Chapter 1

1. Economics: The social science concerned with the efficient

use of scarce resources to achieve the maximum satisfaction
of economic want. (3)
2. Economic perspective: An economic way of thinking used
by economists. (3)
3. Marginal Analysis: Comparisons between marginal benefits
and marginal costs (4)
4. Scientific Method: The procedure for systematic pursuit of
knowledge involving the observation of facts and the
formulation and testing of hypothesis to obtain theories,
principals, and laws. (6)
5. Theoretical economics: To systematically arrange facts,
interpret them, and generalize from them. (6)
6. Principles: Statements about economic behavior or the
economy that enable the prediction of the probable effects of
certain actions. (6)
7. Generalizations: Economic theories, principals, principals, and
laws relating to economic behavior or the economy itself. (7)
8. Other- Things- equal assumption: (ceteris paribus) when
economists all other variables except those under immediate
consideration are held constant for a particular analysis. (7)
9. Policy Economics: Where theories and data can be used to
formulate courses of action based on economic principals and
intended to resolve a specific economic problem or further an
economic goal. (8)
10. Macroeconomics: The examination of either the economy as
a whole or its basic subdivisions or aggregates, such as the
government, household, and business sectors. (9)
11. Aggregate: Collection of specific economic units treated as if
they were one unit. (9)
12. Microeconomics: At this level of analysis, the economist
observes the details of an economic unit, or a very small
segment of the economy, under a figurative microscope. (10)
13. Positive Economics: a focus on facts and cause and effect
relationships. (10)
14. Normative economics: Incorporates value judgments about
what the economy should be like or what particular policy
actions should be recommended to achieve a desirable goal.
(10)
15. Fallacy of Composition: Assumption that what is true for
one individual or one part of a whole is necessarily true for a
group of individuals or the whole. (11)
16. “ after this, therefore because of this” fallacy: Concluding
that because event A precedes event B, A is the cause of B.
(11)
17. Horizontal Axis: Where the determining factor is represented
on a graph. (15)
18. Vertical Axis: Where the dependant variable is represented
on a graph. (15)
19. Direct Relationship: Two variables change in the same
 direction. (16)
20. Inverse Relationship: When two variables change in
opposite directions. (16)
21. Independent Variable: the cause or the variable that
changes first. (16)
22. Dependent Variable: The effect or variable that changes
because of the change in the independent variable. (16)
23. Slope of a straight line: the ratio of the vertical change to
the horizontal change between any two points of the line. (16)
24. Vertical Intercept: the point of the line where the line
meets the vertical axis. (18)

Chapter 2
1. Economizing problem: The choices necessitated because
society’s economic wants for goods and services are unlimited
but the resources available to satisfy these wants are limited.
(22)
2. Utility: pleasure or satisfaction provided by various goods or
services. (22)
3. Economic resources: all natural, human, and manufactured
resources that go into the productions of goods and services.
(23)
4. Land: all natural resources that are used in the production
such as arable land, forests, mineral and oil deposits, and
water resources. (23)
5. Capital: all manufactured aids used in producing consumer
goods and services. (23)
6. Investment: the process of Producing and purchasing capital
goods. (23)
7. Labor: a broad term for all the physical and mental talents
of individuals available and useable in producing goods and
services. (23)
8. Entrepreneurial ability: the human resource that combines
the other resources to produce a product, makes non-routine
decisions, innovates, and bears risks. (23)
9. Factors of Production: the four resources- land, labor,
capital, and entrepreneurial activity- that are combined to
produce goods and services. (24)
10. Full Employment: All available resources are in use. (24)
11. Full Production: all employed resources should be used so
that they provide the maximum possible satisfaction for our
material wants. (24)
12. Productive Efficiency: the production of any particular mix
of goods and services in the least costly way. (24)
13. Allocative Efficiency: The production of that particular mix
of goods and services most wanted by society. (24)
14. Consumer Goods: Products that satisfy our wants directly.
(25)
15. Capital Goods: Products that satisfy wants indirectly by
making possible more efficient production of consumer goods.
(25)
16. Production Possibilities table: lists the different
combinations of two products that can be produced with a
specific set of resources. (25)
17. Productions possibility curve: each point on the production
possibilities curve represents some maximum output of two
products. (26)
18. Opportunity Cost: The amount of other products that must
be forgone or sacrificed to obtain one unit of a specific good.
(27)
19. Law of increasing opportunity cost: the more of a
product that is produced, the greater is its opportunity cost.
(27)
20. Economic Growth: The growth of economic capacity or the
ability to produce a larger total output. (30)
21. Economic system: a particular set of institutional
arrangements and a coordinating mechanism. (33)
22. Market System: Each participant acts in his or her own self
interest and each individual or business seeks to maximize or
profit though its own decisions regarding consumption or
production. (33)
23. Capitalism: the private ownership of resources and the use
of markets and prices to coordinate and direct economic
activity. (33)
24. Command System: Govrnment owns most property
resources and economic descision making occurs through a
central economic plan. (34)
25. Resource Market: the place where resources or the services
of resource suppliers are bought and sold. (34)
26. Product market: the place where goods and services
produced by businesses are bought and sold. (34)
27. Circular Flow Model: Shows a complex interrelated web of
descision making and economic activity involving businesses
and households. (34)

Chapter 3
1. Market: an institution or mechanism that brings together
buyers and sellers of particular goods, services, or resources.
(40)
2. Demand: a schedule or curve that shows the various
amounts of a product that consumers are willing and able to
purchase at each of a series of possible prices during a
specific period of time. (41)
3. Demand Schedule: Demand shown in table form. (41)
4. Law of demand: there is a negative or inverse relationship
between price and quantity demanded. (41)
5. Diminishing marginal unity: in any specific time period,
each buyer of a product will derive less satisfaction from each
successive unit of the product consumed. (41)
6. Income Effect: the lower price increases the purchasing
power of a buyer’s money income, enabling the buyer to
purchase more of the product than she or he could buy
 before. (41)
7. The Substitution Effect: at lower price buyers have the
incentives to substitute what is now a less expensive product
for similar products that are now reality more expensive. (42)
8. Demand Curve: A curve on a graph with quantity demanded
on the horizontal axis and the price on the vertical. (42)
9. Determinants of demand: Factors that can and do affect
purchases. (43)
10. Normal goods: products whose demand varies directly with
money income. (44)
11. Inferior goods: Goods whose demand varies inversely with
money income. (45)
12. Substitute good: a good that can be used in the place of
another. (45)
13. Complementary good: A good that is used together with
another. (45)
14. A change in demand: a shift of the entire demand curve to
the right or to the left. (46)
15. A change in quantity demanded: a movement from one
point to another point, from one price quality combination to
another, on a fixed schedule or demand curve. (46)
16. Supply: The amounts of a product that producers are willing
and able to make available for sale at each of a series of
possible prices during a specific period (46)
17. Supply Schedule: A table showing prices offered for certain
quantities of goods. (46)
18. Law of supply: As price rises, the quantity supplied rises; as
price falls, the quantity supplied falls. (47)
19. Supply curve: a curve with quantity supplied on the x axis
and price on the y-axis. (48)
20. Determinants of supply: Resource prices, technology, taxes
and subsidies, prices of other goods, price expectations, and
the number of sellers in the market (48)
21. Change in supply: a change in the entire schedule and a
shift of the entire curve. (49)
22. Change in quantity supplied: a movement from one point
to another on a fixed supply curve. (49)
23. Surplus: excess supply of a product. (50)
24. Shortage: excess demand for a product. (50)
25. Equilibrium price: there is no shortage or surplus with no
reason for price to change. (50)
26. Equilibrium quantity: Quantity supplied and quantity
demanded are in balance. (50)
27. Rationing function of prices: the ability of the competitive
forces of supply and demand to establish a price at which
selling and buying decisions are consistent. (52)

Chapter 4
1. Private property: private ownership of capital where
individuals and businesses can obtain, use, and dispose of
private resources as they see fit. (59)
2. Freedom of Enterprise: ensures that entrepreneurs and
private businesses are free to obtain and use economic
resources to produce their choice of goods and services and
to sell them in their chosen market. (60)
3. Freedom of Choice: enables owners to employ or dispose of
their property and money as they see fit, allows workers to
enter any line of work for which they are qualified, and
ensures consumers are free to buy the goods and services
that best satisfy their wants. (60)
4. Self interest: Each economic unit tries to do what is best for
itself. (60)
5. Competition: the presence in a market of independent
buyers and sellers competing with one another and the
freedom of buyers and sellers to enter and leave the market.
6. Roundabout Production: the construction and use of capital
to aid in the production of consumer goods. (62)
7. Specialization: focusing ones resources toward few products
or services to be more efficient. (62)
8. Division of labor: The separation of the work required to
produce a product into a number of different tasks that are
performed by different workers, specialization of workers. (62)
9. Medium of exchange: A Convenient way exchanging goods
that makes trade easier. (62)
10. Barter: Swapping goods for other goods. (62)
11. Four Fundamental Questions: what goods and services will
be produced? How will the goods and services be produced?
Who will get the goods and services? How will the system
accommodate the changes? (64)
12. Economic Cost: the payments that must be secure to retain
the needed amounts of those resources. (64)
13. Normal Profit: the payment for the entrepreneur’s
contributions. (64)
14. Economic Profit: an above normal profit given to the
entrepreneur that lures other producers to a particular
industry. (64)
15. Expanding industry: New firms, attracted by the above
normal profits, are formed or shift from less profitable
industries. (65)
16. Declining Industry: the industry becomes unprofitable and
some businesses and firms go out of business or migrate to
other more profitable industries. (65)
17. Consumer Sovereignty: In a market where consumers are
sovereign or in control. (65)
18. “ Dollar votes”: When consumers spend their money on the
goods they are most willing to buy showing their wants via
the demand side. (65)
19. Derived Demand: the demand for resources is derived from
the demand for the products the resources help produce. (65)
20. Guiding function of prices: the ability of price changes to
bring about changes in the quantities of products and
resources demanded and supplied. (67)
21. Creative Destruction: The creation of new products and
production methods completely destroys the market positions
of firms that are wedded to existing products and older ways
 of doing business.
22. “ Invisible hand”: When firms or resource suppliers promote
the public or social interest to further their own self interest.

Chapter 5
1. Functional distribution of income: indicates how the
nations earned income is apportioned among wages, rents,
interest, and prophets, that is, according to the function
performed by the income receiver. (73)
2. Personal distribution of income: indicates how the nation’s
money income is divided between individual households. (73)
3. Durable goods: products that have an expected life of three
or more years. (75)
4. Nondurable goods: products that have a life of less than
three years. (75)
5. Services: Work done for consumers by lawyers, barbers,
doctors, and so on. (75)
6. Plant: a physical establishment that performs one or more
functions in fabricating and distributing goods and services.
(76)
7. Firm: a business organization that owns and operates plants.
(76)
8. Industry: a group of firms that produce the same or similar
product. (76)
9. Sole proprietorship: a business owned and operated by one
person. (76)
10. Partnership: two or more individuals that agree to own and
operate a business together. (76)
11. Corporation: A legal creation that can acquire resources, own
assets, produce and sell products, incur debts, extend credit,
sue and be sued and perform the functions of any other type
of enterprise. (76)
12. Stocks: shared ownerships of a corporation.
13. Bonds: promises to repay a loan. (77)
14. Limited liability: the stockholders carry the risk of losing the
money they invested. (77)
15. Double taxation: dividends are taxed twice, once for the
corporation and once for the stockholder. (78)
16. Principal agent problem: when stockholders hire executives
as their agents to run the business on their behalf. (78)
17. Monopoly: where a single seller controls the industry. (79)
18. Spillover costs: production or consumption costs inflicted on
a third party without compensation. (80)
19. Spillover benefits: when goods or services spill over to the
community. (81)
20. Exclusion principle: those who are unwilling to spend
equilibrium price to buy a good or service. (81)
21. Public goods: indivisible and cannot be sold individually to
buyers.
22. Free rider program: People benefit from a good without
 contributing to its cost (82)
23. Quasi- public goods: goods and services that can be
produced and delivered in such a way that the exclusion
principal would apply. (82)
24. Government purchases: exhaustive where the products
purchased directly absorb recourses and are part of a
domestic output. (84)
25. Transfer payments: Non-exhaustive that do not directly
absorb resources or create output. (84)
26. Personal income tax: tax put on income of households and
businesses. (86)
27. Marginal tax rate: the rate that the tax is paid on each
additional unit of taxable income. (86)
28. Enrage tax rate: the total tax paid divided by the total
taxable income. (86)
29. Payroll taxes: taxes based on wages and salaries. (87)
30. Corporate income tax: taxes levied from a corporations
prophet. (87)
31. Sales and excise taxes: taxes on commodities or on
purchases. (87)
32. Property taxes: money paid for all owned property. (87)
33. Fiscal federalism: federal government makes grants and
gives money to local and state governments to help with
financial needs. (90)