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the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants


the branch of economics that studies decision making for the economy as a whole


the branch of economics that studies decision making by a single individual, household, firm, industry, or level of government


the condition in which human wants are forever greater than the supply of time, goods, and resources


the basic categories of inputs used to produce goods and services; also called factors of production, divided into 3 categories


a shorthand expression for any natural resource provided by nature


the mental and physical capacity of workers to produce goods and services


the creative ability of individuals to seek profits by taking risks and combining resources to produce innovative products


the physical plants, machinery, and equipment used to produce other goods; human made goods that do not directly satisfy human wants


a cost or benefit imposed on people other than the consumers and producers of a good or service

market economy

an economic system that answers the what, how, and for whom questions using prices determined by the interaction of the forces of supply and demand

adam smith

father of economics

laissez faire

allow to act

invisible hand

a phrase that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests

consumer sovereignty

the freedom of consumers to cast their dollar votes to buy or not to buy at prices determined in competitive markets

opportunity cost

the best alternative sacrificed for a chosen alternative

marginal analysis

an examination of the effects of additions to or subtractions from a current situation

production possibilities curve

a curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology


the body of knowledge applied to how goods are produced

law of increasing opportunity costs

the principle that the opportunity cost increases as production of one output expands

price ceiling

a legally established maximum price a seller can charge

price floor

a legally established minimum price a seller can be paid

nominal income

the actual number of dollars received over a period of time

real income

the actual number of dollars received (nominal income) adjusted for changes in the CPI

public good

a good or service with two properties: (1) users collectively consume benefits, and (2) there is no way to bar people who do not pay (free riders) from consuming the good or service

market failure

a situation in which market equilibrium results in too few or too many resources used in the production of a good or service. This inefficiency may justify government intervention

normal profit

the minimum profit necessary to keep a firm in operation. a firm that earns normal profit earns total revenue equal to its total opportunity cost

business cycle

alternating periods of economic growth and contraction, which can be measured by changes in real GDP


the phase in the business cycle in which real GDP reaches its maximum after rising during recovery


a downturn in the business cycle during which real GDP declines, and the unemployment rate rises; also called a contraction


the phase of the business cycle in which real GDP reaches its minimum after falling during a recession


an upturn in the business cycle during which real GDP rises; also called an expansion

economic growth

an expansion in national output measured by the annual percentage increased in a nation's real GDP

full employment

the situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates

GDP gap

the difference between actual real GDP and potential or full-employment real GDP

price system

a mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices

natural monopoly

an industry in which the long-run average cost of production declines throughout the entire market. as a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms

economic system

the organizations and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced

traditional economy

a system that answers the What, How, and For Whom questions they way they always have been answered

command economy

a system that answers the What, How, and For Whom questions by central authority


an economic system characterized by private ownership of resources and markets


an economic system characterized by government ownership of resources and centralized decision making

government expenditures

federal, state, and local government outlays for goods and services, including transfer payments


any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged


a market condition existing at any price where the quantity supplied is greater than the quantity demanded


a market condition existing at any price where the quantity supplied is less than the quantity demanded


a market condition that occurs at any price and quantity at which the quantity demanded and the quantity supplied are equal

law of demand

the principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus


process of turning a government enterprise into a private enterprise


act of transforming a private enterprise's assets into government ownership

poverty line

the level of income below which a person or a family is considered to be poor

in-kind transfers

government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing

explicit costs

payments to nonowners of a firm for their resourcess

implicit costs

the opportunity costs of using resources owned by the firm

economic profit

total revenue minus explicit and implicit costs

marginal revenue product

the increase in a firm's total revenue resulting from hiring an additional unit of labor or other variable resource

demand curve or labor

a curve showing the different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus. it is equal to the marginal revenue product of labor

human capital

the accumulation of education, training, experience, and health that enables a worker to enter an occupation and be productive


the union forces firms to hire more workers than are required or to impose work rules that reduce output per worker


a market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market


the value of the stock of assets owned at some point in time

nominal interest rate

actual rate of interest earned over a period of time

real interest rate

the nominal rate of interest minus the inflation rate

proportional tax

a tax that charges the same percentage of income, regardless the size of income

vicious circle of poverty

the trap in which countries are poor because they cannot afford to save and invest, but they cannot save and invest because they are poor


capital goods usually provided by the government, including highways, bridges, waste and water systems, and airports


a market structure characterized by (1) few sellers, (2) either a homogenous or a differentiated product, and (3) difficult market entry

normative economics

an analysis based on value judgement

positive economics

an analysis limited to statements that are verifiable

benefits received principle

the concept that those who benefit from governemnt expenditures should pay the taxes that finance their benefits

ability to pay principle

the concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of benefits received

progressive tax

a tax that charges a higher percentage of income as income rises

average tax rate

the tax divided by the income

marginal tax rate

the fraction of additional income paid in taxes

regressive tax

a tax that charges a lower percentage of income as income rises

gross domestic product

the market value of all final goods and services produced in a nation during a period of time, usually a year

crowding out effect

a reduction in private-sector spending as a result of federal budget deficits financed by US Treasury borrowing

crowding in effect

an increase in private-sector spending as a result of federal budget deficits financed by US Treasury borrowing

aggregate supply curve

the curve that shows the level of real GDP produced at different possible price levels during a time period, ceteris paribus

classical economists

a group of economists whose theory dominated economic thinking from the 1770s to the great depression. they believed recessions would naturally cure themselves because the price system would automatically restore full employment

transactions demand for money

the stock of money people hold to pay everyday predictable expenses

precautionary demand for money

the stock of money people hold to pay unpredictable expenses

speculative demand for money

the stock of money people hold to take advantage of expected future changes in the price of bonds, stock, or other non money financial assets

discretionary fiscal policy

the deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy

spending multiplier

the change in aggregate demand (total spending) resulting from an initial change in any component of aggregate demand, including consumption, investment, government spending, and net exports. as a formula, the spending multiplier = 1/(1 - MPC)

keynesian range

the horizontal segment of the aggregate supply curve, which represents an economy in a severe recession

intermediate range

the rising segment of the aggregate supply curve, which represents an economy as it approaches full-employment output

classical range

the vertical segment of the aggregate supple curve, which represents an economy at full-employment output


the narrowest definition of the money supply. it includes currency, and checkable deposits

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