Understanding Economics: Key Concepts and Definitions
Economy
The science that deals with managing scarce resources and unlimited needs, with the objective of producing and distributing goods and services for consumption among society members.
Shortage
In economics, a shortage refers to the relative lack of a property concerning the needs, desires, and requirements of consumers, not a total lack.
Need
In economics, a need is identical to a consumer’s desire for a commodity or service. It does not necessarily imply urgency or hardship. Financial needs can never be fully satisfied because goods and services are scarce relative to unlimited consumer desires.
Goods
A good is anything that serves or is used to meet needs. These assets are classified as economic, free, independent, substitutes, and complements.
Microeconomics vs. Macroeconomics
Microeconomics studies how to allocate scarce resources to satisfy needs. Macroeconomics is concerned with how available resources are fully utilized, how they grow over time, and related issues.
Positive vs. Normative Economics
Positive Economics
This branch seeks objective explanations of economic phenomena, focusing on what is or could be. It assesses the consequences of observed phenomena.
Normative Economics
This branch offers prescriptions for action based on value judgments about what is desirable, focusing on what should be. Propositions about what should be respond to ethical, ideological, or political views about what is considered desirable or undesirable.
Economic Theory
The set of hypotheses that seek to reproduce aspects of economic reality. There are two distinct approaches: microeconomics and macroeconomics.
The Economic Cycle
The regular fluctuation of economic activities over time, usually measured or expressed as gross national product variations driven by economic phenomena. Its evaluation focuses on comparing potential output and the actual product.
Potential or Trend Output
Full-employment income is the level of production obtained if all resources are fully utilized.
Real or Effective Product
Refers to the increase in production, but prices of a base year, discounting the effect of rising prices. Constant prices.
Aggregate Demand
The sum of consumer spending, business investment, government spending, and the foreign sector. It depends on the price level and monetary, fiscal, and external sector policies.
Aggregate Supply
The total amount of goods and services producers are willing and able to offer at different price levels. It depends on prices, productive capacity, costs, and market conditions.
Inflation
Defined as a continuous and widespread increase in the price level from one period to another, meaning that most prices of goods and services in the economy begin to grow simultaneously.