LEARNING OBJECTIVES: The student should be able to complete the following:

 1.Define  opportunity cost.

2.Define comparative and absolute advantage.

3.Describe and give examples of  the law of comparative advantage.

4.Desrcibe, analyze and apply the "economic" way of thinking.

5.Graph and analyze data. 

6.Graph and distinguish between inverse, direct, and zero relationships.

7.Graph and distinguish between constant and variable relationships.

8.Indentify the origins of the problem of scarcity.

9.Identify the opportunity costs involved in various courses of action.

10.Construct and interpret a production possibilities curve form data.

11.Apply the concept of opportunity cost to a production possibilities curve.

12.Compare and interpret the impact of societal priorities on the slope, operating points and limits of the production possibilities curve.

13.Identify the mechanisms  utilized by  the market, command, and tradition economy to allocate resources.

14. Identify advantages and disadvantages between the two systems.

15. Apply scarcity to economic situations.


KEY TERMS (All definitions taken directly from McConnell & Brue) 



The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction on human material wants.

economic perspective

A viewpoint which envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.

marginal analysis

The comparison of marginal (“extra” or “additional”) benefits and marginal costs usually for decision making.

theoretical economics

The process of deriving principles.


Generalizations about the way individuals and institutions behave; meaningful statements about economic behavior or the economy.


A method of reasoning which proceeds from facts to generalization.


Reasoning from assumptions to conclusions; a method of reasoning which first develops a hypothesis (an assumption) and then tests the hypothesis with economic facts.


A general statement, law, principle, or proposition.

"other things being equal" assumption

(Or, ceteris paribus) The assumption that all other variables except those under immediate consideration are held constant for a particular analysis.

policy economics

The formulation of courses of action to bring about desired economic outcomes or to prevent undesired occurrences.


The sacrifice of some or all of one economic goal good or service to achieve some other goal good or service.


The part of economics concerned with the economy as a whole; with such major aggregates as the household business and governmental sectors; and with measures of the total economy.


A collection of specific economic units treated as if they were one unit. For example, we might use the term, consumers to refer to an aggregate of all consumers in the US.


The part of economics concerned with such individual units as industries firms and households; and with individual markets particular prices and specific goods and services.

positive economics

The analysis of facts or data to establish scientific generalizations about economic behavior.

normative economics

That part of economics involving value judgments about what the economy should be like; concerned with identifying economic goals and promoting them via public policies.

fallacy of composition

Incorrectly reasoning that what is true for the individual (or part) is necessarily true for the group (or whole).

"after this therefore because of this" fallacy

(Or, Post hoc, ergo propter hoc) The fallacy that because B follows A, that B must be caused by A.

Quick Outline Chapter One 


economizing problem

The choices necessitated because society’s material wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).


The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

economic resources

The land labor capital and entrepreneurial ability which are used in the production of goods and services; productive agents; factors of production.


Natural resources (“free gifts of nature”) used to produce goods and services.


Human-made resources (buildings machinery and equipment) used to produce goods and services; goods which do not directly satisfy human wants; also called capital goods.


Spending for the production and accumulation of capital and additions to inventories.


The physical and mental talents and efforts of people which are used to produce goods and services.

entrepreneurial ability

The human resources which combine the other resources to produce a product make non routine decisions innovate and bear risks.

factors of production

Economic resources: land capital labor and entrepreneurial ability.

full employment

(1) Use of all available resources to produce want-satisfying goods and services. (2) The situation when the unemployment rate is equal to the full-employment unemployment rate and there is frictional and structural but no cyclical unemployment (and the real output of the economy equals its potential real output).

full production

Employment of available resources so that the maximum amount of (or total value of) goods and services is produced; occurs when both productive efficiency and allocative efficiency are realized.

productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and at which marginal product per dollar’s worth of input is the same for all inputs.

allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal.

consumer goods

Products and services which satisfy human wants directly.

capital goods

(See Capital.)

production possibility table

A table listing the different combinations of two products that can be produced with a specific set of resources.

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment full-production economy in which the available supplies of resources and technology are fixed.

opportunity cost

The amount of other products which must be forgone or sacrificed to produce a unit of a product.

law of increasing opportunity costs

As the production of a good increases the opportunity cost of producing an additional unit rises.

economic growth

(1) An outward shift in the production possibilities curve which results from an increase in resource quantity or quality or an improvement in technology; (2) an increase either in real output (gross domestic product) or in real output per capita.

economic system

A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy; of which the market economy command economy and traditional economy are three general types.

pure capitalism

An economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities.

market systems

All the product and resource markets of a market economy and the relationships among them; a method which allows the prices determined in these markets to allocate the economy’s scarce resources and to communicate and coordinate the decisions made by consumers firms and resource suppliers.

command economy

An economic system (method of organization) in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities.

traditional economies

An economic system in which traditions and customs determine how the economy will use its scarce resources.

resource market

A market in which households sell and firms buy resources or the services of resources.

product market

A market in which products are sold by firms and bought by households.

circular flow model

The flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.


Quick Outline Chapter 2


private property

The right of private persons and firms to obtain own control employ dispose of and bequeath land capital and other property.

freedom of enterprise

The freedom of firms to obtain economic resources to use these resources to produce products of the firm’s own choosing and to sell their products in markets of their choice.

freedom of choice

The freedom of owners of property resources to employ or dispose of them as they see fit of workers to enter any line of work for which they are qualified and of consumers to spend their incomes in a manner which they think is appropriate.


That which each firm property owner worker and consumer believes is best for itself and seeks to obtain.


The presence in a market of a large number of independent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.

roundabout production

The construction and use of capital to aid in the production of consumer goods.


The use of the resources of an individual a firm a region or a nation to produce one or a few goods and services.

division of labor

Dividing the work required to produce a product into a number of different tasks which are performed by different workers; specialization of workers.

medium of exchange

Items sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.


The exchange of one good or service for another good or service.


Any item which generally is acceptable to sellers in exchange for goods and services.

Five Fundamental Questions

The 5 questions which every economy must answer: how much to produce what to produce how to produce it how to divide the total output and how to ensure economic flexibility.

economic costs

A payment which must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products which cannot be produced when resources are instead used to make a particular product.

normal profit

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income which entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.

economic profit

The total revenue of a firm less all its economic costs; also called “pure profit” and “above normal profit.”

expanding industry

An industry whose firms earn economic profits and which experience an increase in output as new firms enter the industry.

declining industry

An industry in which economic profits are negative (losses are incurred) and which will therefore decrease its output as firms leave it.

consumer sovereignty

Determination by consumers of the types and quantities of goods and services which will be produced with the scarce resources of the economy; consumer direction of production through dollar votes.

dollar votes

The “votes” which consumers and entrepreneurs cast for the production of consumer and capital goods respectively when they purchase them in product and resource markets.

derived demand

The demand for a resource which depends on the demand for the products it can be used to produce.

guiding function of prices

The ability of price changes to bring about changes in the quantities of products and resources demanded and supplied.

“invisible hand”

The tendency of firms and resource suppliers seeking to further their own self-interests in competitive markets to also promote the interest of society as a whole.

Quick Outline Chapter Four


functional distribution of income

The manner in which national income is divided among the functions performed to earn it (or the kinds of resources provided to earn it); the division of national income into wages and salaries proprietors’ income corporate profits interest and rent.

personal distribution of income

The manner in which the economy’s personal or disposable income is divided among different income classes or different households.

durable good

A consumer good with an expected life (use) of 3 or more years.

nondurable good

A consumer good with an expected life (use) of less than 3 years.


An (intangible) act or use for which a consumer firm or government is willing to pay.


A physical establishment which performs one or more functions in the production fabrication and distribution of goods and services.


An organization which employs resources to produce a good or service for profit and owns and operates one or more plants.

vertical combination

A group of plants engaged in different stages of the production of a final product and owned by a single firm.

horizontal combination

A group of plants in the same stage of production which are owned by a single firm.

conglomerate combination

A group of plants owned by a single firm and engaged at one or more stages in the production of different products (of products that do not compete with each other).


A group of (one or more) firms which produces identical or similar products.

sole proprietorship

An unincorporated firm owned and operated by one person.


An unincorporated firm owned and operated by two or more persons.


A legal entity (“person”) chartered by a state or the Federal government which is distinct and separate from the individuals who own it.


An ownership share in a corporation.


A financial device through which a borrower (a firm or government) is obligated to pay the principle and interest on a loan at a specific date in the future.

limited liability

Restriction of the maximum loss to a predetermined amount for the owners (stockholders) of a corporation; the maximum loss is the amount they paid for their shares of stock.

double taxation

The taxation of both corporate net income (profits) and the dividends paid from this net income when they become the personal income of households.

principal-agent problem

A conflict of interest which occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals’ (stockholders) goals.


A market structure in which the number of sellers is so small that each seller is able to influence the total supply and the price of the good or service. (Also see Pure monopoly.)

spillover costs

A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river killing the fish sport fishers seek.

spillover benefits

A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover.

exclusion principle

The ability to exclude those who do not pay for a product from receiving its benefits.

public goods

A good or service which is indivisible and to which the exclusion principle does not apply; a good or service with these characteristics provided by government.

free-rider problem

The inability of potential providers of an economically desirable but indivisible good or service to obtain payment from those who benefit because the exclusion principle is not applicable.

quasipublic goods

A good or service to which the exclusion principle could apply but which has such a large spillover benefit that government sponsors its production to prevent an under allocation of resources.

government purchases

Disbursements of money by government for which government receives a currently produced good or service in return; the expenditures of all governments in the economy for final goods and services.

transfer payments

A payment of money (or goods and services) by a government to a household or firm for which the payer receives no good or service directly in return.

personal income tax

A tax levied on the taxable income of individuals households and unincorporated firms.

marginal tax rate

The tax rate paid on each additional dollar of income.

average tax rate

Total tax paid divided by total (taxable) income as a percentage.

payroll taxes

A tax levied on employers of labor equal to a percentage of all or part of the wages and salaries paid by them; and on employees equal to a percentage of all or part of the wages and salaries received by them.

corporate income tax

A tax levied on the net income (profit) of corporations.

sales and excise taxes

A tax levied on the cost (at retail) of a broad group of products.

property taxes

A tax on the value of property (capital land stocks and bonds and other assets) owned by firms and households.

fiscal federalism

The system of transfers (grants) by which the Federal government shares its revenues with state and local governments.


State and/or local government sponsored voluntary gambling enterprise. A controversial topic (see page 96).


Quick Outline Chapter Five