Chapter 1. Welcome to Economics!


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
products (goods and services) made domestically and sold abroad
fiscal policy
economic policies that involve government spending and taxes
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
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
the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
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
the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
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)
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


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UH Macroeconomics 2022 Copyright © by Terianne Brown and Cynthia Foreman is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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