1. Scarcity and Shortage Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires Shortages occur when producers will not or cannot offer goods or services at current prices

2. Physical Capital All human goods that are used to produce other goods and services

3. Opportunity Cost The most desirable alternative given up as the result of a decision.

4. Thinking at the Margin When you decide how much more or less to do, you are thinking at the margin. Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours of sleep 3 hours of sleep

5. How does society answer the three basic economic questions? Based on the importance it attaches to various economic goals and societal values.

6. What does the production possibilities curve show? Shows alternative ways to use an economy’s resources

7. Traditional Economy Habits, customs, and/or rituals decided what to produce, how to produce it, and whom to distribute to.

8. Factor Market Firms purchase the factors of production from households

9. Centrally Planned Performance almost always falls far short of its ideals upon which the system is built

10. Market economies and Adam Smith Government intervention has increased

11. Free enterprise system Give consumers freedom to make economic choices

12. Basic principles of free enterprise Profit motive Legal equality Private property rights Free contract Competition

13. Public disclosure Requires companies to give consumers important information about their products

14. Economic stability General price levels Government aims to prevent sudden, drastic shifts in prices

15. Public goods Good or service should be made available to everyone Increasing the number of consumers would increase the cost to a private provider It would be impractical to make consumers pay individually

16. Technology Providing additional goods and services

17. Law of demand Consumers buy more of a good when its price decreases and less when its price increases

18. Income effect and consumption Price of good goes up, less money equals less consumption

19. Inferior goods A good that consumers demand less of when their income increases

20. Elasticity Availability of substitutes Goods relative importance Whether the good is a necessity or a luxury

21. Law of Supply Suppliers offer more goods at higher prices

22. Supply schedule Determines total supply at a certain price, based on relationships between prices and the total quantity supplied by all suppliers in the same market

23. Marginal product and Diminishing marginal return Is the change in output from hiring one more worker A level of production in which the marginal product of labor decreases as the number of workers increase

24. Equilibrium The point at which quantity demanded and quantity supplied are equal

25. Government actions Subsidies Excise tax regulation

26. Price ceilings A maximum price that can be legally charged for a good or service Apartment cannot exceed this ceiling, making it affordable for low income families

27. Increase in supply, price, and demand Increase of supply will make prices fall and quantity demanded increase to a new equilibrium

28. Demand curve A rapid shift to the right in a market demand curve

29. Rationing A system of allocating scarce goods and services using criteria other than price

30. Barriers to entry Factors that make it difficult for new firms to enter a market

31. Economies of scale Occurs when a producer’s average cost drops as production increases

32. Oligopoly A market structure in which a few large firms dominate the market

33. Monopolistic competition A market structure in which many companies sell products that are similar but not identical Differentiate products

34. Sole proprietor Business owned and managed by a single individual Assumes all of the business liability

35. General partnership and LLP General partnership share in all responsibility and liability LLP partners are limited from personal liability in certain situations (another partner’s mistakes)

36. Limited liability in corporation Individual stockholders

37. Horizontal merger A merger between companies that make the same product Ford and Chevy

38. Franchising Becoming more popular because small franchise businesses allow owners a degree of control

39. Competition for a scarce labor market Wages will go up to attract workers to a firm and to keep existing workers

40. Minorities Whites have had access to more education and work experience

41. Labor Unions The industrial revolution and manufacturing initiated the labor union movement

42. Collective bargaining, mediation, & arbitration Unions and company leaders

43. Real GDP Reflects output more accurately than nominal GDP by using constant prices

44. Business cycle Business investments Interest rates and credit Consumer expectations External shocks

45. Structural unemployment Occurs when workers’ skills do not match the jobs that are available

46. Cyclical unemployment Rises during economic downturns and falls when the economy improves

47. Purchasing power Inflation makes it difficult to purchase goods and services Inflation creates higher prices

48. Demand-Pull Inflation occurs when demand for goods and services exceeds existing supplies

49. Cost-Push Inflation occurs when producers raise prices in order to meet increased costs

50. Consumer Price Index An index of the cost of living for all U.S. consumers

51. Constitution power to tax Federal taxes must be for the common defense and general welfare, same in every state

52. Inflation rate and Interest rate Inflation effects the purchasing power if the interest rate is lower

53. Lorenz curve Illustrates the distribution of income

54. Entitlement programs Mandatory spending programs

55. Federal Reserve Coordinates all regulatory activities and examines banks periodically

56. Interest rates and money supply As interest rates rise, people generally keep their wealth in assets that pay returns, restricting the money supply

57. Reserve Ratio It would make banks recall loans and would hurt borrowers

58. Inside and outside lag policies Inside lags are delays in the implementation of policy, and outside lags indicate the time it takes a new policy to become effective

59. Infant industries Shield new industries in the early stages of their development from the competition of more mature rivals

60. GDP per capita GDP alone does not adequately compare the living standards within nations, and per capita GDP takes population into consideration

61. Human capital Skills and knowledge gained by a worker through education and experience