DEFINITIONS

 

Economics: The study of how individuals and societies seek to satisfy their needs and wants.

 

Needs: Products that are essential.

 

Universal Needs: Products that are essential for everyone.

 

Nonuniversal needs: Products that are essential to groups or individuals.

 

Wants: Non-essential products that individuals and/or societies desire.

 

Basic Ecnomic Truth: There are not enough resources to satisfy everyone's wants and some people do not even get their needs.

 

Rational Self Interest: In making choices, people will choose the alternative that has the greatest net benefit.

 

Macroeconomics: The study of economics relevant to complete economic systems.

 

Microeconomics: The study of economics relevant to individuals, families, and businesses.

 

Scarcity: Limited quantities of resources to meet unlimited needs and/or wants.

 

Shortage: When the excess demand/ scarcity is the result of low prices.

 

Products: The goods and services produced by businesses.

 

Goods: Physical items such as a desk, a chair, a pencil, or a pen.

 

Services: Actions that individuals perform for others such as the dentist that cleans your teeth, the teacher that educates you

 

Standard of Living: How well a society satisfies its need and wants.

 

Gross Domestic Product "GDP": The value of all the goods and services produced by a nation.

 

Per-Capita "GDP": The value of all the goods and services produced by a nation divided by its population.

 

Market: A place where a transaction takes place between a buyer and a seller.

 

Self-interests: Doing something for one's own personal gain.

 

Incentives: An expectation that encourages or motivates people to behave a certain way.

 

Free Transactions: A transaction between two or more parties that is not coerced. THe motivation being increased satisfaction for all parties.

 

Quotas: Limitations on imported goods.

 

Tariffs: Taxes on imported goods.

 

Globalization: Increasing economic interdependency and relationships of various systems and societies.

 

Trade deficit: The net excess value of imports in comparison to exports. (How much more we import than we export.)

 

Trade offs: All the possible choices and options that you have when making a choice.

 

Opportunity Cost: The next best alternative or next most satisfying choice sacrificed when a choice is made?

Guns or Butter: The choice that the government makes between allocating scarce resources to satisfying either the military or the non-military needs and wants of our society (nation).

 
Probability: Something that has a reasonable chance of happening/occurring.

 

Possibility: Something that while highly unlikely could conceivably happen/occur. For example: Mr. Lopez dating Shakira.

 

Household: One or more people living together

 

Business: The producer of goods and/or services.

 

Profit: The net gain or satisfaction that results from a transaction, not always financial.

Institutions: Organizations primarily government that determine the economic system and incentives that control behavior. (Also includes culture, religions, morality, superstitions.)

 

Positive incentive: The expectation of a reward or profit that encourages or motivates people to behave a certain way

 

Negative incentive: The expectation of a punishment or cost that encourages or motivates people to behave a certain way

 

Sunk costs: Costs that have already been incurred.

 

Factors of Production: The three types of resources , land , labor, and capital that are used to produce all goods and services.

 

Land: Natural resources that are used to produce goods and services.

 

Labor: The efforts of people devoted to a task for which they are compensated.

 

Capital: Human made resources that are used to produce goods or services.

 

Human Capital: The knowledge and skills gained by experience or from education.

 

Physical Capital: Human made goods that are used to produce goods and services.

 

Factor market: Market where businesses purchase factors of production from households.

 

Product market: Market where households purchase products (goods and services) from businesses.

 

Factor Payments: The monies received by the households for selling their factors of production in the factor market. Examples: Rent, salaries, wages, interests, and dividends

 

Land: Land and natural resources.

 

Labor: The physical efforts of individuals.

 

Capital: Man-made goods and/or knowledge and skills.

 

Human capital: Knowledge and skills acquired from education or experience.

 

Physical goods: Man made products

Economic System: The method used by a society in seeking to satisfy its needs and wants.

Intermediaries: Third parties that facilitate transactions in a market.

 

Specialization: The concentration of the productive efforts of individuals and/or businesses on a limited number of tasks.

 

Thinking at the Margin: Making decisions in increments or units. For example, should I study another hour? Should we hire another worker?

 

Marginal Benefit: The benefit of an additional increment or worker. For example, what is the benefit of remaining in Iraq another day.

 

Marginal Cost: The cost of an additional increment or unit. For example, the cost of hiring an additional worker.

 
Net Marginal Benefit: The profit from additional unit or increment . (MB-MC=NMB)

 

Law of Diminishing Returns: The tendency that with each additional increment or unit, the marginal benefit declines. For example , I initially enjoyed listening to Cher but after hearing the song three times, I could not stand hearing it again.

 

Utility: The satisfaction derived from a good or service.

 

Production Possibilities Schedule: A table showing the different combinations of two products that can be produced.

Production Possibilities Graph: A graph illustrating the different combinations of two products that can be produced.

Law of Increasing Cost: Producing a increasing quantity of one product will result in an increasing opportunity cost of another.

 

Centrally Planned System: A socialist economic system that provides for the government to make the important economic decisions.

 

Free Market Economy: A capitalist economic system in which most economic decisions occur as a result of transactions in markets.

 

Mixed Market System: A capitalist economic system in which most economic decisions occur as a result of transactions in markets subject to government regulations.

Socialism: Those economic systems based upon the government making important economic decisions. These systems believe the market cannot be trusted to make decisions in the best common interests.

Public goods: Shared goods and services that can be most efficiently provided by the government.

Free Rider: Someone who would not choose to pay for a benefit that they would get anyway.

Capitalism: Economic systems where decisions are made in the marketplace and that are based upon four principles: The Rule of Law, Entrepreneurship, Private Property Rights, and the Free Transaction.

Consumer Sovereignty: The idea that the consumer in a free or mixed economic system determines which goods and services are produced by voting with their money.

Invisible Hand: The self regulating nature of the free market.

Inferior goods: Goods we would not purchase if we had more money.

Normal goods: Goods that we would purchase if we had more money.

Marking Clearing Price: The price at which both the buyer and seller are most satisfied and transactions occur most efficiently.

Rule of Law: The principle that all are equally subject to the law.

Private Property: Property that belongs to individuals and/or businesses.

Socialism: Economic systems that are based upon having the government "participate" in many economic decisions seeking the common good.

Fiscal Policy: Actions taken by the government with regards to the economy: Examples: Increase or decrease taxes and/or tax credits and increase or decrease government spending.

Monetary Policy: Actions taken by the Federal Reserve Bank ("The FED") with regards to the economy. Examples: Increase or decrease interest rates, increase or decrease the money supply.

Federal Reserve Bank ("the FED"): The Central Bank of the United States, the bank of the government and the bank for banks.

Inflation: A general increase in prices.

Deflation: A general decrease in prices.

 

Entrepreneur: A person who takes a risk to start a business hoping to make a profit.

Free Rider or Free loader: Someone who would not choose to pay for a good or service but would get the benefits of it anyway.


Externality: An economic side effect of a good or service that generates cost or benefits to another third person.

Positive externality: The positive benefit generated to another person by the production of a good or service.

Negative externality: The negative cost generated to another person by the production of a good or service.

Cartel: A group of businesses producing the same good or service attempting to control the market price of their product.

Collusion: An agreement by a group of businesses to divide the market and/or set prices for their product.

 

Demand: The desire to own something and the ability to pay for it.

Law of Demand: If the price increases the quantity demanded decreases OR if the price decreases than the quantity demanded will increase.

Income or Wealth Effect: If a person feels poorer they will spend less OR if a person feels richer they will spend more.

Substitution Effect: Consumers will react to an increase in the price of a good by purchasing less of that good and more of another that can be used in place of the first good.

Substitutes: Goods that can be used in lieu or in place of each other.

Complementary Goods: Goods that are purchased to be used together.

 

Elasticity of Demand: A measure of how consumers will react to a change in price.

Inelastic: Demand that is not sensitive to price. (Consumers will still buy it even at the higher price)

Elastic: Demand that is sensitive to price. (If the price increases consumers will reduce the quantity demanded)

Individual Demand Schedule/Graph: A table/graph that shows the quantity that an individual (one person) will demand at various prices.

Market Demand Schedule/Graph: A table/graph that shows the quantity that a market (group of people) will demand at various prices.

 

Supply: The amount of products (goods and/or services) available

Law of Supply: If the price increases the quantity supplied increases OR if the price decreases the quantity supplied decreases.

 

Elasticity of Supply: A measure of how businesses will respond to a change in price.

Fixed costs: A cost that does not change.

Variable costs: A cost that increases or decreases depending on the level of production.

Production costs: The cost of producing a good or service.

Subsidy: A payment by the government to a business.

Excise tax: A tax of a good or service.

Individual Supply Schedule/Graph: A schedule/graph showing the quantity supplied by one business at various prices.

Market Supply schedule/Graph: A schedule/graph showing the quantity supplied by a group of businesses at various prices.

Equilibrium: When the quantity demanded is equal to the quantity supplied.

Disequilibrium: When the quantity demanded is NOT equal to the quantity supplied.

Price: The compensation given for a good or service.

Competition: Rivalry between businesses for consumers' dollars.

Price ceiling: The maximum price that can legally be charged for a good or service. Example: Rent control.

Price Floor: The minimum price that can legally be paid for a good or service. Example: Minimum wage.

 

Underutilization: When an economy is not producing to its full capability. On a production possibilities gtraph it is any point below the line.

 

 

Entrepreneurship: The ability to take a risk to start a business hoping to make a profit.