Business 2

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Economics

Back 1

is the social science that studies the production, distribution, and consumption of goods and services.

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Scarcity

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Ever-present situation in all markets whereby either fewer goods are available than the demand for them, or only too little money is available to their potential buyers for making the purchase. This universal phenomenon leads to the definition of economics as the "science of allocation of scarce resources.” Individuals, families, businesses, and government all face this basic economic problem.

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Economizing

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practicing economics; that is, avoiding waste or reducing expenditures. For example, your mother buys the larger, more concentrated laundry detergent in order to economize.

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Opportunity cost

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the best alternative that is forgone because a particular course of action is pursued. For example, buying an expensive iPod Nano means you'll have less money to spend on fun weekend activities.

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Trade-off

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an exchange of one thing in return for another, especially relinquishment of one benefit or advantage for another regarded as more desirable. For example, you want both a new outfit and a new and a class ring. You forgo the outfit for something that will last longer.

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Consumption

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Expenditure during particular period on goods and services used in satisfaction of needs and wants.

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Production

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someone who produces or manufactures something.

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Producer

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someone who produces or manufactures something

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Exchange

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reciprocal transfer of goods or services from one entity to another.

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Distribution

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in economics, the movement of goods from manufacturer, or a way in which wealth is shared in any particular economic system

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Culture

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a particular society at a particular time and place; the knowledge and values shared by a society

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Subculture

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A social group within a national culture that has distinctive patterns of behavior and beliefs.

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Ethnocentric

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centered on a specific ethnic group, usually one's own

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Social class

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having the same social, economic, or educational status

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Nuclear family

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a family consisting of parents and their children and grandparents of a marital partner

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Extended family

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a family consisting of the nuclear family and their blood relatives

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Custom

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practice or rule of conduct established in a particular community, locality, or trade, by long usage and obligatory on those within its scope

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Self-interest

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personal advantage or interest

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Financial incentives

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a monetary reward for a specific behavior, designed to encourage that behavior.

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Non-financial incentives

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a reward that does not include money

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Perverse incentives

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an incentive that has an unintended and undesirable effect, that is against the interest of the incentive makers. For example, 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that peasants dug up the bones and then smashed them into multiple pieces to maximise their payments.

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Demand

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for certain good or service supported by the capacity to purchase it.

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Law of demand

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observation that, as a general rule, the demand for a product varies inversely with its price—lower prices stimulate demand and higher prices dampen it.

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Supply

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– total amount of a product (good or service) available for purchase at any specified price. It is determined by: (1) Price: producers will try to obtain the highest possible price whereas the buyers will try to pay the lowest possible price—both settling at the equilibrium price where supply equals demand. (2) Cost of inputs: lower the input price the higher the profit at a price level and more product will be offered at that price. (3) Price of other goods: lower prices of competing goods will reduce the price and the supplier may switch to switch to more profitable products thus reducing the supply.

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Law of supply

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if demand is held constant, an increase in supply leads to a decreased price, while a decrease in supply leads to an increased price.

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Law of supply and demand

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economic proposition that, in any free market, the relationship between supply and demand determines price and the quantity produced. A change in either will lead to changes in price and/or amount produced in order to achieve equilibrium in the market

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Buyer's market

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a market that has more sellers than buyers; low prices result from this excess of supply over demand; also called soft market; opposite of seller's market.

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Seller's market

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a market that has more buyers than sellers; high prices result from this excess of demand over supply.

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Elasticity

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degree to which supply or demand for a product or service will change as a result of a change in price.

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Elastic demand

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responsiveness of buyers to changes in price, defined as the percentage change in the quantity demanded divided by the percentage change in price

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Inelastic demand

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desire for a product or service that does not vary with increases or decreases in price. Products that are daily necessities, and for which there are few alternatives, tend to exhibit inelastic demand.

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Price

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Cost, usually expressed in monetary terms.

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Relative prices

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is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices

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Substitution effect

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in economics, the effect of a change in the price of a commodity, which encourages consumers to substitute one good for another. If a good's price falls, consumers will tend to buy it in preference to other goods; if its price rises, consumers will buy other goods instead.

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Rationing

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method for limiting the purchase or usage of an item when the quantity demanded of the item exceeds the quantity available at a specific price. For example, during World War II many domestic items in the United States, including gasoline and other commodities, were rationed

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Equilibrium price

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price when the supply of goods in a particular market matches demand