economy comes from the Greek word oikonomos, which means “one who manages a
household.”
Scarcity means that society has limited resources and therefore cannot produce all the
goods and services people wish to have.
Economics is the study of how society manages its scarce resources.
Efficiency means that society is getting the maximum benefits from its scarce
resources. Equality means that those benefits are distributed uniformly among
society’s members. In other words, efficiency refers to the size of the economic pie,
and equality refers to how the pie is divided into individual slices.
opportunity cost of an item is what you give up to get that item.
Rational people systematically and purposefully do the best they can to achieve their
objectives, given the available opportunities.
marginal change to describe a small incremental adjustment to an existing plan of
action.
incentive is something that induces a person to act, such as the prospect of a
punishment or reward.
market economy, the decisions of a central planner are replaced by the decisions of
millions of firms and households.
In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations,
economist Adam Smith made the most famous observation in all of economics:
Households and firms interacting in markets act as if they are guided by an “invisible
hand” that leads them to desirable market outcomes.
market failure to refer to a situation in which the market on its own fails to produce
an efficient allocation of resources.
one possible cause of market failure is an externality, which is the impact of one
person’s actions on the well-being of a bystander.
market power, which refers to the ability of a single person or firm (or a small group
of them) to unduly influence market prices.
productivity—that is, the amount of goods and services produced by each unit of
labor input.
inflation, an increase in the overall level of prices in the economy.
business cycle—the irregular and largely unpredictable fluctuations in economic
activity, as measured by the production of goods and services or the number of people
employed.
