ECON 2 (CH 1-4)


Limited resources and unlimited wants


study of how society manages its scarce resources


The property of society getting the most from its scarce resources


The property of distributing economic prosperity fairly among society's members


Systematically and purposefully doing the best you can to achieve your objectives

Opportunity Cost

Whatever is given up to get something

Marginal Changes

Incremental adjustments to an existing plan

Property Rights

The ability of an individual to own and exercise control over scarce resources

Invisible Hand

The principle that self interested market participants may unknowingly maximize the welfare of society as a whole

Market Failure

A situation in which the market fails to allocate resources efficiently


When one person's actions have an impact on a bystander

Market Power

The ability of an individual or group to substantially influence market prices

Market Economy

An economic system where interaction of households and forms in market determines the allocation of resources


The case in which there is only one seller in the market


The amount of goods and services produced per hour by worker


An increase in the overall level of prices

Business Cycle

Fluctuation in economic activity


Determine Intended and Unintended Results (DI and UR)
Government raise minimum wage to $10 per hour. 1.Workers find jobs with higher wage and are better off. 2. Workers find no job at all because fewer firms want to higher them and pay for the higher wage

Susan gives up income from work and money from tuition

Determine Opportunity Cost.
Susan can work full time or go to college. She chooses college.

Susan gives up college degree and higher pay in the future

Determine Opportunity Cost.
Susan can work full time or go to college. She chooses work.

No. Yes because you can't have clean air without giving something up.

Is air scarce? is clean air scarce?

Scientific Method

Objective development and testing of theories

Economic Models

Simplifications of reality based on assumptions

Circular Flow Diagram

A diagram of the economy that shows the flow of goods and services , factors of production and the monetary payments between household and firms

Factors of Production

Inputs such as land, labor, and capital

Production Possibilities Frontier

A graph that shows the combination of output the economy can possibly produce given the available factors of production and the available production technology


The study of how households and firms make decisions and how they interact in the markets


The study of the economy wide phenomena

Positive Statements

Descriptions of the world as it is

Normative Statements

Prescription of how the world ought to be


Something that induces a person to act

Absolute Advantage

The ability to produce a good with lower inputs

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Gains from Trade

The increase in total production due to specialization by trade


Goods produced abroad and sold domestically


Goods produced domestically and sold abroad