Glossary
Absolute Advantage
The ability to produce more of a good or service than another producer using the same amount of resources, or the same amount using fewer resources.
Example:
If Country A can produce 100 cars with 10 workers, while Country B can only produce 80 cars with 10 workers, Country A has an absolute advantage in car production.
Allocative Efficiency
Producing the specific mix of goods and services that society desires most, reflecting consumer preferences.
Example:
If a society values education highly and resources are shifted to produce more schools and teachers, it moves towards allocative efficiency.
Capital (Factor of Production)
Man-made resources used to produce other goods and services, including physical tools, machinery, and human capital (skills/knowledge).
Example:
The robots on an assembly line producing cars are a form of physical capital, while the engineers who program them possess human capital.
Command (Economic System)
An economic system where the government controls the economy and makes all major decisions about production, distribution, and prices.
Example:
Historically, the Soviet Union operated as a command economy, with central planners dictating economic activity.
Comparative Advantage
The ability of an economic actor to produce a good or service at a lower opportunity cost than another economic actor.
Example:
Even if a lawyer is faster at typing than their assistant, the assistant likely has a comparative advantage in typing because the lawyer's opportunity cost of typing (lost billable hours) is much higher.
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than another producer. This is the basis for beneficial trade.
Example:
Even if a doctor is also the fastest typist, they have a comparative advantage in medicine, so it's more efficient for them to specialize as a doctor and hire a typist.
Cost-Benefit Analysis
A systematic process of weighing the total expected costs against the total expected benefits of a decision or action.
Example:
Before launching a new product, a company performs a cost-benefit analysis to determine if the potential profits outweigh the development and marketing expenses.
Demand
The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period.
Example:
When the price of a new video game drops, the demand for it typically increases as more consumers are willing to purchase it.
Economics
The study of how individuals and societies allocate limited resources to satisfy unlimited wants and needs.
Example:
When a city decides whether to fund a new park or improve public transportation, it's making an economics decision about how to allocate its limited budget.
Entrepreneurship (Factor of Production)
The ability to combine land, labor, and capital to create new goods and services, taking on risks and innovating.
Example:
Steve Jobs' vision and risk-taking in founding Apple exemplify entrepreneurship.
Equilibrium
The market condition where the quantity demanded equals the quantity supplied, resulting in a stable price and quantity.
Example:
The price of concert tickets often settles at an equilibrium where the number of tickets fans want to buy matches the number of tickets the venue is selling.
Explicit Costs
Direct, out-of-pocket monetary payments made for resources or inputs.
Example:
The monthly rent paid for a storefront is an explicit cost for a retail business.
Free-Market (Economic System)
An economic system where decisions about production and prices are determined by the interaction of supply and demand, with minimal government intervention.
Example:
The United States operates largely as a free-market economy, where consumers' choices influence what businesses produce.
Implicit Costs
The opportunity costs of using resources that are already owned, for which no direct payment is made.
Example:
The income a business owner could have earned working for someone else, but chose to forgo to run their own business, is an implicit cost.
Labor (Factor of Production)
The human effort, both physical and mental, used in the production of goods and services.
Example:
The skills and effort of a software engineer designing a new app represent labor in the production process.
Laissez-faire
An economic philosophy advocating for minimal government intervention in the economy, allowing free markets to operate without significant regulation.
Example:
A government adopting a laissez-faire approach would avoid setting minimum wages or regulating product prices, believing the market will self-regulate.
Land (Factor of Production)
Natural resources used in the production of goods and services, including raw materials and the physical space.
Example:
The fertile soil used to grow corn for ethanol production is an example of land as a factor of production.
Marginal Benefit (MB)
The additional satisfaction or utility gained from consuming or producing one more unit of a good or service.
Example:
The marginal benefit of studying for an extra hour might be the increased likelihood of getting a higher score on an exam.
Marginal Cost (MC)
The additional cost incurred from producing or consuming one more unit of a good or service.
Example:
For a bakery, the marginal cost of baking one more loaf of bread includes the cost of additional flour, yeast, and labor.
Marginal Utility
The additional satisfaction or happiness gained from consuming one more unit of a good or service.
Example:
While the first scoop of ice cream might provide a lot of satisfaction, the marginal utility of the fifth scoop is likely much lower.
Markets
Systems or institutions where buyers and sellers interact to exchange goods, services, and resources, determining prices and quantities.
Example:
The stock market is a complex system where millions of buyers and sellers determine the prices of company shares.
Microeconomics
The branch of economics that studies how individuals, households, and firms make decisions regarding the allocation of limited resources.
Example:
Understanding why a local coffee shop decides to raise its prices is a topic of Microeconomics.
Mixed (Economic System)
An economic system that combines elements of both free-market and command economies, with varying degrees of government intervention.
Example:
Most modern economies, like Canada's, are mixed systems, featuring both private enterprise and government regulation.
Opportunity Cost
The value of the next best alternative that must be given up when a choice is made.
Example:
If you choose to spend your Saturday studying for the AP Macro exam, the opportunity cost might be missing out on a fun movie night with friends.
Opportunity Cost
The value of the next best alternative that must be forgone when a choice is made.
Example:
If you choose to attend college, the opportunity cost might be the income you could have earned working full-time instead.
Production Possibilities Curve (PPC)
A graphical model that illustrates the maximum combinations of two goods or services an economy can produce when all resources are fully and efficiently employed.
Example:
A country's Production Possibilities Curve might show that it can produce more cars only by producing fewer computers, illustrating the trade-off.
Production Possibilities Curve (PPC)
A graph that illustrates the maximum combinations of two goods an economy can produce with its available resources and technology.
Example:
A country's Production Possibilities Curve might show the trade-off between producing more military goods versus more consumer goods.
Productive Efficiency
Producing goods and services at the lowest possible cost, meaning all resources are fully employed and used effectively.
Example:
A factory operating at full capacity, with no wasted materials or idle workers, is demonstrating productive efficiency.
Scarcity
The fundamental economic problem that arises because human wants are unlimited, but the resources available to satisfy those wants are limited.
Example:
Even billionaires face scarcity of time, as there are only 24 hours in a day, limiting how many ventures they can pursue simultaneously.
Scarcity
The fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources.
Example:
Even a billionaire faces scarcity of time, as they cannot do everything they desire in a single day.
Specialization
Focusing production on a specific good or service where an individual, firm, or country has a comparative advantage.
Example:
A country that is rich in oil resources might engage in specialization by focusing its production on petroleum products.
Supply
The quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period.
Example:
If the cost of producing solar panels decreases, manufacturers might increase their supply of panels at every price level.
Trade-offs
The act of giving up one thing in order to gain another. It is an inherent consequence of scarcity.
Example:
Deciding to spend your Saturday studying for the AP Micro exam means a trade-off of not attending a friend's party.
Utility
The satisfaction, happiness, or usefulness that a consumer derives from consuming a good or service.
Example:
The utility you get from eating a delicious slice of pizza is the satisfaction it brings you.
Utils
A hypothetical unit of measurement used to quantify the amount of utility or satisfaction a consumer receives from a good or service.
Example:
If eating an apple gives you 10 utils of satisfaction, while a candy bar gives you 5 utils, you prefer the apple.