Economics Chapter 1

Economic Model

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

Productive Efficiency

A situation where a good or service is produced at the lowest possible cost.

Allocative Efficiency

Achieved when the decision on what to produce is determined strictly by consumer demand - minimises oversupply of some production and undersupply of other products - therefore reduces wastage.

Economic Variable

Something measurable that can have different values (ex: income of doctors).

Economics

Study of choices people make to attain their goals given their scarce resources.

Equity

The fair distribution of economic benefits. (Everyone has their definition on what's equal).

Opportunity Cost

The highest amount of other goods/services that must be sacrificed to produce a unit of a product.

Scarcity

When unlimited wants exceed unlimited needs.

Mixed Economy

An economy where most economic decisions are made by the interactions of buyers and sellers in markets but also where the government plays a significant role in the allocation of resources.

Market Economy

An economy where the decisions of households and firms involved in a market allocate economic resources.

Centrally Planned Economy

An economy where the government decides how economic resources will be allocated.

Positive Analysis

Analysis concerned with "what is." Economics is about positive analysis which measures the costs and benefits of different courses of action.

Normative Analysis

Analysis concerned with "what ought to be." The decision, for example, as to whether or not minimum wage law is a good one is a normative decision.

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

Trade-Off

Because of scarcity, you have to produce more of one good or service and in turn produce less of another good or service.

Voluntary Exchange

Buyer and seller are made better off by the transaction.

Microeconomics

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

Macroeconomics

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