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Economics
The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
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Opportunity cost
The best alternative that we forgo, or give up, when we make a choice or a decision.
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Marginalism
The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.
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Sunk Costs
Costs that cannot be avoided because they have already been incurred.
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Efficient market
A market in which profit opportunities are eliminated almost instantaneously.
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Microeconomics
The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units-that is, firms and households.
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Macroeconomics
The branch of economics that examines the economics behavior of aggregates- income, employment, output, and so on-on a national scale.
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Positive economics
An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
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Normative economics
An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.
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Descriptive economics
The compilation of data that describe phenomena and facts.
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Ecomomic theory
A statement or set of related statements about cause and effect, action and reaction.
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Model
A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.
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Variable
A measure that can change from time to time or from observation to observation.
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Ockham's razor
The principle that irrelevant detail should be cut away.
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ceteris paribus, or all else equal
A device used to analyze the relationship between two variables while the values of other variables are held unchanged.
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post hoc, ergo propter hoc
Literally, "after this (in time), therefore because of this." A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.
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Fallacy of composition
The erroneous belief that what is true for a part is necessarily true for the whole.
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Empirical Economics
The collection and use of data to test economic theories.
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Efficiency
In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.
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Economic growth
An increase in the total output of an economy.
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Stability
A condition in which national output is grawing steadily, with low inflation and full employment of resources.
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Theory of comparative advantage
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.
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Abosolute advantage
A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources.
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Comparative advantage
A producer has a compartive advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.
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Consumer goods
Goods produced for present consumption.
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Investment
The process of using resources to produce new capital.
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Production possibility frontier
A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.
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Marginal rate of transformation
The slope of the production possiblility frontier.
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Economic growth
An increase in the total output of an economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources.
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Command economy
An economy in which a central government either directly or indirectly sets output targets, incomes, and prices.
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laissez-faire economy
French: "allow [them] to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.
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Consumer sovereignty
The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
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Free enterprise
The freedom of individuals to start and operate private businesses in search of profits.
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Firm
An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.
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Households
The consuming units in an economy.
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Product or output markets
The markets in which goods and services are exchanged.
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Input or factor markets
The markets in which the resources used to produce goods and services are exchanged.
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Labor Market
The input/factor market in which households supply work for wages to firms that demand labor.
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Capital market
The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
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Land market
The input/factor market in which households supply land or other real property in exchange for rent.
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Factors of production
The inputs into the production process. Land, labor and capital are the three key factors of production.
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