Basics Of Economics

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Absolute quota

Back 1

Restricts the number of units of a specific good that can be imported
into a country or from a specific source

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Accounting cost

Back 2

The monetary cost of an item, production, or any activity; also known
as out-of-pocket expense and explicit cost

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Accounting profit

Back 3

Equals total revenue minus accounting cost

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Ad valorem tariff

Back 4

Levied on the value of a good or service; for example, a 2.5% tariff on
the final value of all imported automobiles

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Allocative efficiency

Back 5

Goods, services, and resources are allocated to the activities that society
values most

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Bargaining cost

Back 6

Type of transaction cost; includes the value of the time and effort spent
to come to an acceptable agreement, draw up a contract, etc.

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Barter

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The direct trade of goods and services for one another; requires a
double coincidence of wants: I must want what you have and you must
want what I have for exchange to take place

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Bullion

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Precious metals, such as gold and silver

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Capital

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One of the four factors of production; includes all resources used to
produce other goods or services; can be divided into both physical and
human forms; does not include money

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Capital stock

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The total pool of capital goods in a nation

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Capitalism

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The economic and political theory in which individual economic
agents own the means of production and economic decisions are made
in free markets

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Ceteris paribus

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Agents acting together to either coordinate action or to combine efforts
to reach common goals

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Collective action

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Agents acting together to either coordinate action or to combine efforts
to reach common goals

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Command economies

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Economies in which the government plays a significant role; decisionmaking
is generally autocratic in nature or confined to bureaucratic
elements which are not responsible to the public for their decisions; one
of the two types of planned economies; for example, North Korea

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Comparative advantage

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An individual economic agent’s comparative advantage is whatever
good or service it can produce at the lowest relative price (lowest
opportunity cost)

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Cost-benefit analysis

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The simplest decision-making model for economics; one compares the
costs and benefits of a given activity

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Creative destruction

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Competition and innovation result in the elimination of old firms,
practices, goods, etc. over time as they are replaced with newer, more
efficient, firms, practices, or goods

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Economic cost

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The sum of accounting (explicit) and opportunity (implicit) costs

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Economics

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The social science of allocating scarce resources among competing ends

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Entrepreneurship

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One of the four factors of production; is human ingenuity which seeks
out new or more efficient combinations of the other three factors of
production

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Land

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One of the four factors of production; includes all natural resources

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Externality

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Cost or benefit of an activity that affects a third party; since it is not
faced by the decision-maker, it is not factored into that agent’s
decision-making

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Factors of production

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The factors, or inputs, required to produce any good or service

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Free good

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A good without an opportunity cost, such as air

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Free market economies

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Economies in which the government has only a very basic role in
private economics; decision-making on economic matters is completely
left to individual economic agents

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Human capital

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Human capabilities such as training, education, and intelligence; can be
improved through education

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Incentives

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Inducements to perform or refrain from a certain activity; in other
words, rewards or punishments for certain actions

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Interest

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Payment for capital

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Labor

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One of the four factors of production; consists of all human physical
and mental efforts

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Laissez-faire economics

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An extreme form of free-market economics; the government has no
economic role other than the provision of the most basic of services and
the enforcement of the most limited of laws

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Law of diminishing marginal
utility

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As individuals consume greater amounts of a single good or service,
each additional unit consumed will bring the consumer less utility

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Liberalism

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Political ideology which generally favors private enterprise over public
involvement; compare to social welfarism

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Libertarianism

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An extreme form of capitalism which envisions an extremely limited
government

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Marginal analysis

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A modification of cost-benefit analysis focusing not on all-or-nothing
decisions but on the impacts of incremental changes in behavior on
total costs and benefits

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Marginal cost

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The cost of consuming or producing one additional unit of a good or
service

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Marginal benefit

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The benefit gained from the consumption or production of one
additional unit of a good or service

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Market

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Exists wherever and whenever two or more parties wish to make an
exchange

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Mercantilism

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A market system featuring heavy government control and regulation of
the economy and government manipulation of trade to ensure the
steady inward flow of precious metals

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Mixed-market economy

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Economy in which most economic decisions are made in free markets,
but the government plays an active role in such decisions through
spending or regulation; the dominant type of economy today

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Money

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An item which is used as a medium of exchange, unit of account, and
store of value that is durable, portable, hard to counterfeit, easily
divisible, scarce, and accepted by all parties

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Negative incentive

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An incentive which increases the costs an agent will incur from acting
in a certain way; for example, industrial pollution

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Normative economics

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Strays from what is factually testable by introducing opinions and
preferences; usually marked by statements of what “should be”

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Opportunity cost

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The cost of the next best alternative to a chosen good, service, or
activity; also known as implicit cost

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Optimization

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The process by which we attempt to maximize benefits and minimize
costs

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Physical capital

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Physical goods or other items which are used for the production of
other goods or services, such as factory machines

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Planned economy

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Economy in which the government plays a significant role in answering
the fundamental economic questions; includes command and indicative
economies

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Positive economics

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Economics as science; statements are limited to objective and
observable facts that can be tested and proved to be true or false

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Positive incentive

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An incentive which increases the benefits an agent will receive from
acting in a certain way

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Production possibilities

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The possible combinations of two goods or services that an individual,
firm, or society can produce with given factor endowments and
productivity

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Production Possibilities
Frontier (PPF)

Back 50

The graphical representation of the possible combinations of two goods
or services that a given agent can produce; all points on the curve are
equally efficient; all points inside are inefficient; all points beyond the
curve are impossible without improved factor endowments or increases
in productivity; also known as production possibilities curve

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Productivity

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The output of goods or services which a given unit of a factor of
production yields

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Regulation

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Government intervention in an economy or market

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Rent (traditional)

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Payment for land; compare to economic rent

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Resource endowments

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Another name for factor endowments, but this term often focuses purely
on land endowments

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Scarcity

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A fundamental problem that exists with all resources because human
desires are endless and resources are limited

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Social welfarism

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Political ideology which favors government or public involvement over
private businesses; also known as social democracy; compare to liberalism

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Specialization

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When an individual economic agent focuses on producing a single
good or service to take advantage of increased efficiency; agents will
then satisfy other needs by trading with others

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Tariff

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Tax paid on imported goods

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Trade barrier

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Any obstruction to trade, including natural and artificial barriers

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Trade deficit

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When a country imports more than it exports

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Traditional economy

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Economy in which the fundamental economic questions are answered
according to tradition

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Utility

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The satisfaction or pleasure that one receives from consuming a good or
service or performing a certain activity

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Wants

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Unlimited human desires; they are unlimited because they can never be
completely satisfied

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Wage

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Payment for labor; generally presented as a rate per hour