Economics Terms

What is Economics?

• Microeconomics - The branch of economics that studies the economy of consumers or households or individual firms.

• Macroeconomics - The branch of economics that studies the overall working of a national economy.

• Scarcity - Scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants, in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs

• Economic Efficiency - The use of resources so as to maximize the production of goods and services.

• Economic Equity - Equity is the concept or idea of fairness.

• Opportunity Cost - The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity).

• Productivity - The ratio of the quantity and quality of units produced to the labor per unit of time.

• Inflation - A general and progressive increase in prices.

• Phillips Curve - A historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation.

• Market Power - The ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors.

• Externality - A cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit.

• Market Failure - A concept within economic theory wherein the allocation of goods and services by a free market is not efficient.

• Market Economy - A market economy is an economy based on the power of division of labor in which the prices of goods and services are determined in a free price system set by supply and demand.

Thinking Like an Economist

• Marginal Change - A small change in some quantity.

• Production Possibilities Frontier - A graph that shows the different rates of production of two goods and/or services that an economy can produce efficiently during a specified period of time.

• Circular-Flow Model - A simple economic model which describes the reciprocal circulation of income between producers and consumers.

• Positive Statement - A statement about what actually is (was or will be), as opposed to what ought to be. An expression that can be verified by observation.

• Normative Statement - expresses a judgement about whether a situation is desirable or undesirable. "The world would be a better place if the moon were made of green cheese" is a normative statement because it expresses a judgement about what ought to be.

• Comparative Advantage - The ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party.

• Absolute Advantage - The ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.

• Import - Commodities (goods or services) bought from a foreign country.

• Export - Commodities (goods or services) sold to a foreign country.

The Market Forces of Supply and Demand

• Supply - Offering goods and services for sale

• Demand - The consumer's willingness and ability to purchase some quantity of a commodity-based on the price of that commodity.

• Shortage - A disparity between the amount demanded a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus.

• Surplus - an excess of production or supply over demand.

• Equilibrium Price - The market price at which the quantity supplied of a commodity equals the quantity demanded.

• Equilibrium Quantity - The quantity demanded and supplied at the equilibrium price, where demand equals supply.

• Supply Curve - The graph of quantity supplied as a function of price, normally upward sloping, straight or curved, and drawn with quantity on the horizontal axis and price on the vertical axis.

• Supply Schedule - A table showing for selected values the relationship between the quantity of some product that producers wish to make and sell per period of time and the price of that product, other things being equal.

• Law of Supply - The tendency of suppliers to offer more of a good at a higher price. The relationship between price and quantity supplied is usually a positive relationship. A rise in price is associated with a rise in quantity supplied.

• Law of Demand - Consumers buy more of a good when its price decreases and less when its price increases.

• Quantity Supplied - The specific number of units of a product in the economy that is provided by producers at a given price level.

• Demand Curve - The graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule.

• Demand Schedule - A list of prices and corresponding quantities demanded, or the graph of that information.

• Complement Good - Goods that, "go together." Such as cookie dough and chocolate chips.

• Substitute Good - Goods which may replace each other in use.

• Inferior Good - A good that decreases in demand when consumer income rises.

• Normal Good - A good that increases in demand when consumer income rises.

• Quantity Demanded - The amount of a product that consumers wish to purchase in some time period.

• Competitive Market - An economic environment where those selling and those buying exchange goods and services at a price-controlled by that market. Customers have the option of purchasing their energy from more than one provider.

• Market - A market is any one of a variety of different systems, institutions, procedures, social relations, and infrastructures whereby a person's trade and goods and services are exchanged, forming part of the economy. It is an arrangement that allows buyers and sellers to exchange items.

• Price Elasticity of Supply - The sensitivity of supply of a product to changes in its price.

• Cross-Price Elasticity of Demand - Measures the responsiveness of the demand for a good to a change in the price of another good.

• Income Elasticity of Demand - The responsiveness of the demand for a good to a change in the income of the people demanding the good. It is calculated as the ratio of the percentage change in demand to the percentage change in income.

• Revenue - Income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

• Price Elasticity of Demand - A measure used in economics to show the responsiveness, or elasticity, of the quantity, demanded of a good or service to a change in its price.

• Elasticity - The ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a unit-less way.

International Trade

• Price Ceiling - A government-imposed limit on the price charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable.

• Price Floor - A government- or group-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price.

• Tax Incidence - The analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax.

• Producer Surplus - The amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for.

• Cost - The total spent on goods or services including money and time and labor.

• Consumer Surplus - The amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay.

• Willingness to Pay - The maximum amount a person would be willing to pay, sacrifice or exchange for a good.

• Welfare - The economic well being of an individual, group, or economy.

• Deadweight Loss - The net loss in economic welfare that is caused by a tariff or other source of distortion, defined as the total losses to those who lose, minus the total gains to those who gain.

• Import Quota - An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time.

• Tariff - A system of government-imposed duties levied on imported or exported goods.

• World Price - The price of a good that prevails in the world market for that good.

• Internalizing an Externality - Require the person/entity or group to repair the problem caused by their economic activity.

• Transaction Costs - A cost incurred in making an economic exchange (restated: the cost of participating in a market).

• Cost-Benefit Analysis - An analysis of the cost-effectiveness of different alternatives in order to see whether the benefits outweigh the costs

Public Goods and Common Resources

• Free Rider - Those who consume more than their fair share of a public resource, or shoulder less than a fair share of the costs of its production.

• Common Resources - An environmental resource that is owned by many people in common or by no one. A resource that is open to everyone but tends to be destroyed because no one is compelled to preserve it.

• Public Goods - a good that is non-rivalrous and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce the availability of the good for consumption by others; and non-excludability that no one can be effectively excluded from using the good.

• Private Goods - A good exclusively owned that cannot be simultaneously used by others.

• Rivalry - A good is considered either rivalrous (rival) or nonrival. Rival goods are goods whose consumption by one consumer prevents simultaneous consumption by other consumers. Most goods, both durable and nondurable, are rival goods.

• Excludability - A good or service is said to be excludable when it is possible to prevent people who have not paid for it from having access to it, and non-excludable when it is not possible to do so.