysis that involved comparing marginal benefits and marginal costs. |
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trade-off |
the idea that because of scarcity, producing more of one good or service means producing less of another good or service. |
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centrally planned economy |
an economy in which the government decides how economic resources will be allocated. |
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market economy |
an economy in which the decisions of households and firms interacting in markets allocate economic resources. |
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mixed economy |
an economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources. |
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productive efficiency |
the situation in which a good part or service is produced at the lowest possible cost. |
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allocative efficiency |
a state of the economy in which production reflects consumer preferences in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. |
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voluntary exchange |
the situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction. |
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equity |
the fair distribution of economic benefits. |
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economic variable |
something measurable that can have different values, such as the wages of software programmers. |
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positive analysis |
analysis concerned with what is. |
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normative analysis |
analysis concerned with what ought to be. |
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microeconomics |
the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. |
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macroeconomics |
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. |
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production possibilities frontier |
a curve showing the maximum attainable combinations of two products that may be produced with available resources. |
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opportunity cost |
the highest valued alternative that must be given up to engage in an activity. |
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economic growth |
the ability of the economy to produce increasing quantities of goods and services. |
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trade |
the act of buying or selling. |
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absolute advantage |
the ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources. |
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comparative advantage |
the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers. |
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market |
a group of buyers or sellers of a good or service and the institution or arrangement by which they come together to trade. |
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product markets |
markets for goods- such as computers- and services- such as medical treatment. |
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factor markets |
markets for factors of production, such as labor, capital, natural resources, and entrepreneurial ability. |
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circular-flow diagram |
a model that illustrates how participants in markets are linked. |
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free market |
a market with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed. |
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entrepreneur |
someone who operates a business, bringing together the factor of production-labor, capital, and natural resources-to produce goods and services. |
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property rights |
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it. |
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quantity demanded |
the amount of a good or service that a consumer is willing and able to purchase at the given price. |
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demand schedule |
a table showing the relationship between the price of a product and the quantity of the product demanded. |
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market demand |
the demand by all the consumers of a given good or service. |
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law of demand |
holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. |
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substitution effect |
the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. |
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income effect |
the change in the quality demanded of a good that results from the effect of a change in the good's price on consumer purchasing power. |
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cetris paribus |
the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant. |
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substitutes |
goods and services that can be used for the same purpose. |
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complements |
goods that are used together. |
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normal good |
a good for which the demand increases as income rises and decreases as income falls. |
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inferior good |
a good for which the demand increases as income falls, and decreases as income rises. |
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demographics |
the characteristics of a population with respect to age, race, and gender. |
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quantity supplied |
the amount of a good or service that a firm is willing and able to supply at a given time. |
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supply schedule |
a table that shows the relationship between the price of a product and the quantity of the product supplied. |
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supply curve |
a curve that shows the relationship between the price of a product and the quantity of the product supplied. |
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law of supply |
holding everything constant, increases in price cause increases in the quantity supplied, and decreases in the quantity supplied. |
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input |
anything used in the production of a good or service. |
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technological change |
change in the ability of a firm to produce a given level of output with a given quantity of inputs. |
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market equilibrium |
a situation in which quantity demanded equals quantity supplied. |
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competitive market equilibrium |
a market equilibrium with many buyers and many sellers. |
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surplus |
a situation in which the quantity supplied is greater than the quantity demanded. |
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shortage |
a situation in which the quantity demanded is greater than the quantity supplied. |
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price ceiling |
a legally determined maximum price that sellers may charge. |
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price floor |
a legally determined minimum price that sellers my receive. |
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marginal benefit |
the additional benefit to a consumer from consuming one more unit of a good or service. |
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consumer surplus |
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. |
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marginal cost |
the additional cost to a firm of producing one more unit of a good or service. |
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producer surplus |
the difference between the lowest price a firm would have been willing to accept and the price it actually receives. |
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economic surplus |
the sum of consumer surplus and producer surplus. |
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deadweight loss |
the reduction in economic surplus resulting from a market not being in competitive equilibrium. |
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economic efficiency |
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum. |
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black market |
buying and sell at prices that violate government price regulations. |
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tax incidence |
the actual division of the burden of a tax between buyers and sellers in a market. |
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elasticity |
a measure of how much one economic variable responds to changes in another economic variable. |
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price elasticity of demand |
the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price. |
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price elasticity of supply |
the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price. |
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elastic demand/supply |
when the percentage change in quantity demanded/supplied is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value. |
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inelastic demand/supply |
when the percentage change in quantity demanded/supplied is less than the percentage change in price, so the price elasticity is less than 1 in absolute value. |
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unit-elastic demand/supply |
when the percentage change in quantity demanded/supplied is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value. |
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perfectly inelastic demand/supply |
when a change in price results in no change in quantity demanded/supplied. |
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perfectly elastic demand/supply |
when a change in price results in an infinite change in quantity demanded/supplied. |
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total revenue |
the total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold. |
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cross-price elasticity of demand |
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. |
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income elasticity of demand |
a measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage in income. |
