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Scarcity

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Fundamental economic problem of meeting people's visually unlimited wants with scarce resources.

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TINSTAAFL

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There's no such thing as a free lunch.

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Utility

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The pleasure, happiness, or satisfaction obtained from consuming a good or service.

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Rational Self-Interest

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Buying something out of both self-interest and rationality (for example: health care)

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Economics

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Social science concerned with how individuals, institutions, and society make best choices under conditions of scarcity.

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Marginal Analysis

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Comparisons of marginal benefits and marginal costs, usually for decision making.

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Marginal Benefit (MB)

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The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service.

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Marginal Cost (MC)

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The change in the total cost that arises when the quantity produced changes by one unit.

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Economic Principle

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A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.

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Ceteris Paribus

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Commonly known as "All other things being equal".

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Microeconomics

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Branch of economics concerned with individual units such as a person, a household, a firm, or an industry.

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Macroeconomics

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Branch of economics that examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.

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Aggregate

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A collection of specific economic units treated as if they were one unit.

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Positive Economics

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Focuses on facts and cause-and-effect relationships.

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Normative Economics

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Incorporates value judgements about what the economy should be like or what particular actions should be recommended to achieve a desirable goal.

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Economizing Problem

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The need to make choices because economic wants exceed economic means.

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Budget Line

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Schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.

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Trade-offs

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Situations that involve losing one quality aspect of something in return for gaining another quality or aspect.

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Opportunity Costs

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The cost of an alternative that must be forgone in order to pursue a certain action.

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Economic Resources

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All natural, human, and manufactured resources that go into the production of goods and services.

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Land

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All natural resources ("gifts of nature") used in the production process, such as arable land, forests, mineral and oil deposits, and water resources.

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Labor

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Consists of the physical and mental talents of individuals used in producing goods and services.

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Capital

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All manufactured aids used in producing consumer goods and services.

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Investment

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The purchase of capital.

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Entrepreneurial Ability

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A special human resource, distinct from labor.

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Function of an Entrepreneur

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Takes the initiative in combining the resources of land, labor, and capital to produce a good or a service.

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Function of an Entrepreneur

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Makes the strategic business decisions that set the course of an enterprise.

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Function of an Entrepreneur

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Being an innovator.

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Function of an Entrepreneur

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Being a risk bearer.

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Factors of Production

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Land, labor, capital, and entrepreneurial ability. Commonly referred to as "inputs".

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Consumer Goods

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Products that satisfy our wants directly (pizza).

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Capital Goods

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Products that satisfy our wants indirectly by making possible more efficient production of consumer goods (robots).

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Production Possibilities Curve

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A graphical representations of the data presented in a production possibilities table.

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Good

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Material that satisfies human wants and provides utility.

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Services

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An intangible commodity.

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Law of increasing opportunity costs

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As the production of a particular good increases, the opportunity cost of producing an additional unit rises.

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Optimal Output

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The output of a good that, when sold, maximizes profit.

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Economic Growth

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A larger total output.

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Fallacy of composition

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One infers that something is true of the whole from the fact that it is true of some part of the whole.

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Economics system

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A particular set of institutional arrangements and a coordinating mechanism.

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Traditional Economy

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Economic system involving extensive subsistence agriculture or one that otherwise falls outside the definitions of market or command economies.

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Command Economy

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Government owns most property resources and decision making occurs through a central economic plan.

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Market Economy

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Private ownership of resources and the use of markets and prices to coordinate and direct economic activity.

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Socialism

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Government owns most property resources and economic decision making occurs through a central economic plan.

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Laissez-faire

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Government's role would be limited to protecting private property and establishing an environment appropriate to the operation of the market system.

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Private Property Rights

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Enables individuals and businesses to obtain, use, and dispose of property resources as they see fit.

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Freedom of Enterprise

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An economic system where few restrictions are placed on business activities and ownership.

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Freedom of Choice

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Enables owners to employ or dispose of their property and money as they see fit.

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Self-interest

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Motivating force of the various economic units as they express their free choices.

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Competition

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Rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume.

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Market

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An institution or mechanism that brings buyers and sellers into contact.

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Production

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The act of making products (goods and services)

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Technology

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Innovations that solve problems and make life easier.

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Specialization

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The use of resources to produce one or a few goods or services rather than an entire range of goods and services.

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Division of Labor

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Human Specialization

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Medium of Exchange

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The first and most important function of money.

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Barter

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Swapping goods for goods.

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Money

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Convenient social invention to facilitate exchanges of goods and services.

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Five Economic Questions

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1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How will the system accommodate change? 5. How will the system promote progress?

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Consumer Sovereignty

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Consumers are in command - crucial in determining the types and quantities of goods produced.

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Dollar Votes

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Used to register wants in the market.

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Creative Destruction

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Process of industrial mutation that revolutionizes the economic structure from within, destroying the old one, creating the new one.

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Invisible Hand

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Natural phenomenon that guides free markets and capitalism through competition for scarce resources.

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Circular Flow Diagram

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Illustrates the continuous, repetitive flow of goods and services, resources, and money.

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Private Sector

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Part of economy that is not state controlled, and is run by individuals and companies for profit.

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Public Sector

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Part of economy concerned with providing basic government services.

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Households

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Multiple streams of income used to buy goods and services.

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Business Firm

answer

Organization involved in the trade of goods, services, or both to consumers.

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Law of Diminishing Returns

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The marginal product of an employee will eventually decrease as the number of employees increase.

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Paradox of Value

answer

Although water is more useful for survival, diamonds command a higher price in the market.

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Comparative Advantage

answer

The ability to produce goods and/or services at a lower opportunity cost than others.

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Absolute Advantage

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The ability to produce a good or service at a lower cost per unit than any other.

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Protective Tariffs

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Excise taxes or duties placed on imported goods.

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Import quotas

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Limits on the quantities or total value of specific items that may be imported.

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Nontariff Barriers

answer

A form of restrictive trade where barriers to trade are set up and take a form other than a tariff.

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Export Subsidies

answer

Government payments to domestic producers of export goods.

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Depreciation

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A method of allocating the cost of a tangible asset over its useful life.

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Principle of comparative advantage

answer

Total output is greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good.

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Terms of Trade

answer

Value of a country's exports relative to that of its imports

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Trading Possibilities Line

answer

Different combinations of two products that an economy is able to obtain when it specializes in the production of one product and trades it to obtain the other product.

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Productive Efficiency

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The production of any particular good in the least costly way.

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Allocative Efficiency

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The particular mix of goods and services most highly valued by society.

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