Chapter 1 (The Scope and Method of Economics)

economics- the study of how individuals and societies choose to use the scarce resources that
nature and previous generations have provided
opportunity cost- the best alternative that we forgo, or give up, when we make a choice or
decision
scarce- limited
marginalism- the process of analyzing the additional or incremental costs or benefits arising
from a choice or decision
sunk costs- costs that cannot be avoided because they have already been incurred
efficient market- a market in which profit opportunities are eliminated almost instantaneously
Industrial Revolution- The period in England during the late eighteenth and early nineteenth
centuries in which new manufacturing technologies and improved transportation gave rise to the
modern factory system and a massive movement of the population from the countryside to the
cities
microeconomics- the branch of economics that examines the functioning of individual industries
and the behavior of individual decision-making units—that is, firms and households
macroeconomics- the branch of economics that examines the economic behavior of aggregates-
income, employment, output, and so on—on a national scale
positive economics- an approach to economics that seeks to understand behavior and the
operation of systems without making judgments. It describes what exists and how it works
normative economics- an approach to economics that analyzes outcomes of economic behavior,
evaluates them as good or bad, and may prescribe courses of action. Also called policy
economics
descriptive economics- the compilation of data that describe phenomena and facts
economic theory- a statement or set of related statements about cause and effect, action and
reaction
model- a formal statement of a theory, usually a mathematical statement of a presumed
relationship between two or more variables
variable- a measure that can change from time to time or from observation to observation
Ockham’s razor- the principle that irrelevant detail should be cut away
ceteris paribus or all else equal- a device used to analyze the relationship between two variables
while the values of other variables are held unchanged
post hoc, ergo propter hoc- literally, “after this (in time), therefore because of this.” A common
error made in thinking about causation. If Event A happens before Event B, it is not necessarily
true that A caused B
fallacy of composition- the erroneous belief that what is true for a part is necessarily true for the
whole
empirical economics- the collection and use of data to test economic theories
efficiency- in economics, allocative efficiency. An efficient economy is one that produces what
people want at the least possible cost
equity- fairness
economic growth- an increase in the total output of an economy
stability- a condition in which national output is growing steadily, with low inflation and full
employment of resources
Chapter 2 (The Economic Problem: Scarcity and Choice)

capital- things that are produced and then used in the production of other goods and services
factors of production (or factors)- the inputs into the process of production. Another term for
resources
production- the process that transforms scarce resources into useful goods and services
inputs or resources- anything provided by nature or previous generations that can be used
directly or indirectly to satisfy human wants
outputs- goods and services of value to households
opportunity cost- the best alternative that we give up, or forgo, when we make a choice or
decision
theory of competitive advantage- Ricardo’s theory that specialization and free trade will
benefit all trading parties, even those that may be “absolutely” more efficient producers
absolute advantage- a producer has an absolute advantage over another in the production of a
good or service if he or she can produce that product using fewer resources
comparative advantage- a producer has a comparative advantage over another in the production
of a good or service if he or she can produce that product at a lower opportunity cost
consumer goods- goods produced for present consumption
investment- the process of using resources to produce new capital
production possibility frontier (ppf)- a graph that shows all the combinations of goods and
services that can be produced if all of society’s resources are used efficiently
marginal rate of transformation (MRT)- the slope of the production possibility frontier (ppf)
economic growth- an increase in the total output of an economy. It occurs when a society
acquires new resources or when it learns to produce more using existing resources
command economy- an economy in which a central government either directly or indirectly sets
output targets, incomes, and prices
laissez-faire economy- literally from the French “allow [them] to do.” An economy in which
individual people and firms pursue their own self-interest without any central direction or
regulation.
market- the institution through which buyers and sellers interact and engage in exchange
consumer sovereignty- the idea that consumers ultimately dictate what will be produced (or not
be produced) by choosing what to purchase (and what not to purchase).
free enterprise- the freedom of individuals to start and operate private businesses in search of
profits
Chapter 3 (Demand, Supply, and Market Equilibrium)

firm- an organization that transforms resources (inputs) into producers (outputs). Firms are the
primary producing units in a market economy.
entrepreneur- a person who organizes, manages, and assumes the risks of a firm, taking a new
idea or a new product and turning it into a successful business.
household- the consuming units in an economy.
product or output markets- the markets in which goods and services are exchanged.
input or factor markets- the markets in which the resources used to produce goods and services
are exchanged.
labor market- the input/factor market in which households supply work for wages to firms that
demand labor.
capital market- the input/factor market in which households supply their savings, for interest or
for claims to future profits, to firms that demand funds to buy capital goods.
land market- the input/factor market in which households supply land or other real property in
exchange for rent.
factors of production- the inputs into the production process. Land, labor and capital are the three
key factors of production.
quantity demanded- the amount (number of units) of a product that a household would buy in a
given period if it could buy all it wanted at the current market price.
demand schedule- a table showing how much of a given product a household would b eiwlling to
buy at different prices.
demand curve- a graph illustrating how much of a given product a household would be willing to
buy at different prices.
law of demand- the negative relationship between price and quantity demanded. As price rises,
quantity demanded decreases; as price falls, quantity demanded increases.
income- the sum of all a household’s wages, salaries, profits, interest payments, rents, and other
forms of earnings in a given period of time. It is a flow measure.
wealth or net worth- the total value of what a household owns minus what it owes. It is a stock
measure.
normal goods- goods for which demand goes up when income is higher for which demand goes
down when income is lower.
inferior goods- goods for which demand tends to fall when income rises.
substitutes- goods that can serve as replacements for one another; when the price of one
increases, demand for the other increases.
perfect substitutes- identical products.
complements, complementary goods- goods that “go together”; a decrease in the price of one
results in an increase in demand for the other and vice versa.
shift of a demand curve- the change that takes place in a demand curve corresponding to a new
relationship between quantity demanded of a good and price of that good. The shift is brought
about by a change in the original conditions.
movement along a demand curve- the change in quantity demanded brought about by a change in
price.
market demand- the sum of all the quantities of a good or service demanded per period by all the
households buying in the market for that good or service.
profit- the difference between revenues and costs.
quantity supplied- the amount of a particular product that a firm would be willing and able to
offer for sale at a particular price during a given time period.
supply schedule- a table showing how much of a product firms will sell at alternative prices.
law of supply- the positive relationship between price and quantity of a good supplied. An
increase in market price will lead to an increase in quantity supplied, and a decrease in market
price will lead to a decrease in quantity supplied.
supply curve- a graph illustrating how much of a product a firm will sell at different prices.
movement along a supply curve- the change in quantity supplied brought about by a change in
price.
shift of a supply curve- the change that takes place in a supply curve corresponding to a new
relationship between quantity supplied of a good and the price of that good. The shift is brought
about by a change in the original conditions.
market supply- the sum of all that is supplied each period by all producers of a single product.
equilibrium- the condition that exists when quantity supplied and quantity demanded are equal.
At equilibrium, there is no tendency for price to change.
excess demand or shortage- the condition that exists when quantity demanded exceeds quantity
supplied at the current price.
excess supply or surplus- the condition that exists when quantity supplied exceeds quantity
demanded at the current price.