Economics Terminology
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The working vocabulary of an introductory economics course: scarcity and opportunity cost, supply and demand, costs and market structures, market failure, GDP and inflation, money and banking, fiscal policy, trade and investing.
- What is supply?
- The quantity of a good producers are willing and able to offer for sale at each possible price over a period.
- What is demand?
- The quantity of a good buyers are both willing and able to purchase at each possible price over a period.
- What is inflation?
- A sustained general rise in the price level, which reduces the purchasing power of money.
- What is deflation?
- A sustained general fall in the price level.
- What is perfect competition?
- A market with many small buyers and sellers, an identical product, free entry and exit, and full information, so no participant can influence the price.
- What is opportunity cost?
- The value of the next best alternative given up when a choice is made.
- What is scarcity?
- The condition that wants exceed the resources available to satisfy them. It is the reason economics exists as a subject.
- What is fiscal policy?
- Government use of taxation and public spending to influence the level of economic activity.
- What is monetary policy?
- A central bank's management of interest rates and the money supply in order to influence inflation and economic activity.
- What is a sunk cost?
- A cost already incurred that cannot be recovered, and which therefore should not affect a decision about what to do next.
- What does it mean to think at the margin?
- To decide by comparing the additional benefit of one more unit against its additional cost, rather than judging totals.
- Microeconomics vs macroeconomics
- Microeconomics studies the decisions of individual households and firms and single markets; macroeconomics studies the economy as a whole.
- Positive vs normative economics
- Positive statements describe what is and can be tested against evidence; normative statements say what ought to be and rest on values.
- What does ceteris paribus mean?
- All other things held equal. It isolates the effect of one variable by assuming the rest do not move.
- What is a production possibilities frontier?
- A curve showing the maximum combinations of two goods an economy can produce with its current resources and technology.
- What is comparative advantage?
- The ability to produce a good at a lower opportunity cost than someone else.
- What is absolute advantage?
- The ability to produce more of a good than someone else using the same resources.
- What is a market economy?
- An economic system in which prices set by voluntary exchange between buyers and sellers direct what is produced and for whom.
- What is a command economy?
- An economic system in which a central authority decides what is produced, in what quantity and at what price.
- What is the law of demand?
- All else equal, as the price of a good rises the quantity demanded falls, and as the price falls the quantity demanded rises.
- What is the law of supply?
- All else equal, as the price of a good rises the quantity supplied rises, and as the price falls it falls.
- What is market equilibrium?
- The price at which the quantity demanded equals the quantity supplied, so there is no pressure for the price to move.
- What is a surplus in a market?
- A situation where quantity supplied exceeds quantity demanded, which happens when the price sits above equilibrium.
- What is a shortage in a market?
- A situation where quantity demanded exceeds quantity supplied, which happens when the price sits below equilibrium.
- Shift in demand vs movement along the demand curve
- A change in the good's own price moves you along the curve. A change in anything else, income, tastes, the price of a substitute, shifts the whole curve.
- What are substitute goods?
- Goods that can replace each other, so a rise in the price of one raises demand for the other.
- What are complementary goods?
- Goods used together, so a rise in the price of one reduces demand for the other.
- Normal goods vs inferior goods
- Demand for a normal good rises when income rises; demand for an inferior good falls when income rises.
- What is a price ceiling?
- A legal maximum price for a good, binding only when it is set below the equilibrium price.
- What is a price floor?
- A legal minimum price for a good or service, binding only when set above the equilibrium price.