Unit 1: Basic Economic Concepts

• Macroeconomics: The study of entire economic systems, looking at the overall economic performance and at aggregates
• Normative statement: Evaluations of what ought be, what should be in place
• Traditional economy: Economic system governed by traditions, customs, belief systems
• Market economy: Economic system in which consumers and producers make decisions by "voting with dollars"
• Mixed economy: Economic system in which elements of other economic systems are mixed together
• Model 


  Simplified, small-scale version of some economic aspect
• Assumption: Something that is accepted as true or as certain to happen without proof
• Incentive: Reward or penalty that encourages or discourages an action
• Ceteris paribus 


  "With other things held the same"
• Output: The quantity of goods or services produced by an individual, business, country, etc.
• Efficiency 


  Measure of how well resources are being used
• Inefficiency: State in which resources are not being used at full employment
• Law of increasing opportunity costs: If units of a resource are added to fixed quantities of other resources, eventually the additional output will decline
• Unemployment: Number of people who want to work yet are not employed
• Economic resources: All natural, human, or manufactured items that help produce goods and services
• Land 


  Natural resources used to produce goods and services
• Entrepreneurial ability: Human resource that combines other resources to produce a product, make decisions, innovate, and take risks
• Trade-off: When all resources are being used efficiently, in order to increase the production of one good, the decision-maker must decrease the production of another good
• Free lunch: Ability to increase production of both goods without giving up anything because resources are being used inefficiently
• Opportunity cost: Value of next-best alternative that the decision forces the decision-maker to forgo, usually given in terms of another alternative
• Marginal analysis: A method of calculating optimal decision by testing whether, and by how much, a small change in a decision will move things toward or away from a goal
• Comparative advantage: The ability of a party to produce a particular good or service at a lower opportunity cost than another party
• Absolute advantage: The ability of a party to produce more of a good or service than another party using the same amount of resources
• Optimal decision: The choice that best serves the objectives of the decision-maker
• Circular flow model: Simple economic model illustrating the flow of goods and services through an economy