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a visual model of the economy that shows how dollars flow through markets among households and firms
circular-flow diagram
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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
production possibilities frontier
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the study of how households and firms make decisions and how they interact in markets
microeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
macroeconomics
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claims that attempt to describe the world as it is
positive statements
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claims that attempt to prescribe how the world should be
normative statements
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the ability to produce a good using fewer inputs than another producer
absolute advantage
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whatever must be given up to obtain some item
opportunity cost
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the ability to produce a good at a lower opportunity cost than another producer
comparative advantage
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produced abroad and sold domestically
imports goods
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produced domestically and sold abroad
exports goods
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a group of buyers and sellers of a particular good or service
market
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a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
competitive market
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the amount of a good that buyers are willing and able to purchase
quantity demanded
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the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
law of demand
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a table that shows the relationship between the price of a good and the quantity demanded
demand schedule
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a good for which, other things being equal, an increase in income leads to an increase in demand
normal good
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a good for which, other things being equal, an increase in income leads to a decrease in demand
inferior good
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two goods for which an increase in the price of one leads to an increase in the demand for the other
substitutes
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
complements
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the amount of a good that sellers are willing and able to sell
quantity supplied
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the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
law of supply
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a table that shows the relationship between the price of a good and the quantity supplied
supply schedule
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a graph of the relationship between the price of a good and the quantity supplied
supply curve
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a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
equilibrium
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the price that balances quantity supplied and quantity demanded
equilibrium price
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the quantity supplied and the quantity demanded at the equilibrium price
equilibrium quantity
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a situation in which quantity supplied is greater than quantity demanded
surplus
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a situation in which quantity demanded is greater than quantity supplied
shortage
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the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
law of supply and demand
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