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Absolute advantage

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The ability to produce more units of a good or service than some other producer, using the same quantity of resources.

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Adam Smith

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He is the father of modern economics. He wrote An Inquiry in the Nature and Causes of the Wealth of Nations which was published in 1776 and explained the nature of economic exchange and the role of government in the economy.

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Benefits

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Monetary or non-monetary gain received because of an action taken or a decision made

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Business cycle

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Fluctuations in the overall rate of national economic activity with alternating periods of expansion and contraction; these vary in duration and degrees of severity; usually measured by real gross domestic product (GDP).

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Capital

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manmade goods, such as tools, which are used to produce other goods.

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Choice

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the condition that arises from unlimited wants and limited resources;

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Circular Flow

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The movement of output and income from one sector of the economy to another; often illustrated as a circular flow diagram.3

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Command economy

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An economy in which most economic issues of production and distribution are resolved through central planning and control.

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Comparative advantage

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The ability to produce a good or service at a lower opportunity cost than some other producer. This is the economic basis for specialization and trade.

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Consumer price index

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A price index that measures the cost of a fixed basket of consumer goods and services and compares the cost of this basket in one time period with its cost in some base period. Changes in the CPI are used to measure inflation.

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Consumer Sovereignty

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The concept that consumers rule and buyers ultimately determine which goods and services remain in production.

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Corporation

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A legal entity owned by shareholders whose liability for the firm's losses is limited to the value of the stock they own.

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Cost-benefit analysis

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A process of examining the benefits (positive results) and costs (what is given up - lost benefits) of each available alternative in arriving at a decision.

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Costs

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An amount that must be paid or spent to buy or obtain something. The effort, loss or sacrifice necessary to achieve or obtain something. The money spent for the inputs used in producing a good or service1 (see cost of production).

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Decision

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A conclusion reached after considering alternatives and their results.

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Demand

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The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time.

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Demand curve

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A graph used to show the data from a demand schedule. The vertical axis shows the price and the horizontal access shows the quantity demanded. A demand curve shows an inverse relationship - the curve slopes downward from left to right.

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Demand schedule

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A table showing the quantity demanded of a good or service corresponding to a number of prices.

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Determinants of Demand

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Factors other than the price of a good or service that change (shift) the demand schedule, causing consumers to buy more or less at every price. Factors include income, number of consumers, preferences and prices of related goods.

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Determinants of Supply

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Factors other than the price of a good or service that change (shift) the supply schedule, causing producers to supply more or less at every price. Factors include number of producers, production costs, and technology and productivity.

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Diminishing marginal utility

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A widely observed relationship in which the additional satisfaction (marginal utility) associated with consuming additional units of the same product in a given amount of time eventually declines.

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Elasticity of Demand

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Price elasticity of demand is the percentage change in quantity demanded as a result of the percentage change in demand price. Generally, a relative response of a change in quantity demanded to a relative change in price.

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Elasticity of Supply

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Price elasticity of supply is the percentage change in quantity supplied as a result of the percentage change in demand price. Generally, a relative response of a change in quantity supplied to a relative change in price.

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Entrepreneurs

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People who take calculated risks in order to start new businesses and develop innovative products and processes. A person who draws upon his or her skills and initiative to launch a new business venture with the aim of making a profit. Often a risk-taker, inclined to see opportunity when others do not.

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Equilibrium price

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The price at which the quantity demanded by buyers equals the quantity supplied by sellers; also called the market-clearing price.

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Equilibrium quantity

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The quantity demanded and quantity supplied at the equilibrium or market-clearing price.

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Exports

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domestic goods and services that are sold to buyers in other nations.

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Gross Domestic Product (GDP)

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The market value of all final goods and services produced in a country in a calendar year.

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Gross Domestic Product per Capita (GDP per capita)

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The market value of all final goods and services produced in a country in a calendar year divided by the total population.

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Human capital

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The health, education, experience, training, skills and values of people.

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Imports

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foreign goods and services that are purchased from sellers in other nations.

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Inflation

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A rise in the general or average price level of all the goods and services produced in an economy. Can be caused by pressure from the demand side of the market (demand-pull inflation) or pressure from the supply side of the market (cost-push inflation).

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Law of demand

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As the price of a good or service rises (or falls), the quantity of that good or service that people are willing and able to buy during a certain period of time falls (or rises); that is, price and quantity demanded are inversely related.

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Law of Supply

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Producers will produce more when they can sell at a high price and less at a low price; in other words, price and quantity supplied are directly related.

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Marginal analysis

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A decision-making tool for comparing the additional or marginal benefits of a course of action to the additional or marginal costs.

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Marginal benefit

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The additional gain from consuming or producing one more unit of a good or service; can be measured in dollars or satisfaction. The benefit gained by consuming one more of something.

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Marginal cost

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The increase in a producer's total cost when it increases its output by one unit. The cost incurred by consuming one more of something.

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Market

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Places, institutions or technological arrangements where or by means of which goods or services are exchanged. Also, the set of all sale and purchase transactions that affect the price of some good or service.

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Market economy

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An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, each of them pursuing their own self-interest.

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Negative incentive

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A penalty that discourages a behavior (e.g., library fine, parking ticket).

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Opportunity cost

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The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another.

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PACED decision-making process

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A decision-making process designed to help people solve problems in a rational, systematic way. It includes the following steps: State the Problem, List Alternatives, Identify Criteria, Evaluate Alternatives, and Make a Decision.

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Positive incentive

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A reward or other enticement that encourages a behavior (e.g., prize, wages).

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Price

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The amount of money that people pay when they buy a good or service; the amount they receive when they sell a good or a service.

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Productivity

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The amount of output (goods and services) produced per unit of input (productive resources) used

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Profit

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The amount remaining when all costs are subtracted from all revenues.

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Recession

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A decline in the rate of national economic activity, usually measured by a decline in real GDP for at least two consecutive quarters (i.e., six months).

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Resources

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Things that we have that are in limited supply and which may include personal resources (financial, skill, time) or productive resources (capital resources, human resources, natural resources and entrepreneurship).

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Revenue

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The income generated by the sale of goods and services (price × quantity).

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Salary

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A regular payment, often at monthly or biweekly intervals, made by an employer to an employee, especially in the case of professional or white-collar employees. Salaries are paid for services rendered and are not based on hours worked.

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Scarcity

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the condition of not being able to have all the goods and services one wants. It exists because human wants for goods and services exceed the quantity of goods and services that can be produced from all available resources.

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Shortage

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The situation that results when the quantity demanded for a product exceeds the quantity supplied. Generally happens because the price of the product is below the market equilibrium price.

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Specialization

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A situation in which people produce a narrower range of goods and services than they consume. Specialization increases productivity; it also requires trade and increases interdependence.

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Supply

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The amount of a good or service that producers are willing and able to offer for sale at each possible price during a given period of time.

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Surplus

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The situation that results when the quantity supplied of a product exceeds the quantity demanded. Generally happens because the price of the product is above the market equilibrium price.

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Trade-offs

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The giving up of one benefit or advantage in order to gain another regarded as more favorable.

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Unemployment

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The number of people (over the age of 15) without jobs who are actively seeking work.

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Unemployment rate

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The number of unemployed people, expressed as a percentage of the labor force.

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Unintended consequences

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The unexpected and unplanned results of a decision or action.

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Voluntary exchange

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Trading goods and services with other people because both parties expect to benefit from the trade

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Wage

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Payments for labor services that are directly tied to time worked, or to the number of units of output produced.

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Wants

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Desires that can be satisfied by consuming or using a good or service.

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