Fundamental Economic Terms & Definitions
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Scarcity
The limited nature of society’s resources.
Economics
The study of how society manages its scarce resources.
Efficiency
The property of society getting the most it can from its scarce resources.
Equity
The property of distributing economic prosperity fairly among the members of society.
Opportunity Cost
Whatever must be given up to obtain an item.
Marginal Changes
Small, incremental adjustments to a plan of action.
Market Economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Market Failure
A situation in which a market, left on its own, fails to allocate resources efficiently.
Externality
The uncompensated impact of one person’s actions on the well-being of a bystander.
Market Power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity
The amount of goods and services produced from each hour of a worker’s time.
Inflation
An increase in the overall level of prices in an economy.
Phillips Curve
A curve that shows the short-run trade-off between inflation and unemployment.
Business Cycle
Fluctuations in economic activity, such as employment and production.
Circular Flow Diagram
A model that explains how the economy is organized and how participants in the economy interact with one another.
Production Possibilities Frontier
A graph that shows the various combinations of output.
Microeconomics
The study of how households and firms make decisions and how they interact in specific markets.
Macroeconomics
The study of economic phenomena.
Positive Statements
Statements about the world that make a claim about how the world is.
Normative Statements
Statements about the world that make a claim about how the world should be.
Absolute Advantage
The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage.
Opportunity Cost
The opportunity cost of some item is what we give up to get that item.
Comparative Advantage
The comparison among producers of a good according to their opportunity cost.
Imports
Goods and services that are produced abroad and sold domestically.
Exports
Goods and services that are produced domestically and sold abroad.