KEY TERMS: GETTING STARTED

-Microeconomics: the study of individual firms and households in specific industries

and markets

-Macroeconomics: the study of the entire economy of a region, a country, or the

entire world

-Opportunity Cost: is the value of the next-best forgone alternative to making a

choice

-Gains from Trade: improvements in income, production, or satisfaction owing to the

exchange of goods or services

-Specialization: a concentration of production effort on a single specific task

-Division of Labor: the division of production into various parts in which different
groups of workers specialize

-Comparative Advantage: a situation in which a person or group can produce one

good at a lower opportunity cost than another person or group

-Production Possibilities Curve: a graph illustrating the tradeoffs an economy faces

when producing two different goods

-Increasing Opportunity Costs: the idea that as production of a good increases, the
opportunity cost of producing that good becomes higher

KEY TERMS: OBSERVING AND EXPLAINING THE ECONOMY

-Causation: the concept that one event brings about another event.

-Correlation: the concept that one event is usually observed to occur along with
another event; note that correlation does not imply causation

-Normative Economics: economic analysis that makes recommendations about

economic policy

-Positive Economics: economic analysis that explains what happens in the economy
and why, without making recommendations about economic policy.

KEY TERMS: THE SUPPLY AND DEMAND MODEL

-Demand: A relationship between price and quantity demanded.

-Price: The amount of money or other goods that one must pay to obtain a
particular good.

-Quantity Demanded: The quantity of a good that people want to buy at a given
price during a specific time period.

-Demand Schedule: A tabular presentation of demand showing the price and

quantity demanded for a particular good, all else being equal. Below is an example
of a demand schedule for bicycles.

-Law of Demand: The tendency for the quantity demanded of a good in a market to
decline as its price rises.

-Demand Curve: A graph of demand showing the down-ward sloping relationship

between price and quanity demanded. Below is an example of a demand curve for
bicycles, showing shifts of the demand curve versus movements along the demand
curve.

-Supply: A relationship between price and quantity supplied.

-Quantity Supplied: The quantity of a good that firms are willing to sell at a given
price.

-Supply Schedule: A tabular presentation of supply showing the price and quantity
supplied of a particular good, all else being equal. Below is an example of a supply
schedule for bicycles.

-Law of Supply: The tendence for the quantity supplied of a good in a market to
increase a its price rises.

-Supply Curve: A graph of supply showing the upward-sloping relationship between

price and quantity supplied. Below is an example of a supply curve for bicycles,
showing shifts of versus movements along the supply curve.

-Shortage (excess demand): A situation in which quantity demanded is greater than

quantity supplied.

-Surplus (excess supply): A situation in which quantity supplied is greater than

quantity demanded.

-Equilibrium Price: The price at which quantity supplied equals quantity demanded.

-Equilibrium Quantity: The quantity traded at the equilibrium price.

-Market Equilibrium: The situation in which the price is equal to the equilibrium price
and the quantity traded equals the equilibrium quantity. The figure below shows a
market equilibrium.

KEY TERMS: USING THE SUPPLY AND DEMAND MODEL

-Elastic Demand: demand for which the price elasticity is greater than 1.

-Inelastic Demand: demand for which the price elasticity is less than 1.

-Minimum Wage: a wage per hour below which it is illegal to pay workers.

-Perfectly Elastic Demand: demand for which the price elasticity is infinite,
indicating an infinite response to a change in price and therefore a horizontal
demand curve.

-Perfectly Elastic Supply: supply for which the price elasticity is infinite, indicating an
infinite response of quantity supplied to a change in price and therefore a horizontal
supply curve.

-Perfectly Inelastic Demand: demand for which the price elasticity is zero, indicating
no response to a change in price and therefore a vertical demand curve.

-Perfectly Inelastic Supply: supply for which the price elasticity is zero, indicating no
response of quantity supplied to a change in price and therefore a vertical supply
curve.

-Price Ceiling: a government price control that sets the maximum allowable price for
a good.

-Price Control: a government law or regulation that sets or limits the price to be
charged for a particular good.

-Price Elasticity of Demand: the percentage change in the quantity demanded of a

good divided by the percentage change in the price of that good.

-Price Elasticity of Supply: the percentage change in quantity supplied divided by

the percentage change in price.

-Price Floor: a government price control that sets the minimum allowable price for a
good.

-Rent Control: a government price control that sets the maximum allowable rent on
a house or apartment.

-Unit-Free Measure: a measure that does not depend on a unit of measurement.