KEY TERMS

allocative efficiency
when the mix of goods produced represents the mix that society most desires

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

command economy
an economy where economic decisions are passed down from government authority and where the government owns the resources

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

exports

products (goods and services) made domestically and sold abroad

fiscal policy

economic policies that involve government spending and taxes

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

goods and services market

a market in which firms are sellers of what they produce and households are buyers

gross domestic product (GDP)

measure of the size of total production in an economy

imports

products (goods and services) made abroad and then sold domestically

labor market

the market in which households sell their labor as workers to business firms or other employers

law of diminishing returns

as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

market

interaction between potential buyers and sellers; a combination of demand and supply

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

model

see theory

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

traditional economy

typically an agricultural economy where things are done the same as they have always been done

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations