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Foundations and Models
Key Terms
23
Economics
Undergraduate 1
02/02/2009
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Term
Scarcity
 Definition
Although wants are limited, the resources available to fulfill those wants are limited.
Term
Economics
 Definition
The study of the choices consumers make to attain their goals given scarcity.
Term
Economic Models
 Definition
Simplified versions of reality used to analyze real-world economic situations.
Term
Market
 Definition
A group of buyers and sellers of a good or service and the way they come together and meet.
Term
3 Basic Economic Ideas
 Definition
1. People are rational.
2. People respond to incentives.
3. Optimal decisions are made at the margin.
Term
Marginal
 Definition
Additional, extra, etc.
Term
Marginal Cost
 Definition
That which is given up when a certain decision is made.
Term
Marginal Benefit
 Definition
That which is gained when a certain decision is made.
Term
Marginal Analysis
 Definition
Analysis that involves comparing marginal benefits and marginal costs.
Term
Trade-offs
 Definition
Producing more of one good means producing less of another.
Term
Opportunity Costs
 Definition
The highest-valued alternative that must be given up to engage in that activity.
Term
Centrally Planned Economy
 Definition
When the government decides how the economic resources will be allocates.
Term
Market Economy
 Definition
When firms and households interacting in markets allocate economic resources.
Term
Mixed Economy
 Definition
Where 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.
Term
Productive Efficiency
 Definition
When a good or service is produced at the lowest possible cost.
Term
Allocative Efficiency
 Definition
When production is in ordinance with consumer preferances.
Term
Voluntary Exchange
 Definition
The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
Term
Equity
 Definition
The fair distribution of economic benefits.
Term
Economic Variable
 Definition
Something measurable that can have different values, such as the wages of software programmers.
Term
Positive Analysis
 Definition
Analysis concerned with what IS
Term
Allocative Analysis
 Definition
Analysis concerned with what OUGHT TO BE.
Term
Microeconomics
 Definition
The study of how firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Term
Macroeconomics
 Definition
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
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