Chapter 1: Ten Principles of Economics Chapter 2: Thinking like an economist

 Scarcity—Limited resources and unlimited wants Economic Models

 Economics —Study of how society manages its  Circular-flow diagram —a visual model of the
scarce resources economy that shows how dollars flow through
 Efficiency —The property of society getting the most markets among households and firms.
from its scarce resources
 Equality —The property of distributing economic
prosperity uniformly among society’s members
 Rational —Systematically and purposefully doing the
best you can to achieve your objectives
 Opportunity cost —Whatever is given up to get
something else
 Marginal changes —Incremental adjustments to an
existing plan
 Incentive —Something that induces a person to act
 Market economy —An economic system where
interaction of households and firms in markets
determines the allocation of resources
 Property rights —The ability of an individual to own  Production possibilities frontier— a graph that
and exercise control over scarce resources shows the combinations of output that the
 “Invisible hand” —The principle that self-interested economy can possibly produce given the
market participants may unknowingly maximize the available factors of production and the available
welfare of society as a whole production technology.
 Market failure —A situation in which the market fails
to allocate resources efficiently
 Externality —When one person’s actions have an
impact on a bystander
 Market power —The ability of an individual or group
to substantially influence market prices
 Monopoly —The case in which there is only one
seller in the market
 Productivity —The amount of goods and services
produced from each unit of labor input
 Microeconomics —the study of how households
 Inflation —An increase in the overall level of prices
and firms make decisions and how they interact
 Business cycle —Fluctuations in economic activity
in markets
How People Make Decisions  Macroeconomics —the study of economy-wide
 People face trade-offs phenomena, including inflation, unemployment,
 The cost of something is what you give up to get it and economic growth
 Rational people think at the margin  Positive statements— claims that attempt to
 People respond to incentives describe the world as it is
How People Interact  Pormative statements— claims that attempt to
 Trade can make everyone better off prescribe how the world should be
 Markets are usually a good way to organize Chapter 3: Interdependence and
economic activity the Gains from Trade
 Government can sometimes improve market
 Absolute advantage —The ability to produce a
outcomes
good using fewer inputs than another producer
How the Economy Thinks as a whole  Comparative advantage —The ability to produce
 A country’s standard of living depends on its ability a good at a lower opportunity cost than another
to produce goods and services producer
 Prices rise when the government prints too much  Gains from trade —The increase in total
money production due to specialization allowed by trade
 Society faces a short-run trade-off between inflation  Opportunity cost—Whatever is given up to
and unemployment obtain some item
  Imports —Goods produced abroad and sold  Law of supply and demand—The claim that the price
domestically of any good adjusts to bring the quantity supplied
 Exports —Goods produced domestically and sold and quantity demanded for that good into balance
abroad Variables that shift Demand Curve
Chapter 4: The Market Forces of  Income
Supply and Demand  Price of related goods
 Market—A group of buyers and sellers of a particular  Tastes
good or service  Expectations
 Competitive market —A market in which there are  Number of buyers
many buyers and sellers so that each has a negligible Variables the shifts Supply Curve
impact on the market price  Input Prices
 Monopoly —Market with only one seller  Technology
 Quantity demanded —The amount of a good that  Expectations
buyers are willing and able to purchase  Number of sellers
 Law of demand —The claim that, other things equal, Chapter 5: Elasticity and Its
the quantity demanded of a good falls when the price
of the good rises
Application
 Elasticity—A measure of the responsiveness of the
 Demand schedule—A table that shows the
quantity demanded or quantity supplied to one of its
relationship between the price of a good and the
quantity demanded determinants.
 Price elasticity of demand —A measure of how much
 Demand curve —A graph of the relationship
the quantity demanded of a good responds to a
between the price of a good and the quantity
change in the price of that good.
demanded
 Elastic —When the quantity demanded or supplied
 Normal good —A good for which, other things equal,
responds substantially to a change in one of its
an increase in income leads to an increase in demand
determinants.
 Inferior good —A good for which, other things equal,
 Inelastic —When the quantity demanded or
an increase in income leads to a decrease in demand
supplied responds only slightly to a change in one of
 Substitutes —Two goods for which an increase in the
its determinants.
price of one leads to an increase in the demand for
 Total revenue —The amount paid by buyers and
the other
received by sellers of a good computed as P × Q.
 Complements —Two goods for which an increase in
 Income elasticity of demand —A measure of how
the price of one leads to a decrease in the demand
much the quantity demanded of a good responds to
for the other
a change in consumers’ income.
 Quantity supplied —The amount of a good that  Cross-price elasticity of demand —A measure of how
sellers are willing and able to sell
much the quantity demanded of one good responds
 Law of supply —The claim that, other things equal, to a change in the price of another good.
the quantity supplied of a good rises when the price  Price elasticity of supply—A measure of how much
of the good rises the quantity supplied of a good responds to a change
 Supply schedule —A table that shows the in the price of that good.
relationship between the price of a good and the  Normal good —A good characterized by a positive
quantity supplied income elasticity.
 Supply curve —A graph of the relationship between  Inferior good —A good characterized by a negative
the price of a good and the quantity supplied income elasticity.
 Equilibrium —The quantity supplied and the quantity
Chapter 6: Supply Demand and
demanded at the equilibrium price
 Equilibrium price —The price that balances quantity Government Policies
supplied and quantity demanded  Price Ceiling—A legal minimum on the price at which
 Equilibrium quantity —A situation in which the price a good can be sold
has reached the level where quantity supplied equals  Price floor —A legal maximum on the price at which
quantity demanded a good can be sold
 Surplus —A situation in which quantity supplied is  Tax incidence —The manner in which the burden of
greater than quantity demanded a tax is shared among participants in a market
 Shortage—A situation in which quantity demanded is  Tax wedge —The difference between what the buyer
greater than quantity supplied pays and the seller receives after a tax has been
imposed.
(Note: When Price Ceiling is below the equilibrium, the Other Benefits of International
Price Ceiling is binding and creates shortage)
(Note: When Price floor is above the equilibrium, the
Trade
 Increased Variety of goods
Price Floor is binding and creates a surplus)
 Lower cost through economic scale
Chapter 7: Consumers, Producers, and  Increased competition
the Efficiency of Markets  Enhanced flow of ideas
 Welfare economics —The study of how the The Arguments for Restricting Trade
allocation of resources affects economic wellbeing  The Jobs Argument
 Willingness to pay —The maximum amount that a  The National-Security Argument
buyer will pay for a good  The Infant-Industry Argument
 Consumer surplus —The amount a buyer is willing to  The Unfair-Competition Argument
pay for a good minus the amount the buyer actually  The Protection-as-a-Bargaining-Chip Argument
pays for it
 Cost —The value of everything a seller must give up
to produce a good
 Producer surplus —The amount a seller is paid for a
good minus the seller’s cost of providing it
 Efficiency—The property of a resource allocation of
maximizing the total surplus received by all members
of society
 Equality —The property of distributing prosperity
uniformly among the members of society
 Market failure —The inability of some unregulated
markets to allocate resources efficiently
Chapter 8: Application: The
Costs of Taxation
 Tax wedge —The difference between what the buyer
pays and the seller receives when a tax is placed in a
market
 Deadweight loss —The reduction in total surplus that
results from a tax
 Laffer curve—A graph showing the relationship
between the size of a tax and the tax revenue
collected

Chapter 9: Application: International

Trade
The determinants of Trade
 World price
 Comparative Advantage
 Trade policies
 World price— the price of a good that prevails in
the world market for that good
 Tariff —a tax on goods produced abroad and sold
domestically