Economics - Chapter 1 - Hubbard

Productive efficiency

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

Scarcity

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

The Economic Problem That Every Society Must Solve

1. A limited amount of resources can produce a limited amount of goods and services. 2. The cost of producing more of one good is the value of what must be given up to produce it.

Economic Models

1. Economists use models—simplified versions of reality—to analyze real-world issues. 2. Economists accept a model if it leads to hypotheses that are confirmed by statistical analysis.

Market

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

Economic model

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

Voluntary exchange

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

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.

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.

Market economy

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

Centrally planned economy

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

Positive analysis

Analysis concerned with what is.

Normative analysis

Analysis concerned with what ought to be.

Marginal analysis

Analysis that involves comparing marginal benefits and marginal costs.

Three Key Economic Ideas

People must make choices as they try to attain their goals. People make choices because resources are scarce. Most of economics analyzes what happens in markets.

Economic variable

Something measurable that can have different values, such as the incomes of doctors.

Equity

The fair distribution of economic benefits.

Opportunity cost

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

Trade-off

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

Microeconomics

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

Economics

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

Macroeconomics

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