scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
economics
the study of the choices people make to attain their goals, given their scarce resources
economic model
a simplified version of reality used to analyze real-world economic situations
market
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
marginal analysis
analysis that involves comparing marginal benefits and marginal costs
trade-off
the idea that because of scarcity, producing more of one good or service means producing less of another good or service
opportunity cost
the highest valued alternative that must be given up to engage in an activity
centrally planned economy
an economy in which the government decides how economic resources will be allocated
market economy
an economy in which the decisions of households and firms interacting in markets allocate economic resources
mixed economy
an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
productive efficiency
a situation in which a good or service is produced at the lowest possible cost
allocative efficiency
a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
voluntary exchange
a situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction
equity
the fair distribution of economic benefits
economic variable
something measurable that can have different values, such as the incomes of doctors
positive analysis
analysis concerned with what is
normative analysis
analysis concerned with what ought to be
microeconomics
the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
macroeconomics
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
economics
money, supply and demand, politics, micro and macro
resources
efficient use of time; managing scarce resources
the 4 broad questions economics answers
price, environment, international trade, government price controls
3 economic ideas
(1) people are rational, (2) people respond to economic incentives, (3) decisions are made at the optimal margin
3 questions society addresses
(1) what goods and services to produce, (2) how to produce them, (3) who receives those goods and services
rationality
think through all possible outcomes of a situation; deciding to do something based on information given
marginal
extra or additional
features of centrally planned economy
North Korea, Cuba; government decides what people get, how to produce goods and how they come to the market; low choices, low quality innovation, no competition, low decision power, high prices
features of market economy
United States, Canada, Japan; the market decides economy; high choices, high quality innovation, competition, decision power, low prices
free market or capitalist
consumers buy
steps in economic model
(1) develop a question and identify relevant variables, (2) specify assumptions, (3) formulate hypothesis, (4) use economic data to test hypothesis