Chapter 1

economics -the study of how people use their scarce resources to satisfy their unlimited wants

resources- the inputs, or factors of production, used to produce the goods and services that people want; resources
consist of labor, capital, natural resources, and entrepreneurial ability

labor- the physical and mental effort used to produce goods and services

capital- the buildings, equipment, and human skills used to produce goods and services

natural resources- so-called “gifts of nature” used to produce goods and services; includes renewable and
exhaustible resources

entrepreneurial ability- managerial and organizational skills needed to start a firm, combined with the willingness to
take the risk of profit or loss

entrepreneur- a profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to
life, and assumes the risk of the operation

wages- payment to resource owners for their labor

interest- payment to resource owners for the use of their capital

rent- payment to resource owners for the use of their natural resources

profit- the reward for entrepreneurial ability; sales revenue minus resource cost

good- a tangible product used to satisfy human wants

service- an activity, or intangible product, used to satisfy human wants

scarcity- occurs when the amount people desire exceeds the amount available at a zero price

market- a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms

product market- a market in which a good or service is bought and sold

resource market- a market in which a resource is bought and sold

circular-flow model- a diagram that traces the flow of resources, products, income, and revenue among economic
decision makers

rational self-interest- individuals try to maximize the expected benefit achieved with a given cost or to minimize the
expected cost of achieving a given benefit.

marginal- incremental, additional, or extra; used to describe a change in an economic variable

microeconomics- the study of the economic behavior in particular

markets, such as that for computers or unskilled labor

macroeconomics- the study of the economic behavior of entire economies

variable- a measure, such as price or quantity, that can take on different values at different times
other-things-constant assumption- the assumption, when focusing on the relation among key economic variables,
that other variables remain unchanged; in Latin, ceteris paribus

behavioral assumption- an assumption that describes the expected behavior of economic decision makers, what
motivates them

hypothesis- a theory about how key variables relate

positive economic statement- a statement that reflects an opinion, which cannot be proved or disproved by reference
to the facts

normative economic statement-statement that can be proved or disproved by reference to facts

association-is-causation fallacy- the incorrect idea that if two variables are associated in time, one must necessarily
cause the other

fallacy of composition- the incorrect belief that what is true for the individual, or part, must necessarily be true for
the group, or the whole

secondary effects- unintended consequences of economic actions that may develop slowly over time as people react
to events on a graph depicting two-dimensional space

origin- the zero point

horizontal axis line- on a graph that begins at the origin and goes to the right and left; sometimes called the x axis

vertical axis line- on a graph that begins at the origin and goes up and down; sometimes called the y axis

graph- a picture showing how variables relate in two dimensional space; one variable is measured along the
horizontal axis and the other along the vertical axis

dependent variable- a variable whose value depends on that of the independent variable

independent variable- a variable whose value determines that of the dependent variable

positive, or direct, relation- occurs when two variables increase or decrease together; the two variables move in the
same direction

negative, or inverse, relation- occurs when two variables move in opposite directions; when one increases, the other
decreases

slope- of a line a measure of how much the vertical variable changes for a given increase in the horizontal variable;
the

vertical change between two points divided by the horizontal increase

Chapter 2

opportunity cost- the value of the best alternative forgone when an item
or activity is chosen

sunk cost- a cost that has already been incurred in the past, cannot be recovered, and thus is irrelevant for present
and future economic decisions

law of comparative advantage- the individual, firm, region, or country with the lowest opportunity cost of producing
a particular good should specialize in that good

absolute advantage- the condition that exists when there is no way resources can be reallocated to increase the
production of one good without decreasing the production of another

comparative advantage- the ability to make something using fewer resources than other producers use

barter- the direct exchange of one good for another without using money

division of labor- breaking down the production of a good into separate tasks

specialization of labor- focusing work effort on a particular product or a single task

production possibilities frontier (PPF)- a curve showing alternative combinations of goods

that can be produced when available resources are used efficiently; a boundary line between inefficient and
unattainable combinations

efficiency- getting the most from available resources the value of the best alternative forgone when an item or
activity is chosen

law of increasing opportunity cost- to produce more of one good, a successively larger amount of the other good
must be sacrificed

economic growth- An expansion in the economy’s production possibilities as reflected by an outward shift of the
ppf

economic system- the set of mechanisms and institutions that resolve the what, how, and for whom questions

pure capitalism- an economic system characterized by the public ownership of resources and centralized planning

private property rights- an economic system characterized by the private ownership of resources and the use of
prices to coordinate economic activity in unregulated markets an owner’s right to use, rent, or sell resources or
property

pure command system-resources are directed and production is coordinated not by market forces but by the
“command,” or central plan, of government.

Chapter 3

Utility- the capacity of a commodity or a service to satisfy some human want.

transfer payments- any payment made by a government for a purpose other than that of purchasing goods or
services, as for welfare benefits; any money received that is neither a payment for goods or services nor investment
income

Industrial Revolution- characterized chiefly by the replacement of hand tools with power-driven machines, as the
power loom and the steam engine, and by the concentration of industry in large establishments; development of
large-scale factory production

Firms- economic units formed by profit-seeking entrepreneurs who cobine labor, capital, and natural resources to
produce goods and services

sole proprietorship- single owner firm

partnership- involves two or more individuals who agree to combine their funds and efforts in return for a share of
the profit or loss

corporation- legal entity established through articles of incorporation

cooperative- group of people who cooperate by pooling their resources to buy and sell more efficiently than they
could independently.

not-for-profit organizations- engage in charitable, educational, humanitarian, cultural, professional, and other
activities.

market failure- scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that
can be improved upon from the societal point-of-view

monopoly- sole supplier to the market; sometimes monopoly can produce and sell the product for less than could
competing firms

natural monopoly- when it is cheaper for one firm to serve the market than for two or more firms to do so

private good- Item of consumption that, if used by one person or firm, may not be available for others, such as food
and clothing

public good- nonrival in consumption

externality- cost or benefit that falls on a third party

fiscal policy- pursuing full employment, price stability and economic growth by taxing and spending

monetary policy- pursuing objectives by regulation the money supply

ability-to-pay tax principle- what income or property taxes often rely on

benefits-received- relates taxes to the benefits taxpayers receive from the government activity funded by the tax

tax principle-relates taxes to the benefits taxpayers receive from the government activity

tax incidence- indicates who actually bears the burden of the tax

proportional taxation- taxpayers at all income levels the same percentage of their income in taxes

progressive taxation- percentage of income paid in taxes increases as income increases

marginal tax rate- indicates the percentage of each additional dollar of income that goes to taxes

regressive taxation- percentage of income paid in taxes decreases as income increases, so the marginal tax rate
declines as income increases

merchandise trade balance- equals the value of exported good minus the value of imported goods

balance of payments- record of all economic transactions between its residents and residents of the rest of the world

foreign exchange- foreign currency needed to carry out international transactions

tariff- taxes on imports

quota- limits on the quantity of a particular good that can be imported from a country

Chapter 4

Demand- the quantity consumers are both willing and able to buy at each possible price during a given time.

Law of demand- quantity demanded varies inversely with price, other things constant

Substitution effect of a price change- if the price declines while other prices remain constant, the object becomes
relatively cheaper and consumers are more willing to purchase object when relative price falls

Money income-number of dollars received per period

Real income-income measured in terms of what it can buy.

Income effect of a price change- the price reduction, other things constant, increases the purchasing power of your
income, thereby increasing your ability to buy the product

Demand curves-demand curve slopes downward, reflecting the law of demand. Price and quantity demanded are
inversely related, all other things constant.

Quantity demanded- an individual point on the demand curve

Individual demand- demand of individual consumer

Market demand- sum of the individual demands of all consumers in the market

Normal good- increases as money income increases

Inferior good- demand decreases as money income increases, so demand curve shifts leftward

Substitutes- if an increase in the price of one shifts the demand for the other rightward and, conversely, if a decrease
in the price of one shifts demand for the other leftward

Complements- if an increase in the price of one decreases the demand for the other, shifting that demand curve
leftward

Tastes- likes and dislikes as a consumer

Movement along a given demand curve- change in price, other things constant

Shift of demand curve- change in one of the determinants of demand other than price, changing demand
Supply- how much producers are willing and able to offer for sale per period

Law of supply- quantity supplied is usually directly related to its price, other things constant

Supply curve- price and quantity supplied per week at various possible prices. Producers offer more at a higher price
than at a lower price, so the supply curve slopes upward. Or opposite

Quantity supplied- refers to a particular amount offered for sale at a particular price, as reflected by a point on a
given supply curve

Individual supply- the supply of an individual producer

Market supply- sum of individual supplies of all producers in the market

Relevant resources- those employed in the production of the good in question

Alternative goods- those that use some of the same resources employed to produce the good under consideration

Movement along a supply curve- a change in price, others things constant, changing the quantity supplied

Shift of a supply curve- change in one of the determinants of a supply other than price, changing supply.

Transaction costs- the costs of time and information required for exchange

Surplus- excess quantity supplied

Shortage- excess quantity demanded

Equilibrium- the independent plans of both buyers and sellers exactly match, so market forces exert no pressure for
change

Disequilibrium- time required to adjust. Usually temporary as the market gropes for equilibrium but sometimes can
last decades

Price floor- minimum selling price that is above the equilibrium price

Price ceiling- maximum selling price

Demand- the quantity consumers are both willing and able to buy at each possible price during a given time.

Law of demand- quantity demanded varies inversely with price, other things constant

Substitution effect of a price change- if the price declines while other prices remain constant, the object becomes
relatively cheaper and consumers are more willing to purchase object when relative price falls

Money income-number of dollars received per period

Real income-income measured in terms of what it can buy.

Income effect of a price change- the price reduction, other things constant, increases the purchasing power of your
income, thereby increasing your ability to buy the product

Demand curves-demand curve slopes downward, reflecting the law of demand. Price and quantity demanded are
inversely related, all other things constant.

Quantity demanded- an individual point on the demand curve

Individual demand- demand of individual consumer

Market demand- sum of the individual demands of all consumers in the market

Normal good- increases as money income increases

Inferior good- demand decreases as money income increases, so demand curve shifts leftward

Substitutes- if an increase in the price of one shifts the demand for the other rightward and, conversely, if a decrease
in the price of one shifts demand for the other leftward

Complements- if an increase in the price of one decreases the demand for the other, shifting that demand curve
leftward

Tastes- likes and dislikes as a consumer

Movement along a given demand curve- change in price, other things constant

Shift of demand curve- change in one of the determinants of demand other than price, changing demand

Supply- how much producers are willing and able to offer for sale per period

Law of supply- quantity supplied is usually directly related to its price, other things constant

Supply curve- price and quantity supplied per week at various possible prices. Producers offer more at a higher price
than at a lower price, so the supply curve slopes upward. Or opposite

Quantity supplied- refers to a particular amount offered for sale at a particular price, as reflected by a point on a
given supply curve

Individual supply- the supply of an individual producer

Market supply- sum of individual supplies of all producers in the market

Relevant resources- those employed in the production of the good in question

Alternative goods- those that use some of the same resources employed to produce the good under consideration

Movement along a supply curve- a change in price, others things constant, changing the quantity supplied

Shift of a supply curve- change in one of the determinants of a supply other than price, changing supply.

Transaction costs- the costs of time and information required for exchange

Surplus- excess quantity supplied

Shortage- excess quantity demanded

Equilibrium- the independent plans of both buyers and sellers exactly match, so market forces exert no pressure for
change

Disequilibrium- time required to adjust. Usually temporary as the market gropes for equilibrium but sometimes can
last decades

Price floor- minimum selling price that is above the equilibrium price
Price ceiling- maximum selling price

Chapter 5

Economy- describes the structure of economic life in a community, region, country, group of countries, or the world

Gross domestic product (GDP)- measures the market value of all final goods and services produced in the United
States during a given period

Gross world product-measures the value of all final goods and services produced in the world during a given period

Flow variable-an amount per unit of time. Example: average spending per week

Stock variable- amount measured at a particular point in time. Example: amount of money you have with you right
now

Mercantilism- a policy that held that, as a way of accumulating gold and silver, a nation should try to export more
than import

Economic fluctuations- rise and fall of economic activity relative to the long term growth of the economy

Expansion- economy’s output increases

Contraction-economy’s output decreases

Depression-sharp reduction in the nation’s total production lasting more than a year and accompanied by high
unemployment

Recession-decline in total output lasting at least two consecutive quarters (3 months).

Inflation-increase in the economy’s average price level

Leading economic indicators- business slows down, orders for machinery and computers slip, stock market turns
down, and consumer confidence in the economy also begins to sag, so households spend less. Unsold goods start
piling up

Coincident economic indicators- measures that reflect expansions

Lagging economic indicators-look at the economy through the rearview mirror, include interest rates and how long
people remain unemployed

Aggregate output- the sum total of an economy's production of goods and services in a given period, usually a year

Aggregate demand-relationship between the average price of aggregate output in the economy and the quantity of
aggregate output demanded

Price level-average price of aggregate output

Real gross domestic product (aka real GDP)- the total value of goods and services produced in a country over a
period of time. GDP may be calculated in three ways: (1) by adding up the value of all goods and services produced,
(2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes
from the sale of goods or services.

Aggregate demand curve-shows the relationship between the price level in the economy and real GDP demanded,
other things constant
Aggregate supply curve- shows how much US producers are willing and able to supply at each price level, other
things constant

Demand-side economics-focuses on how changes in aggregate demand could promote full employment

Stagflation-contraction in the economy’s aggregate output and inflation, or increase, in the economy’s price level

Supply-side economics- federal government, by lowering tax rates, would increase after tax wages, which would
provide incentives to increase the supply of labor and other resources

Federal debt- stock variable that measures the net accumulation of prior federal deficits

Real GDP per capita- tells us how much an economy produces on average per resident

Demand- the quantity consumers are both willing and able to buy at each possible price during a given time.

Law of demand- quantity demanded varies inversely with price, other things constant

Substitution effect of a price change- if the price declines while other prices remain constant, the object becomes
relatively cheaper and consumers are more willing to purchase object when relative price falls

Money income-number of dollars received per period

Real income-income measured in terms of what it can buy.

Income effect of a price change- the price reduction, other things constant, increases the purchasing power of your
income, thereby increasing your ability to buy the product

Demand curves-demand curve slopes downward, reflecting the law of demand. Price and quantity demanded are
inversely related, all other things constant.

Quantity demanded- an individual point on the demand curve

Individual demand- demand of individual consumer

Market demand- sum of the individual demands of all consumers in the market

Normal good- increases as money income increases

Inferior good- demand decreases as money income increases, so demand curve shifts leftward

Substitutes- if an increase in the price of one shifts the demand for the other rightward and, conversely, if a decrease
in the price of one shifts demand for the other leftward

Complements- if an increase in the price of one decreases the demand for the other, shifting that demand curve
leftward

Tastes- likes and dislikes as a consumer

Movement along a given demand curve- change in price, other things constant

Shift of demand curve- change in one of the determinants of demand other than price, changing demand

Supply- how much producers are willing and able to offer for sale per period

Law of supply- quantity supplied is usually directly related to its price, other things constant
Supply curve- price and quantity supplied per week at various possible prices. Producers offer more at a higher price
than at a lower price, so the supply curve slopes upward. Or opposite

Quantity supplied- refers to a particular amount offered for sale at a particular price, as reflected by a point on a
given supply curve

Individual supply- the supply of an individual producer

Market supply- sum of individual supplies of all producers in the market

Relevant resources- those employed in the production of the good in question

Alternative goods- those that use some of the same resources employed to produce the good under consideration

Movement along a supply curve- a change in price, others things constant, changing the quantity supplied

Shift of a supply curve- change in one of the determinants of a supply other than price, changing supply.

Transaction costs- the costs of time and information required for exchange

Surplus- excess quantity supplied

Shortage- excess quantity demanded

Equilibrium- the independent plans of both buyers and sellers exactly match, so market forces exert no pressure for
change

Disequilibrium- time required to adjust. Usually temporary as the market gropes for equilibrium but sometimes can
last decades

Price floor- minimum selling price that is above the equilibrium price

Price ceiling- maximum selling price

Chapter 5

Economy- describes the structure of economic life in a community, region, country, group of countries, or the world

Gross domestic product (GDP)- measures the market value of all final goods and services produced in the United
States during a given period

Gross world product-measures the value of all final goods and services produced in the world during a given period

Flow variable-an amount per unit of time. Example: average spending per week

Stock variable- amount measured at a particular point in time. Example: amount of money you have with you right
now

Mercantilism- a policy that held that, as a way of accumulating gold and silver, a nation should try to export more
than import

Economic fluctuations- rise and fall of economic activity relative to the long term growth of the economy

Expansion- economy’s output increases

Contraction-economy’s output decreases

Depression-sharp reduction in the nation’s total production lasting more than a year and accompanied by high
unemployment

Recession-decline in total output lasting at least two consecutive quarters (3 months).

Inflation-increase in the economy’s average price level

Leading economic indicators- business slows down, orders for machinery and computers slip, stock market turns
down, and consumer confidence in the economy also begins to sag, so households spend less. Unsold goods start
piling up

Coincident economic indicators- measures that reflect expansions

Lagging economic indicators-look at the economy through the rearview mirror, include interest rates and how long
people remain unemployed

Aggregate output- the sum total of an economy's production of goods and services in a given period, usually a year

Aggregate demand-relationship between the average price of aggregate output in the economy and the quantity of
aggregate output demanded

Price level-average price of aggregate output

Real gross domestic product (aka real GDP)- the total value of goods and services produced in a country over a
period of time. GDP may be calculated in three ways: (1) by adding up the value of all goods and services produced,
(2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes
from the sale of goods or services.

Aggregate demand curve-shows the relationship between the price level in the economy and real GDP demanded,
other things constant

Aggregate supply curve- shows how much US producers are willing and able to supply at each price level, other
things constant

Demand-side economics-focuses on how changes in aggregate demand could promote full employment

Stagflation-contraction in the economy’s aggregate output and inflation, or increase, in the economy’s price level

Supply-side economics- federal government, by lowering tax rates, would increase after tax wages, which would
provide incentives to increase the supply of labor and other resources

Federal debt- stock variable that measures the net accumulation of prior federal deficits

Real GDP per capita- tells us how much an economy produces on average per resident

Economy- describes the structure of economic life in a community, region, country, group of countries, or the world

Gross domestic product (GDP)- measures the market value of all final goods and services produced in the United
States during a given period

Gross world product-measures the value of all final goods and services produced in the world during a given period

Flow variable-an amount per unit of time. Example: average spending per week
Stock variable- amount measured at a particular point in time. Example: amount of money you have with you right
now

Mercantilism- a policy that held that, as a way of accumulating gold and silver, a nation should try to export more
than import

Economic fluctuations- rise and fall of economic activity relative to the long term growth of the economy

Expansion- economy’s output increases

Contraction-economy’s output decreases

Depression-sharp reduction in the nation’s total production lasting more than a year and accompanied by high
unemployment

Recession-decline in total output lasting at least two consecutive quarters (3 months).

Inflation-increase in the economy’s average price level

Leading economic indicators- business slows down, orders for machinery and computers slip, stock market turns
down, and consumer confidence in the economy also begins to sag, so households spend less. Unsold goods start
piling up

Coincident economic indicators- measures that reflect expansions

Lagging economic indicators-look at the economy through the rearview mirror, include interest rates and how long
people remain unemployed

Aggregate output- the sum total of an economy's production of goods and services in a given period, usually a year

Aggregate demand-relationship between the average price of aggregate output in the economy and the quantity of
aggregate output demanded

Price level-average price of aggregate output

Real gross domestic product (aka real GDP)- the total value of goods and services produced in a country over a
period of time. GDP may be calculated in three ways: (1) by adding up the value of all goods and services produced,
(2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes
from the sale of goods or services.

Aggregate demand curve-shows the relationship between the price level in the economy and real GDP demanded,
other things constant

Aggregate supply curve- shows how much US producers are willing and able to supply at each price level, other
things constant

Demand-side economics-focuses on how changes in aggregate demand could promote full employment

Stagflation-contraction in the economy’s aggregate output and inflation, or increase, in the economy’s price level

Supply-side economics- federal government, by lowering tax rates, would increase after tax wages, which would
provide incentives to increase the supply of labor and other resources

Federal debt- stock variable that measures the net accumulation of prior federal deficits
Real GDP per capita- tells us how much an economy produces on average per resident