Key Economic Concepts and Principles

Basic Economic Definitions

Economics: The study of how societies use scarce resources to produce valuable goods and services and distribute them.

Efficiency: Effective use of society's resources in satisfying people's wants and needs.

Microeconomics: Concerned with the behavior of individual entities such as markets, firms, and households.

Macroeconomics: Concerned with the overall performance of the economy.

Inputs: Commodities or services that are used to produce goods and services.

Outputs: The various goods and services that result from the production process.

Factors of Production and Markets

Factors of Production: Land, labor, and capital.

Production Possibility Frontier: Shows the quantity of goods that can be efficiently produced by an economy.

Market: A mechanism through which buyers and sellers interact to determine prices and exchange goods, services, and assets.

Profits: Net revenues; the difference between total sales and total costs.

Competition and Market Structures

Perfect Competition: Refers to a market in which no firm or consumer is large enough to affect the market price.

Imperfect Competition: When a buyer or seller can affect a good's price.

Public Goods: Commodities which can be enjoyed by everyone and from which no one can be excluded.

Demand and Supply Concepts

Substitution Effect: Occurs when a good becomes relatively more expensive.

Factors Affecting the Demand Curve

• Average income
• Population
• Prices of related goods
• Tastes
• Special influences

Market Equilibrium: Comes at the price at which quantity demanded equals quantity supplied.

Total Revenue: Price multiplied by quantity (P x Q).

Utility and Consumer Behavior

Diminishing Marginal Utility: This law states that the amount of extra or marginal utility declines as a person consumes more and more of a good.

Equimarginal Principle: States that the consumer will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on a good is exactly the same as the marginal utility of the last dollar spent on any other good.

Income Effect: The change in the quantity demanded that arises because a price change lowers consumers' real income.

Income Elasticity: The percentage change in quantity demanded of a good divided by the percentage change in income.

Consumer Surplus: The gap between the total utility of a good and its total market value.