Note - On the online textbook if you hover over the orange words it provides the definitions of them

1.1 Understanding the nature of economics

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Social Sciences
- Any academic discipline that studies human society and social relationships, concerned with
discovering general principles describing how societies function and are organized; include
anthropology, economics, political science, psychology, sociology, and others
Microeconomics
- The branch of economics that examines the behavior of individual decision making units,
consumers and firms; is concerned with consumer and firm behavior and how their interactions in
markets determine prices in goods markets and resource markets
Macroeconomics
- The branch of economics that examines the economy as a whole by use of aggregates, which are
wholes or collections of many individual units, such as the sum of consumer behaviors and the
sum of firms behaviors, total income and output of the entire economy as well as total
employment and the general price level

Page 4: Key Concepts

Scarcity
- The condition in which available resources (land, labor, capital, and entrepreneurship) are limited;
they are not enough to produce everything that human being need and want
Choice
- Economics is a study of choices, or selecting among alternatives, due to the scarcity of resources
Efficiency
- Making the best possible use of scarce resources to avoid waste; may refer to producing at the
lowest possible cost, or producing what consumers mostly want
Allocative efficiency
- An allocation of resources that results in producing the combination and quantity of goods and
services mostly preferred by consumers. The condition for allocative efficiency is given by MSB
= MSC (margubak social benefit = marginal social cost) or P = MC (price is equal to marginal
cost); alternatively it is when social surplus is maximum
Equity
- The condition of being fair or just; should be contrasted with the term ‘equality’. Often used in
connection with income distribution in which case it is usually interpreted to mean income
equality (though this is only one possible interpretation of equity)
Economic well-being
- Refers to levels of prosperity, economic satisfaction, and standards of living among the members
of a society
Sustainability
- Maintaining the ability of the environment and the economy to continue to produce and satisfy
needs and wants into the future for future generations; depends crucially on the preservation of
the environment over time. Related to the concept of sustainable development, meaning
 ‘Development which meets the needs of the present without compromising the ability of future
generations to meet their own needs
Change
- Important in economics in the study of both economic theory as well as in real world events
- Change in situations or between one or more variables
- Continuous in the institutional, technological, social, political, and cultural environments

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Interdependence
- The idea that economic decision-makers interact with and depend on each other; arises form the
fact that no one is self-sufficient
Intervention
- Typically refers to government intervention, meaning that the governemnt becomes involved with
the working of markets
Resources
- Factors of production, used by firms as inputs in the production process
Factors of production
- All resources, or inputs (land, labor, capital, and entrepreneurship) used to produce goods and
services

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Scarcity
- The situation in which available resources, or factors of production, are finite, whereas wants are
infinite. There are not enough resources to produce everything that human beings need and want
Economics
- The study of choices leading to the best possible use of scarce resources in order to best satisfy
unlimited human needs and wants
Sustainable development
- development which meets the needs of the present without compromising the ability of future
generations to meet their own needs

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Sustainability
- Maintaining the ability of the environment and the economy to contribute to produce and satisfy
need and wants into the future (depends on sustainable resource use)
Sustainable resource use
- The preservation of the environment over time. The problem of sustainability arises because
resources are scarce
Land
- A factor of production which includes all natural resources: land and agricultural land, as well as
everything that is under or above the land, such as minerals, oil reserves, underground water,
forests, rivers and lakes. Natural resources are also called ‘gifts of nature’ or ‘nature capital’
Labor
 - A factor of production, which includes the physical and mental effort that people contribute to the
production of goods and services

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Capital
- One of the factors of production which itself has been produced (it does not occur naturally), also
known as ‘physical capital’, including machinery, tools, equipment, buildings, etc. Other types of
capital include ‘human capital’, or the skills, abilities, knowledge and levels of good health
acquired by people; ‘natural capital’ or everything that traditionally has been included in the
factor of production ‘land’; and ‘financial capital’, or purchases of financial instruments such as
stocks and bonds
Entrepreneurship
- One of the factors of production, involving a special human skill that includes the ability to
innovate by developing new ways of doing things, to take business risks and to seek new
opportunities for opening and running a business. Entrepreneurship organizes the other three
factors of froduction (land, labor, and capital) and takes on the risks of success or failure of a
business.
Human capital
- The skills, abilities, and knowledge acquired by people, as well as good levels of health, all of
which make them more productive; considered to be a kind of ‘capital’ because it provides a
stream of future benefits by increasing the amount of output that can be produced in the future.
Physical capital
- Man-made inputs that provide the ability to produce greater quantities of output (more goods in
the future)
Natural capital
- Environmental capital = land + additional natural resources, such as air, biodiversity, soil quality,
the ozone layer, and global climate. Humankind needs natural capital to survive
Financial capital
- Investments in financial instruments that provide a stream of benefits in the form of an income for
the holders, or owners of the financial instruments

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Opportunity cost
- The value of the next best alternative that must be sacrificed to obtain something else, is central to
the economic perspective of the world, and results from the scarcity that forces choices to be
made
Free good
- Any good that is not scarce and therefore has a zero opportunity cost
- Obtained without sacrificing something else
Economic good
- Any good that is scarce, ethier because it is a naturally-occurring scarce resource )such as oil,
gold, coal, forests, and lakes), or because it is produced by scarce resources. All economic goods
have an opportunity cost greater than 0.
1.2 The three basic questions: resource allocation, and output/income distribution

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What/how much to produce
- Refers to the choice that must be made in response to the question what particular goods and
services an economy is to produce and in what quantities
How to produce
- Refers to the choice that must be made in response to the question of what combinations of
resources and what types of technologies to use in order to produce goods and services
For whom to produce
- Refers to the choice that must be made in response to the questions of income or wealth
distribution among a population
Resource allocation
- Assigning available resources, or factors of production, to specific uses chosen among many
possible and competing alternatives; involves answering the ‘what to produce’ and ‘how to
produce’ basic economic questions
Distribution of income
- Concerned with how much of an economy’s total income different individuals or different groups
in the population receive, and involves answering the ‘for whom’ basic economic question

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Redistribution of income
- Refres to changing the distribution of income, giving rise to a new distribution

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Government intervention
- Changes the allocation of resources (and distribution of output and income) from what markets
would have achieved working on their own
Free market economy
- An ‘ideal type’ of economy based on the market approach to making economic decisions; involve
private sector ownership and decision-making, and price rationing; to be contrasted with a
planned economy
Planned economy
- An economy where all economic decision-making is carried out by government planning (based
on command and control methods); rather than reliance on prices determined in markets; to be
contrasted with a free market economy
Mixed economies
- An economy that combines the command approach (governemnt decision-making) with the
market approach (private sector decision making) to resource ownership, decision making and
rationing
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Private ownership
- Consumers (households), firms (businesses), organizations, interest groups, and resource owners
Rationing
- A method used to apportion or divide something up between its interest users; in economics it
refers to the method used to make resource allocation and output/income distribution decisions
Price rationing
- Decisions for what, how, and who will recieve the production of goods is based on the prices of
goods determined in the markets
Non-price rationing
- Who, how, and what will be produced ~ prices of goods are determined by methods and have
nothing to do with prices in markets. A result of no markets or when governments interfere in
markets, in which case the governemnt acts as a central authority and makes economic decisions
by commands

1.3 Understanding the world by use of models

1.4 The method of economics

1.5 The origins of economic ideas