Unit 1: basic economic concepts key terms

Ceteris Paribus

"All other things help constant", important in economics because it doesn't usually happen in the real world

Price ceiling

A legal maximum on the price at which a good can be sold

Price floor

A legal minimum on the price at which a good can be sold

Incentive

A positive or negative environmental stimulus that motivates an action, typically financial

Scarcity

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

Model

A theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them

Constant costs

An industry in which the ratio comparing units produced to production cost per unit remains the same regardless of industry volume or demand growth.

Law of demand

Conditional on all else being equal, as the price of a good increases, quantity demanded decreases; as the price of a good decreases, quantity demanded increases

Positive economics

Explains various economic phenomena, AKA the "what is" branch of economics

Normative economics

Focuses on economic fairness, AKA "what should be"

Complements

Goods and services that are used together

Normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower

Inferior goods

Goods for which demand tends to fall when income rises

Demand

Highly sought after, everybody wants it

Law of supply

Tendency of suppliers to offer more of a good at a higher price

Comparative advantage

The ability of a company to produce a good at a lower cost than another company can

Absolute advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group

Economic growth

The ability of the economy to increase the production of goods and services

Quantity demanded

The actual amount of a good or service consumers are willing to buy at some specific price

Market equilibrium

The actual price you see in the world is a balancing act between supply and demand

Production possibilities

The alternative combinations of goods or services that can be provided at the same time given the current resources and capital

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price

Capital

The assets or other financial resources available to a business

Fallacy of composition

The error of assuming that what is true for a member of the group is true for the whole group

Opportunity cost

The most desirable alternative given up as a result of a decision

Microeconomics

The part of economics concerned with single factors and the effects of individual decisions

Equilibrium price

The price that balances quantity supplied and quantity demanded

Specialization

The process of concentrating on and becoming an expert in a certain subject, activity, or field

Supply

The quantity of something that producers have available for sale

Equilibrium quantity

The quantity supplied and the quantity demanded at the equilibrium price

Terms of trade

The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service

Economics

The study of how society manages its scarce resources

Market demand

The sum of the individual demands of all consumers in the market

Law of increasing opportunity cost

To produce more of one good, a successively larger amount of the other good must be sacrificed

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other

Factors of production

land, labor, capital, entrepreneurship

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth