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Key vocabulary terms from Chapter 1 for Dr. Stern's Principles of Macroeconomics at Auburn University.


The study of how people deal with scarcity.


The situation in which the quantity of resources is insufficient to meet all wants.


A selection among alternative goods, services, or actions.

Economic Interactions

Exchanges of goods and services between people.


An arrangement by which economic exchanges between people take place.

Opportunity Cost

The value of the next-best forgone alternative that was not chosen because something else was chosen.

Gains From Trade

Improvements in income, production, or satisfaction owing to the exchange of goods or services.


A concentration of production effort on a single specific task.

Division of Labor

The division of production into various parts in which different groups of workers specialize.

Comparative Advantage

A situation in which a person or group can produce one good at a lower opportunity cost than another person or group.

International Trade

The exchange of goods and services between people or firms in different nations.

Production Possibilities

Alternative combinations of production of various goods that are possible, given the economy's resources.

Increasing Opportunity Cost

A situation in which producing more of one good requires giving up an increasing amount of production of another good.

Production Possibilities Curve

A curve showing the maximum combinations of production of two goods that are possible, given the economy's resources.

Market Economy

An economy characterized by freely determined prices and the free exchange of goods and services in markets.

Command Economy

An economy in which the government determines prices and production; also called a centrally planned economy.

Freely Determined Prices

Prices that are determined by the individuals and firms interacting in markets.

Property Rights

Rights over the use, sale, and proceeds from a good or resource.


A device that motivates people to take action, usually so as to increase economic efficiency.

Market Failure

Any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government.

Government Failure

The situation where the government fails to improve on the market or even makes things worse.

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