Economics Terms & Concepts Flashcards
Economics
Economics is the social science that studies the production, distribution, and consumption of goods and services. It can also be described as how people use scarce resources to satisfy unlimited needs and wants.
Economics - Marginal Analysis
Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits. Marginal refers to the focus on the cost or benefit of the next unit or individual, for example, the cost to produce one more widget or the profit earned by adding one more worker.
Economic - Equilibrium Analysis
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium. It both studies economies using the model of equilibrium pricing and seeks to determine in which circumstances the assumptions of general equilibrium will hold.
Microeconomics / Micro Analysis
Microeconomics is the study of the economic decision making of businesses and consumers.
Macroeconomics / Macro Analysis
Macroeconomics is the study of the economy as a whole, such as: Inflation, unemployment, economic output, business cycles, fiscal policy, monetary policy, international trade, and the study of economic systems.
Economics - Positive Vs. Normative Analysis
Positive economics and normative economics are two standard branches of modern economics. Positive economics describes and explains various economic phenomena, or “what is”, while normative economics focuses on the value of economic fairness or what the economy “should” or “ought” be.
Economy
An economy is an area of the production, distribution, or trade, and consumption of goods and services by different agents. Understood in its broadest sense, ‘The economy is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the production, use, and management of resources’. Economic agents can be individuals, businesses, organizations, or governments. Economic transactions occur when two parties agree to the value or price of the transacted good or service, commonly expressed in a certain currency. However, monetary transactions only account for a small part of the economic domain.
The Basic Economic Problem
It is often said that the central purpose of economic activity is the production of goods and services to satisfy our changing needs and wants. The basic economic problem is about scarcity and choice.
Scarcity
Scarcity refers to the basic economic problem, the gap between limited – that is, scarce – resources and theoretically limitless wants. This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs and as many additional wants at possible. Any resource that has a non-zero cost to consume is scarce to some degree, but what matters in practice is relative scarcity. Scarcity is also referred to as “paucity.”
Opportunity Cost
Opportunity cost represents the benefits an individual, investor, or business misses out on when choosing one alternative over another. While financial reports do not show opportunity cost, business owners can use it to make educated decisions when they have multiple options before them.
Production Possibilities Frontier (PPF)
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
Law of Supply and Demand
The Law of Supply and Demand is a theory that explains the interaction between the supply of a resource and the demand for that resource. The theory defines the effect that the availability of a particular product and the desire (or demand) for that product has on its price. Generally, low supply and high demand increase price. In contrast, the greater the supply and the lower the demand, the price tends to fall.
Equilibrium
Equilibrium is the state in which market supply and demand balance each other, and as a result, prices become stable. Generally, an over-supply for goods or services causes prices to go down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.
Utility
Utility is an economic term introduced by Daniel Bernoulli (1700-1782) referring to the total satisfaction received from consuming a good or service. The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service. A consumer’s utility is hard to measure, however, but it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility.
Marginal Benefit
A marginal benefit is an additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. A person’s marginal benefit is the maximum amount he is willing to pay to consume that additional unit of a good or service. In a normal situation, the marginal benefit decreases as consumption increases.
Resources
Resources, otherwise known as ‘Factors of Production’, include land, labor, capital, and entrepreneurship - everything it takes to produce the stuff that you and I buy on a regular basis in our economy.
Economic Growth
An increase in the amount of goods and services produced per head of the population over a period of time.
Sustainable Economic Growth
Sustainable economic growth is economic development that attempts to satisfy the needs of humans, but in a manner that sustains natural resources and the environment for future generations.
Market Economy / Unplanned Economy
A market economy, or unplanned economy, is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s individual citizens and businesses. There is little government intervention or central planning. This is the opposite of a centrally ‘planned’ economy, in which government decisions drive most aspects of a country’s economic activity. Compare with Command Economy and Mixed Economy.
Invisible Hand
Some economists believe that the economy is guided by an ‘invisible hand ‘ - a term coined by English economist Adam Smith in his book The Wealth of Nations. Basically, the idea is that buyers and sellers will make decisions based upon what’s best for them - in their self-interest. And, the sum of these interests creates the best result for an economy.
Adam Smith
Adam Smith (1723-1790) contended that the invisible hand was a self-regulating mechanism and that individuals within the economic system would pursue their individual interests to maximize their own benefits, creating a state of equilibrium, which is a state in which all economic forces (such as supply and demand) are totally balanced. He believed that this would lead to a completely free market economy, in which Individuals can freely pursue their own benefit through being both a consumer and a worker, where a trickle-down effect (or when a consumer purchases something, it helps a producer, who in turn might hire another worker) is created.
Market Economy - Advantages
In theory: Competition leads to efficiency, innovation is encouraged, a large variety of goods and services are available, economic activity is encouraged, and freedom of individual choice is possible.
Market Economy - Disadvantages
In theory: Disparity in wealth and mobility exists, environmental damage results, there tends to be a reduced social safety net, poor working conditions can result, and questionable priorities can result.
Mixed Economy / Unplanned and Planned Economy
In most cases, and particularly with reference to Western economies, the term ‘mixed economy’ refers to a capitalist market economy characterized by the predominance of private ownership of the means of production with profit-seeking enterprise and the accumulation of capital as its fundamental driving force. In such a system, markets are subject to varying degrees of regulatory control and governments wield indirect macroeconomic influence through fiscal and monetary policies with a view to counteracting capitalism’s history of boom/bust cycles, unemployment, and income disparities. In this framework, varying degrees of public utilities and essential services operate under public ownership and state activity is often limited to providing public goods and universal civic requirements - such as healthcare, physical infrastructure and management of public lands. Compare with Market Economy and Command Economy.