Unit 1: Basic Economic Concepts

• Microeconomics: The study of the decision-making of individuals, households, and businesses
• Macroeconomics: The study of entire economic systems, looking at the overall economic performance and at aggregates
• Scarcity: Condition arising from our wants exceeding the resources' ability to satisfy them
• Positive statement: Evaluations of what is, what can be tested
• Normative statement: Evaluations of what ought be, what should be in place
• 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
• Theory: Deliberate simplification of relationships to explain how those relationships work
• 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"
• Factor of production: what is used in the production process to produce a good or service
• Output: The quantity of goods or services produced by an individual, business, country, etc.
• Production possibilities frontier: Graphic representation of the different combinations of various goods that a producer can turn out give the available resources and technology
• Efficiency: Measure of how well resources are being used
• Inefficiency: State in which resources are not being used at full employment
• Underemployment: State which exists when resources are not being used in the most efficient way possible
• Economic resources: All natural, human, or manufactured items that help produce goods and services
• Land: Natural resources used to produce goods and services
• Labor: People's physical and mental talents and efforts that are used to produce goods and services
• Capital: Human-made goods that are used to produce other things
• Entrepreneurial ability: Human resource that combines other resources to produce a product, make decisions, innovate, and take risks
• 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
• 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