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Economics

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The study of how society manages its scarce resources

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Microeconomics

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The study of how households and firms make decisions and how they interact in the market

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Macroeconomics

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The study of economy-wide phenomena (inflation, unemployment, price levels, rate of growth, national income, gross domestic product)

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Scarcity

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The limited nature of society's resources

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Opportunity cost

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Whatever must be given up for something else

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Cost/benefit analysis

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A study that compares the costs and benefits to society of providing a public good

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Marginal

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Essentially the next additional unit, product, person, or whatever else you're associating the term with

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Efficiency

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The property of society getting the most it can from its scarce resources

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Equity

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The concept or idea of fairness in economics, particularly in regard to taxation or welfare economics

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Positive

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Positive economics is objective and fact based; positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved

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Normative

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Normative economics is subjective and value based; normative economic statements are opinion based, so they cannot be proved or disproved

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Market economy

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An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

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Traditional economy

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An original economic system in which traditions, customs, and beliefs shape the goods and the services the economy produces, as well as the rules and manner of their distribution

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Command economy

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A system where the government, rather than the free market, determines what goods should be produced, how much should be produced and the price at which the goods will be offered for sale

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Circular flow diagram

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Visual model of the economy; shows how money flows through the markets among households and firms

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Market for goods and services

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Market for the most basic products of an economic system that consist of tangible consumable items and tasks performed by individuals

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Production possibilities curve

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The PPC curve shows the combinations of outputs that the economy can possibly produce given the available factors of production technology

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Specialization

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A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas.

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Comparative advantage

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The ability to produce a good at a lower opportunity cost than another producer

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Absolute advantage

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The ability to produce a good or service using fewer inputs than another producer

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Imports

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Goods provided abroad and sold domestically

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Exports

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Goods produced domestically and sold abroad

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Demand

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An economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa

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Quantity demanded

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The amount of a good that buyers are willing and able to purchase

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Shift determinants (demand)

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Income, number of buyers, substitutes, expectation of future cost, complements, tastes and preferences

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Shift determinants (supply)

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Technology, expectation of future price, number of sellers, taxes, regulations, input costs, profit other products, subsidies

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Diminishing marginal utility

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a law of economics stating that as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

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Shift in demand vs. movement along curve

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A shift in demand will arise from any of the demand determinants, however movement along the demand curve will only occur when the market for a product only had a price change

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Normal good

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A good that experiences an increase in demand as the real income of an individual or economy increases

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Inferior good

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A good for which demand declines as the level of income or real GDP in the economy increases

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Substitutes

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Two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise; substitutes have a positive cross elasticity of demand

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Complements

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A good with a negative cross elasticity of demand, in contrast to a substitute good; the good's demand is increased when the price of another good is decreased

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Ceteris paribus

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'all other things remaining constant'

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Supply

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A fundamental economic concept that describes the total amount of a specific good or service that is available to consumers; can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph

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Law of Supply

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The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

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Quantity supplied

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The amount of a good that sellers are willing and able to sell

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Supply curve

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The graph of the relationship between the price of a good and the quantity supplied

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Inputs

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Factors of production, resources, or inputs are what is used in the production process to produce output—that is, finished goods and services

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Equilibrium price/quantity

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Equilibrium price is the price that balances quantity supplied and quantity demanded; equilibrium quantity is the quantity supplied and the quantity demanded at the equilibrium price

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Surplus

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A situation in which quantity supplied is greater than quantity demanded

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Shortage

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A situation in which quantity demanded is greater than quantity supplied

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Shift in supply vs. movement along curve

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A shift in supply will arise from any of the supply determinants, however movement along the demand curve will only occur when there is a change in price of a good or service

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Elasticity

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A measure of a variable's sensitivity to a change in another variable; refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes

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Inelastic/Perfectly inelastic

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An economic term used to describe the situation in which the quantity of a good or service is unaffected when the price of that good or service changes

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Elastic/perfectly elastic

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An economic term referring to the change in behavior that buyers and sellers have in response to a price change for a good or service/perfectly elastic means an infinitesimally small change in price results in an infinitely large change in quantity demanded or supplied

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Price elasticity of demand

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A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

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Cross-price elasticity of demand

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A measure pf how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

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Elasticity of supply

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Measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. High elasticity indicates the supply is sensitive to changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity means no relationship with price

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Income elasticity

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A measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

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Price ceiling

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

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Price floor

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

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Tax incidence

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the manner in which the burden of a tax is shared among participants in a market

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Total surplus

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This equals the total area for the consumer surplus plus the total area for the producer surplus

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Consumer surplus

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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

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Producer surplus

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the amount a seller is paid for a good minus the seller's cost of providing it

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Marginal buyer

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The buyer who would leave the market is the price were any higher

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Tax revenue

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The tax revenue is the sum of the revenues of different kind of taxes, depending on what is taxed

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Deadweight loss

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The fall in total surplus that results from a market distortion, such as a tax

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Laffer curve

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This curve shows the relationship between tax rates and tax revenue collected by governments

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Domestic price

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The current price for a specific good or service in an economy

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World Price

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The price of a good on the "world market," meaning the price outside of any country's borders and therefore exclusive of any trade taxes or subsidies that might apply crossing a border into a country but inclusive of any that might apply crossing out of a country

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Tariff

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A tax on goods produced abroad and sold domestically

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Quota

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A government-imposed trade restriction that limits the number, or in certain cases the value, of goods and services that can be imported or exported during a particular time period

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Externality

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The uncompensated impact of one person's actions on the well-being of a bystander

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Negative externality

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A cost that is suffered by a third party as a result of an economic transaction

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Positive externality

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This occurs when the consumption or production of a good causes a benefit to a third party

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Internalizing the externality

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Altering incentives so that people take account of the external effects of their actions

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Private solutions

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Private actors will sometimes effectively address externalities and reach efficient outcomes without government intervention

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Coase theorem

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A legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided; asserts that when property rights are involved, parties naturally gravitate toward the most efficient and mutually beneficial outcome

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Command and control policies

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Focuses on preventing environmental problems by specifying how a company will manage a pollution-generating process

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Pigovian tax

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A special tax that is often levied on companies that pollute the environment or create excess social costs, called negative externalities, through business practices

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Tradable permits

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Rights to sell and buy actual or potential pollution in artificially created markets

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Public good

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Goods that are neither excludable nor rival in consumption

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Private good

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Goods that are both excludable and rival in consumption

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Excludability

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The property of a good whereby a person can be prevented from using it

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Rival

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A good whose consumption by one consumer prevents simultaneous consumption by other consumers

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Natural monopoly

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A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

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Common resource

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Goods that are rival in consumption but not excludable

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Costs

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The value of everything a seller must give up to produce a good

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Implicit costs

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Input costs that do not require an outlay of money by the firm

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Explicit costs

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Input costs that require an outlay of money by a firm

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Accounting profit

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Total revenue minus total explicit cost

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Economic profit

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Total revenue minus total cost, including both explicit and implicit costs

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Total revenue

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(for a firm) the amount a firm receives for the sale of its output; (in a market) the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

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Total costs

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The market value of the inputs a firm uses in production

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Fixed costs

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Costs that do not vary with the quantity of output produced

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Sunk costs

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A cost that has already been committed and cannot be recovered

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Variable costs

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Costs that vary with the quantity of output produced

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Average costs

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(average fixed cost) fixed cost divided by the quantity of output; (average total cost) total cost divided by the quantity of output; (average variable cost) variable cost divided by the quantity of output

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Marginal costs

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The increase in total cost that arises from an extra unit of production

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Diminishing marginal product

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The property whereby the marginal product of an input declines as the quantity of the input increases

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Efficient scale

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The quantity of output that minimizes average total cost

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Allocative efficiency

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A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing

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Productive efficiency

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This is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost; productively efficient means the economy must be producing on its production possibility frontier

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Economies of scale

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The property whereby long-run average total cost falls as the quantity of output increases

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Diseconomies of scale

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The property whereby long-run average total cost rises as the quantity of output increases

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Constant returns to scale

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The property whereby long-run average total cost stays the same as the quantity of output changes

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Perfect competition

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A market structure in which the following five criteria are met: 1) All firms sell an identical product; 2) All firms are price takers - they cannot control the market price of their product; 3) All firms have a relatively small market share; 4) Buyers have complete information about the product being sold and the prices charged by each firm; and 5) The industry is characterized by freedom of entry and exit

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Imperfect competition

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A type of market that does not operate under the rigid rules of perfect competition; forms of imperfect competition include monopoly, oligopoly, monopolistic competition, monopsony and oligopsony.

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Monopoly

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A firm that is the sole seller of a product without close substitutes

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Oligopoly

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A market structure in which only a few sellers offer similar or identical products

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Monopolistic competition

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A market structure in which many firms sell products that are similar but not identical

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