Wize AP Macroeconomics Textbook > Economic Concepts
General Economic Terms
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General Economic Terms
Economics
- This is the study of unlimited human wants and limited resources.
- Microeconomics - the study of how households and firms make decisions and how they interact in markets.
- Macroeconomics - the study of the economy as a whole. It looks at inflation, unemployment, and economic growth
Scarcity
There are not enough resources (land, labor, raw materials and capital) in the economy to meet everyone’s desires. Scarcity forces us to make choices
Example
We have a scarce amount of metals in each country that can be used to make buildings, trucks, wires etc.
Marginal
This means "additional."
Examples
- The marginal cost of a book means the additional cost of making one more book.
- The marginal benefit means the additional benefit you will feel from reading one more book.
Market Economy
This is an economy where the government does not intervene (no country is actually like this in the real world).
Command Economy
This is when the government determines what, how and for whom to produce goods.
Examples: North Korea and Cuba
Mixed Economy
This is a mix of command and market economies.
Examples: Canada and USA
Invisible Hand
When we let supply and demand determine the equilibrium price and quantity of products. It also states that consumers and producers act in their own self interest. For consumers, this means maximizing their utility (happiness) and for producers this means maximizing their profits. This helps to allocate resources (like workers and money) efficiently.
Market Failure
A situation in which a market left on its own fails to allocate resources (like workers and money) efficiently.
Example: If there was no tax on cigarettes too many people would be smoking and working in the cigarette industry.
Externality
The impact of one person’s actions on the well-being of a bystander.
Examples
- People that smoke cigarettes hurt the health of people around them that inhale the second hand smoke so cigarettes create a negative externality (negative effect).
- People that get vaccinated with flu shots lower the chance of others getting sick which creates a positive externality (positive effect).
Inflation
An increase in the overall level of prices in the economy (usually measured using the Consumer Price Index).
Consumer Price Index (CPI)
The price of a fixed basket of goods (like cellphones, vegetables, microwaves) that consumers use regularly. It is used to measure the average price level in the economy
Theory
A logical view of how things work, and is frequently formulated on the basis of observation
Example: Many economists believe the theory that less developed countries grow at a faster rate than developed countries.
Model
A formalization of theory that facilitates scientific inquiry. It often simplifies complex real world concepts.
Example: The Production Possibility Frontier (PPF) is a model. In the real world we make millions of goods, but the PPF simplifies it to two goods to make it easier to understand concepts like opportunity cost.
Practice: Definitions
"If the price of a good rises, the quantity demanded for that good will fall." This statement is an example of: