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Terms from chapters 1 and 2 of Microeconomics by Hubbard and O'Brien (second edition)


The situation in which unlimited wants exceed the limited resources available to fulfill those wants


The study of the choices people make to attain their goals, given their scarce resources

Economic Model

A simplified version of reality used to analyze real-world economic situations


A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs


The idea that because of scarcity, producing more of one good or service means producing less of another good or service

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity

Centrally Planned Economy

An economy in which the government decides how economic resources will be allocated

Market Economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources

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

Productive Efficiency

The situation in which a good or service is produced at the lowest possible cost

Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Voluntary Exchange

The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction


The fair distribution of economic benefits

Economic Variable

Something measurable that can have different values, such as the wages of software programmers

Positive Analysis

Analysis concerned with what is

Normative Analysis

Analysis concerned with what ought to be


The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices


The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth


Someone who operates a business. In a market system, they decide what goods and services to produce and how to produce them, often putting their own funds at risk.


The practical application of an invention, or more broadly, any significant improvement in a good or in the means of producing a good


The processes a firm uses to produce goods and services.

Firm, company, or business

An ORGANIZATION that produces a good or service. (Most organizations produce goods or services for profit, but there are also NON-PROFITS, such as universities or some hospitals)


Tangible merchandise, such as books, computers, or DVD players


Activities done for others, such as providing haircuts or investment advice


The total amount received for selling a good or service, calculated by multiplying the price per unit by the number of units sold


The difference between a firm's revenue and its costs.


All persons occupying a home. Suppliers of factors of production


Financial or physical. FINANCIAL includes stocks, bonds issued by firms, bank accounts, and holdings of money. PHYSICAL includes manufactured goods that are used to produce other goods and services. Examples of PHYSICAL are: computers, factory buildings, machine tools, warehouses, and trucks

Capital Stock

The amount of PHYSICAL CAPITAL available in a country

Human Capital

The accumulated training and skills that workers possess. For example, college-educated workers generally have more skills and are more productive than workers who have only high school degrees

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

Economic Growth

The ability of the economy to produce increasing quantities of goods and services


The act of buying or selling

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

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors

Product Markets

Markets for goods, such as computers- and services, such as medical treatment

Factor Markets

Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

Factors of Production

The inputs used to make goods and services (labor, capital, human capital, natural resources-including land, and entrepreneurial ability)

Circular-flow Diagram

A model that illustrates how participants in markets are linked

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

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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