Macroeconomics: the branch of Land: any natural resource, including are well suited within the overall
economics that focuses on broad issues actual land, but also trees, plants, production process.
such as growth, unemployment, livestock, wind, sun, water, etc.
economies of scale: when the average
inflation, and trade balance. Economic capital: anything that’s
cost of producing each individual unit
manufactured in order to be used in the
Scarcity means that there are never declines as total output increases.
production of goods and services.
enough resources to satisfy all human
Labor: any human service—physical or Trade and Markets
wants.
intellectual. Also referred to as human Specialization only makes sense if
Every society, at every level, must make capital.
choices about how to use its resources. workers (and other economic agents such
Entrepreneurship: the ability of as businesses and nations) can use their
Economics is the study of the trade-offs someone (an entrepreneur) to recognize a income to purchase the other goods and
and choices that we make, given the fact profit opportunity, organize the other services they need.
of scarcity. factors of production, and accept risk. Specialization requires trade.
Opportunity cost is what we give up Opportunity Cost: the value of the next
when we choose one thing over another. The market allows you to learn a
best alternative. specialized set of skills and then use the
Economic Goods: goods or services a Individual Decisions: In some cases, pay you receive to buy the goods and
consumer must pay to obtain; also called recognizing the opportunity cost can services you need or want.
scarce goods. alter personal behavior.
Monetary Policy: policy that involves
Free Goods: goods or services that a Societal Decisions: Opportunity cost altering the level of interest rates, the
consumer can obtain for free because comes into play with societal decisions. availability of credit in the economy, and
they are abundant relative to the demand. These trade-offs also arise with the extent of borrowing
government policies.
Productive Resources: the inputs used Fiscal Policy: economic policies that
division of labor: the way in which the
in the production of goods and services involve government spending and
work required to produce a good or
to make a profit: land, economic capital,
service is divided into tasks performed Economic Model: a simplified version
labor, and entrepreneurship; also called
by different workers. of reality that allows us to observe,
“factors of production” our productive
specialization: when workers or firms understand, and make predictions about
resources also called factors of
focus on particular tasks for which they economic behavior. Circular Flow
production:
Diagram: a diagram indicating that the
economy consists of households and
firms interacting in a goods-and-services slope: the change in the vertical Line Graphs: show a relationship
market and a labor market. axis divided by the change in the between two variable
horizontal axis.
goods-and-services market (also called Pie Graphs: (sometimes called a pie
the product market), in which firms sell variable: a quantity that can chart) is used to show how an overall
and households buy. assume a range of values. total is divided into parts. A circle
represents a group as a whole.
labor market, in which households sell x-axis: the horizontal line on a
labor to business firms or other graph, commonly represents Bar Graphs: uses the height of different
employees. quantity (q) on graphs in bars to compare quantities.
economics.
real world, there are many different
markets for goods and services and y-axis: the vertical line on a graph, Thinking Like an Economist
markets for many different types of commonly represents price (p) on
When they are trying to explain the
labor. The circular flow diagram graphs in economics.
world, they are scientists.
simplifies these distinctions in order to
Positive slope indicates that two
make the picture easier to grasp. When they are trying to change the
variables are positively related; when world, they are policymakers. Involves
The PRODUCTION POSSIBILITIES one variable increases, so does the other, thinking analytically and objectively,
FRONTIER is a graph showing the and when one variable decreases, the makes use of the scientific method.
various combinations of output that the other also decreases.
POSITIVE STATEMENTS are
economy can possibly produce given the
negative slope indicates that two statements that describe the world as it
available factors of production and is. Called descriptive analysis
variables are negatively related; when
technology. NORMATIVE STATEMENTS are
one variable increases, the other
Function: a relationship or expression decreases, and when one variable statements about how the world should
involving one or more variables. decreases, the other increases. be.Called prescriptive analysis.
Variable: a quantity that can assume a Slope of zero indicates that there is a
Ten Principles of Economics
range of values represented by a letter or constant relationship between two
a symbol. variables: when one variable changes,
Economics is the study of how society
the other does not change.
Intercept: the point on a graph where a manages its scarce resources.
line crosses the vertical axis or horizontal Nonlinear relationships can be
axis. interpreted similar to linear relationships. How People Make Decisions
1.People face tradeoffs. 7. Governments can sometimes improve The Market Forces of Supply and
2.The cost of something is what you give market outcomes. Demand
up to get it. When the market fails government A MARKET is a group of buyers and
the opportunity cost of an item is the can intervene to promote sellers of a
next best alternative choice that you give efficiency and equity. particular product.
up to obtain that item. Market failure occurs when the market Buyers determine demand
3. Rational people think at the margin. fails to allocate resources efficiently. Sellers determine supply
People make decisions by comparing A competitive market is one with many
costs and benefits at the margin. How the Economy as a Whole Works? buyers and sellers,
Marginal changes are small, each has a negligible effect on price.
incremental adjustments to an existing 8. A country’s standard of living depends In a perfectly competitive marketAll
plan of action. on its ability to produce goods & goods exactly the same
4.People respond to incentives. services. Buyers & sellers so numerous that no
Standard of living may be one can affect market price – each is a
How People Interact measured in different ways: “price taker"
By comparing personal incomes. The quantity demanded of any good is
5. Trade can make everyone better off. By comparing the total market
the amount of
Trade allows people to specialize in what value of a nation’s production. the good that buyers are willing and able
they do best. 9. Prices rise when the government prints to purchase.
too much money. Law of demand: the claim that the
Trade increases the variety of
Inflation is an increase in the overall quantity demanded of
goods and services available.
level of prices in the economy. a good falls when the price of the good
Trade lowers costs for consumers
10. Society faces a short-run tradeoff rises, other
6. Markets are usually a good way to
between inflation and unemployment. things equal
organize economic activity.
market economy, households freely The Phillips Curve illustrates the
Demand schedule: a table that shows
decide what to buy and who to work for tradeoff between inflation and the relationship
and firms freely decide who to hire and unemployment: between the price of a good and the
what to produce. Lower prices are the result of high
quantity demanded
Adam Smith made the observation that unemployment and
Demand Curve a graph of the
households and firms interacting in Higher prices are the result of low
relationship between the
markets act as if guided by an “invisible unemployment.
hand.”
price of a good and the quantity SUPPLY &
demanded SUPPLY AND
DEMAND TOGETHER
Income
QUANTITY SUPPLIED - the amount
Normal good – a good for which, other of a good that sellers are willing and able
things to sell.
being equal, an increase in income leads SUPPLY SCHEDULE -as the price
to an rises, supplies a greater and greater
increase in demand quantity.
LAW OF SUPPLY - the claim that
Inferior good – a good for which other other things being equal, the quantity
things being equal, an increase in income supplied of a good rise when the price of
leads to a good rises.
decrease in demand SUPPLY CURVE-the curve relating
price and quantity supplied.
PRICES OF RELATED GOODS INDIVIDUAL SUPPLY - is the amount
EEMAND CURVE of a commodity that a certain company is
Substitutes– two goods for which an willing and able to sell at a specific price
increase in the price of one leads to an during a specific period.
increase in the demand for the other MARKET SUPPLY - is the amount of
a good that all businesses are willing and
Complements– two goods for which an
ready to offer for sale at a specific price
increase in the price of one leads to a
during a specific period.
decrease in the demand for the other
The supply curve shows how price
TASTES-Change in tastes– changes
affects quantity supplied other things
the demand
being equal
EXPECTATIONS -Expectations
CHANGE IN SUPPLY-occurs when a
affect consumers’ buying decisions.
non-price determinant of supply change.
NUMBERS OF BUYERS-market
CHANGE IN THE QUANTITY
demand depends on the number of
SUPPLIED- occurs when the price
buyers
change.
