Key Economic Concepts Defined
Microeconomics
The branch of economics that studies the economy of consumers, households, or individual firms.
Macroeconomics
The branch of economics that studies the overall working of a national economy.
Scarcity
Scarcity is the fundamental economic problem of having seemingly unlimited human needs and wants in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs.
Economic Efficiency
The use of resources to maximize the production of goods and services.
Economic Equity
Equity is the concept or idea of fairness.
Opportunity Cost
The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity).
Productivity
The ratio of the quantity and quality of units produced to the labor per unit of time.
Inflation
A general and progressive increase in prices.
Philips Curve
A historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation.
Market Power
The ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors.
Externality
A cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit.
Market Failure
A concept within economic theory wherein the allocation of goods and services by a free market is not efficient.
Market Economy
A market economy is an economy based on the power of division of labor, in which the prices of goods and services are determined in a free price system set by supply and demand.
Marginal Change
A small change in some quantity.
Production Possibilities Frontier
A graph that shows the different rates of production of two goods and/or services that an economy can produce efficiently during a specified period of time.
Circular-Flow Model
A simple economic model that describes the reciprocal circulation of income between producers and consumers.
Positive Statement
A statement about what actually is (was or will be), as opposed to what ought to be. An expression that can be verified by observation.
Normative Statement
Expresses a judgment about whether a situation is desirable or undesirable. “The world would be a better place if the moon were made of green cheese” is a normative statement because it expresses a judgment about what ought to be.
Comparative Advantage
The ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party.
Absolute Advantage
The ability of a party (an individual, firm, or country) to produce more of a good or service than competitors, using the same amount of resources.