Unit 1: Basic Economic Concepts and Supply & Demand

Input

A good or service that is used to produce another good or service.

Price Ceiling

A maximum price that sellers are allowed to charge for a good or service.

Utility

A measure of personal satisfaction.

Price floor

A minimum price that sellers that buyers are required to pay for a good or service.

Productive efficiency

Achieved by an economy if it produces at a point on its production possibilities curve.

Allocative efficiency

Achieved by an economy if it produces at the point along its production possibilities curve that makes consumer as well off as possible.

Gains from trade

An economic principle that states that people can get more of what they want through trade than they could if they tried to be self-sufficient; this increase in output is due to specialization.

Command systems /(economy?)

An economy in which industry is publicly owned and a central authority makes production and consumption decisions.

Marginal benefit

Change in total benefit that results from the consumption of one more unit of output.

Marginal cost

Change in total cost that results from the sale of one more unit of output.

Specialization

Each person specializes in the task the he or she is good at performing.

Economic aggregates

Economics measures that summarize data across many different markets.

Consumer goods

Goods that are ready for consumption in satisfaction of human wants.

Production possibilities curve (frontier)

Illustrated the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for each possible quantity of the other good produced.

Scarcity

In short supply; when a resource is not available in sufficient quantities to satisfy all the various ways a society wants to use it.

Equilibrium quantity

Price at which the quantity demanded and the quantity supplied are equal (intersect), shelves are clear, and price stability occurs.

Positive economics

The branch of economic analysis that describes the way the economy actually works.

Normative economics

The branch of economic analysis that makes prescriptions about the way the economy should work.

Macroeconomics

The portion of economics concerned with the overall performance of the economy; focused on aggregate demand-aggregate supply relationship, and the resultant output, income, employment, and price levels.

Equilibrium price (market clearing price)

The price of a good at which the quanitity demanded of that good equals the quantity supplied of that good.

Marginal analysis

The study of the costs and benefits of doing a little bit more of an activity versus a little bit less

Marginal utility

The use a consumer gains of from the addition of one more unit of good or service.

Shortage

When the quantity of a good or service demanded exceeds the quantity supplied; occurs when the price is below its equilibrium level and is also known as excess demand.

Surplus

When the quantity supplied of a good or service exceeds the quantity demanded; occurs when the price is above its equilibrium level, and is also known as excess supply.

Trade-off

When you give up something in order to obtain something else.

Market economic system (capitalism)

free market economic system in which property is privately owned and the invisible forces of supply and demand set price and quantity.

Capital goods

manufactured goods used to make other goods and services.

Capital

resources (buildings, machinery, and equipment) used to produce goods and services; also known as investment goods.

Economic resources (factors of production)

resources: land, capital, and entrepreneurial ability.

Compartive advantage

the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people.

Absolute Advantage

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; not the same thing as comparative advantage.

Microeconomics

the branch of economics that studies how individuals, households, and firms make decisions and how those decisions interact.

Law of increasing opportunity cost

the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.

Opportunity cost

the real cost of an item: what you must give up in order to get it.

Certeris paribus (other-things-equal)

the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.