Scarcity
The basic economic problem that resources are limited while human wants are unlimited, forcing individuals and societies to make choices.
FoundationsOpportunity cost
The value of the next-best alternative given up when a choice is made. Every decision — by consumers, firms, or governments — carries an opportunity cost.
FoundationsFactors of production
The resources used to produce goods and services: land, labor, capital, and entrepreneurship.
FoundationsEconomic system
A method a society uses to answer what, how, and for whom to produce — ranging from market economies (price-driven) to command economies (centrally planned) to mixed economies.
FoundationsCeteris paribus
Latin for "all else equal" — the assumption that only the variable being studied changes while every other factor is held constant. Used throughout economic analysis, including the laws of supply and demand.
FoundationsProduction possibilities curve (PPC)
A graph showing the maximum combinations of two goods an economy can produce with given resources and technology, assuming full and efficient use of resources.
PPCProductive efficiency
Producing the maximum possible output from available resources — represented by any point on (not inside) the PPC.
PPCIncreasing opportunity cost
The principle that, because resources aren't perfectly adaptable between uses, each additional unit of one good requires giving up increasing amounts of the other good — the source of the PPC's outward bow.
PPCEconomic growth
An outward shift of the entire PPC, caused by an increase in resources, an improved technology, or a larger labor force — expanding what the economy is capable of producing.
PPCAbsolute advantage
The ability to produce more output, or to use fewer resources to produce a given output, than another producer.
TradeComparative advantage
The ability to produce a good at a lower opportunity cost than another producer. This — not absolute advantage — is what determines the gains from specialization and trade.
TradeTerms of trade
The agreed-upon rate at which two parties exchange goods; mutually beneficial trade requires terms that fall between each party's opportunity costs.
TradeSpecialization
Focusing production on the good(s) for which a producer has a comparative advantage, then trading for other goods — increasing total output for all parties involved.
TradeDemand
The entire relationship between price and quantity demanded, holding all other factors constant — represented by a downward-sloping curve.
DemandLaw of demand
As the price of a good rises, quantity demanded falls, all else equal — an inverse relationship between price and quantity demanded.
DemandDeterminants of demand
Factors other than a good's own price that shift the entire demand curve: income, prices of related goods, tastes/preferences, number of buyers, and expectations.
DemandSubstitute goods
Goods that can replace one another; a price increase in one good increases demand for its substitute.
DemandComplementary goods
Goods typically used together; a price increase in one good decreases demand for its complement.
DemandSupply
The entire relationship between price and quantity supplied, holding all other factors constant — represented by an upward-sloping curve.
SupplyLaw of supply
As the price of a good rises, quantity supplied rises, all else equal — a direct relationship between price and quantity supplied.
SupplyDeterminants of supply
Factors other than a good's own price that shift the entire supply curve: input prices, technology, number of sellers, taxes/subsidies, and producer expectations.
SupplyMarket equilibrium
The price and quantity at which quantity demanded equals quantity supplied — where the supply and demand curves intersect.
EquilibriumSurplus
A condition at a price above equilibrium where quantity supplied exceeds quantity demanded, putting downward pressure on price.
EquilibriumShortage
A condition at a price below equilibrium where quantity demanded exceeds quantity supplied, putting upward pressure on price.
Equilibrium