Scarcity
The condition that resources are limited relative to the unlimited wants of people. Scarcity is the basic problem economics tries to address.
FoundationsOpportunity cost
The value of the next-best alternative given up when making a choice. Every decision has an opportunity cost because resources are scarce.
FoundationsCeteris paribus
Latin for "all else equal." Economists use this assumption to isolate the effect of one variable while holding everything else constant.
FoundationsEconomic model
A simplified representation (often a graph or equation) of economic relationships, used to explain or predict behavior by focusing on key variables.
FoundationsFactors of production
The resources used to produce goods and services: land, labor, capital, and entrepreneurship.
FoundationsCommand economy
An economic system in which the government makes the central decisions about what, how, and for whom to produce.
Economic SystemsMarket economy
An economic system in which decentralized buyers and sellers, guided by prices, determine what, how, and for whom to produce.
Economic SystemsMixed economy
An economic system that combines elements of market and command systems — most real-world economies, including the U.S., are mixed.
Economic SystemsProduction possibilities curve (PPC)
A graph showing the maximum combinations of two goods an economy can produce given its existing resources and technology.
PPCProductive efficiency
A point on the PPC itself, where resources are fully and efficiently used — no more of one good can be produced without producing less of the other.
PPCPoint inside the PPC
Represents inefficiency or underutilized resources (e.g., unemployment); the economy could produce more of both goods.
PPCPoint outside the PPC
An unattainable combination given current resources and technology; only reachable through economic growth, which shifts the whole curve outward.
PPCIncreasing opportunity cost
As an economy produces more of one good, it must give up increasingly larger amounts of the other — the reason the PPC is bowed outward (concave).
PPCEconomic growth
An increase in an economy's productive capacity, caused by more resources or better technology, shown as an outward shift of the entire PPC.
PPCAbsolute advantage
The ability to produce more of a good than another producer using the same amount of resources.
TradeComparative advantage
The ability to produce a good at a lower opportunity cost than another producer. Comparative advantage, not absolute advantage, determines who should specialize in what.
TradeSpecialization
Concentrating production on the good(s) for which a producer has a comparative advantage, then trading for everything else.
TradeTerms of trade
The rate at which one good can be exchanged for another between two trading partners; must fall between each partner's opportunity costs for trade to benefit both.
TradeDemand
The relationship between the price of a good and the quantity consumers are willing and able to buy at each price, holding all else constant.
DemandLaw of demand
As price rises, quantity demanded falls, and vice versa, holding all else constant — the basis of the downward-sloping demand curve.
DemandDeterminants of demand
Non-price factors that shift the entire demand curve: income, tastes/preferences, prices of related goods, expectations, and number of buyers.
DemandSubstitute goods
Goods that can replace each other in use (e.g., coffee and tea). A price increase in one raises demand for the other.
DemandComplementary goods
Goods used together (e.g., printers and ink). A price increase in one decreases demand for the other.
DemandSupply
The relationship between the price of a good and the quantity producers are willing and able to sell at each price, holding all else constant.
SupplyLaw of supply
As price rises, quantity supplied rises, and vice versa, holding all else constant — the basis of the upward-sloping supply curve.
SupplyDeterminants of supply
Non-price factors that shift the entire supply curve: input/resource costs, technology, prices of related goods in production, expectations, number of sellers, and government policy.
SupplyMarket equilibrium
The price and quantity at which quantity demanded equals quantity supplied — where the supply and demand curves intersect.
EquilibriumSurplus
A situation where quantity supplied exceeds quantity demanded at a given price (price above equilibrium), pushing price down toward equilibrium.
EquilibriumShortage
A situation where quantity demanded exceeds quantity supplied at a given price (price below equilibrium), pushing price up toward equilibrium.
EquilibriumMovement along the curve
A change in quantity demanded or supplied caused only by a change in the good's own price — not a shift of the curve itself.
EquilibriumShift of the curve
A change in the entire demand or supply relationship caused by a non-price determinant, moving the whole curve left or right.
Equilibrium