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Chapters 1-2 Book: Economics-Principles and Practices


fundamental economic problem of meeting people's virtually unlimited wants with scarce resources


the social science that deals with the allocation of scarce resources

factors of production

productive resources that make up the four categories of land, capital, labor, and entrepreneurs


includes actual land, but refers to all natural resources (the land itself and anything on it)

capital (capital goods)

manufactured (something that is man-made) aids to production; some sort of physical tool that helps you (machinery)


the physical and mental talents of people used to produce goods and services


people coming up with ideas; the organizing and risk-taking factor that brings together the other factors

gross domestic product (GDP)

dollar value of all final goods, services, and structures produced within a country's borders during a one-year period


monetary worth of a good or service as determined by the market

paradox of value

apparent contradiction between the high monetary value of a nonessential item and the low value of an essential item


measure of usefulness or pleasure (satisfaction)

economic growth

increase in a nation's total output of goods and services over time

human capital

sum of people's skills, abilities, health, knowledge, and motivation

division of labor

division of work into a number of separate tasks to be performed by different workers

opportunity cost

the next best alternative forgone when an economic decision is made (never in terms of money)

production possibilities frontier

shows the maximum combinations of goods and services that an economy can produce in a given time period, if all the resources in the economy are being used fully and efficiently, and the amount of resources and the state of technology are fixed (ceteris paribus)

free enterprise economy

market economy in which privately owned businesses have the freedom to operate for a profit with limited government intervention


economic system in which private citizens own and use the factors of production in order to generate profits

mixed economy

economic system that has some combination of traditional, command, and market economies

market economy

economic system in which supply, demand, and the price system help people make economic decisions and allocate resources

command economy

economic system with a central authority that makes the major economic decisions

traditional economy

economic system in which the allocation of scarce resources and other economic activities are based on ritual, habit, or custom

mixed or modified free entreprise economy

economy where people carry on their economic affairs freely but are subject to some government intervention and regulation


the study of the economy as a whole, or its basic subdivisions or aggregates, such as the government sector, the household sector, and the business sector


the study of the choices that individuals and businesses make, and the way these choices interact in markets, and the influence of governments

economic good

this is anything that has an opportunity cost (everything besides air is a ____ ____)

positive economics

FACTS; things that can be proven true or false; refers to statements that may be proven right or wrong by looking at the facts; it describes "what is"

normative economics

OPINIONS; think of norms or guidelines; refers to statements that cannot be conclusively decided and use words like "ought," "should," "too much," "too little," etc.; normative statements involve value judgments; this aspect of economics studies "what ought to be" instead of "what is"

ceteris paribus

"everything else being equal" (isolating variables, making sure all else is constant)

basic economic problem

the ____ ____ ____ (scarcity) forces producers to answer: what to produce? how to produce? and for whom to produce?

actual output

the amount an economy is producing at a given time

potential output

any point on the PPF (curve); the maximum amount an economy could produce if all resources are being used fully and efficiently

economic growth

occurs when actual output increases

economic development

occurs when potential output increases

law of increasing opportunity costs

as the production of a good or service increases, the opportunity cost of producing it tend to rise (i.e. the more computers produced, the less corn produced because more resources are used to make corn)

total utility

the total satisfaction gained from consuming a certain quantity of a product

marginal utility

the extra utility gained from consuming one more unit of a product; what happens with one more of something...does the utility decrease, increase, or stay the same? (compare ____ ____ with rising costs)

law of decreasing marginal utility

in most cases, marginal utility falls as consumption increases; it can even be negative or become negative (i.e. example with ice cream scoops)

transition economies

this terms refers to economies that formerly were planned but are moving towards a free market system; they are mostly "Eastern Block" countries such as Poland, Hungary, and Russia.

planned economy

same as the command system; decisions about "what, how and for whom" are made by a central body (the government), and all resources are collectively owned and managed by the government; governments arrange all production, set wages, set prices

free market economy

same as capitalism; instead of a central body, prices are used to make decisions about "what, how, and for whom;" production is left in private hands and demand and supply are left to set wages and prices in the economy

self-righting (self-correcting)

a free market economy is ____-____

capital goods

tool, equipment, or other manufactured good used to produce other goods and services; a factor of production

consumer goods

good intended for final use by consumers rather than businesses

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