Glossary

Allocate

Assign or distribute a resource, good, or service.

Bond

A type of investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Budget

A financial plan that summarizes an individual’s planned income, spending, saving, and investing over a specific time period.

Capital

The buildings, tools, and machines people create and use to produce final goods and services.

Charitable giving

Donations of money, goods, or services to nonprofit organizations.

Command economy

An economic system entirely controlled by a small group of ruling elites in government. This group allocates all available resources.

Commodities

Goods traded in bulk in a financial market; examples include materials from the earth like oil, precious metals, and certain foods, as well as other usable goods or credits with standardized value.

Comparative advantage

When one trading partner can produce goods or services at a lower opportunity cost than the other partner using available resources.

Competition

Rivalry between two or more people such as businesses striving to earn the consumer’s dollar or between to or more consumers trying to purchase the same product.

Consumer

A person who buys goods and services.

Consumer sovereignty

The theory that consumers primarily influence production decisions in a market economy.

Consumption

The process of buying and using a good or service.

Cost

The amount that is spent to obtain something, such as what is spent to employ the four productive resources.

Demand

Amounts of a particular good or service consumers are willing and able to buy at different prices at a particular time.

Demand curve

A visual representation of quantities of a particular good or service consumers are willing and able to buy at different prices at a particular time.

Demand schedule

A table or list that shows the quantities that would be demanded at a number of different prices.

Demand shifters

Factors other than price that change the demand for a good or service.

Economic equity

A condition of economic fairness and impartiality as defined by an established standard.

Economic freedom

A condition in which individuals and businesses have freedom of choice in employment, buying, selling, use of time, and other economically related decisions.

Economic growth

A condition in which the output of goods and services in an economy increases over the previous period, usually a quarter or year.

Economic reasoning

Making rational choices by weighing benefits and costs, including opportunity costs.

Economic security

Market economy goal of protection against financial risks associated with war, natural disasters, and accidents on the job— situations in which people have little or no control.

Economics

A social science that studies how people, individually and in groups, decide to use scarce resources to satisfy their wants.

Efficiency

A condition in which maximum output is obtained at the least cost from the resources used to produce goods and services.

Entrepreneurial talent

An innovator who recognizes opportunities and organizes resources to take advantage of them.

Excess demand

When quantity demanded is greater than quantity supplied at a price lower than the market-clearing price, also known as a shortage.

Excess supply

When quantity supplied is greater than quantity demanded at a price higher than the market-clearing price, also known as a surplus.

Financial market

The markets where buyers and sellers exchange assets such as bonds and stocks.

Foreign exchange market

(Forex) An international market for the trading of currencies that determines foreign exchange rates for every currency.

Free market economy

An economic system that leaves production, consumption, and price decisions largely to consumers and business people with only limited influence by government; also known as a pure market economy. Not currently used by any nation.

Full employment

A condition in which almost all people in the labor force are working in jobs best suited for their skills.

Incentives

Something that encourages different behaviors and choices.

Income

Money earned through the productive employment of resources. Wages, salaries, rent, and interest are the four main sources of income.

Income effect

A consumer’s purchasing power of income changes with changes in price. As the price of an item increases, quantity demanded decreases with the decrease in purchasing power. The opposite occurs with a decrease in price.

Intended consequences

The expected outcomes of a decision.

Labor

The physical and mental effort used to produce goods and services.

Law of demand

An inverse relationship between the quantity demanded and the price of a product.

Law of supply

The principle of a positive relationship between the price of an item and the quantity of it producers are willing to supply when other things are held constant.

Loss

The total cost of production exceeds revenue.

Macroeconomy

The economy as a whole; its study is called macroeconomics

Market

An arrangement that allows buyers and sellers to make exchanges.

Market demand

The total of all individual demands in a given market at a particular time.

Market equilibrium

When the market-clearing price brings quantity demanded equal to quantity supplied.

Market-clearing price

The price at which the quantity supplied is equal to the quantity demanded.

Mixed market economy

An economic system in which decisions about production and consumption are driven in part by supply and demand and in part by government command and/or traditional elements, combining two or more types of economic systems.

Natural Resources

Materials used in production that are provided by nature, like water, minerals, and trees.

Needs

Items or services that you must have in order to live.

Opportunity cost

The highest valued alternative given up as a result of making a choice.

Philanthropy

Gifts or acts made for humanitarian purposes

Price ceiling

Prices imposed by the government that control how high a price can go, often leading to a shortage or excess demand if it is set below market-clearing price.

Price controls

Prices imposed by the government. Controls set either above (price floor) or below (price ceiling) the level that would be established by free markets at the market-clearing price create surpluses or shortages.

Price floor

Prices imposed by the government that control how low a price can go. It can create a surplus or excess supply if it is set above the level that would be established by free markets at the market-clearing price.

Price signals

Information sent to producers and consumers that affects supply and demand, based on the price of goods, services, and resources.

Price stability

An economic condition in which prices of goods, services, and resources do not fluctuate significantly, either up or down, in a short period of time.

Producer

A person or business that makes or supplies goods or services.

Profit

Money earned in excess of what it costs to produce goods and services.

Profit margin

The amount (in percentages) that a business keeps for each dollar of sales.

Quantity demanded

The quantity of goods or services a consumer demands and is willing to buy at a specific price.

Quantity supplied

The amount a producer is willing and able to supply at a particular price, given cost.

Recession

A period of time, six months or longer, in the business cycle during which total GDP output declines.

Resources

Inputs that can be transformed into goods and services (natural, human, capital, and entrepreneurial talent).

Revenue

Money earned from sales.

Scarcity

A condition that exists between unlimited wants and needs and the limited resources available to satisfy them, requiring people to make choices.

Self-interest

A motivating factor that leads individuals to focus on those actions and choices that promise the most personal benefit and involve the least cost.

Shortage

The positive difference between quantity demanded and quantity supplied when the actual price is lower than the market-clearing price. There is excess demand.

Specialization

When each trading partner focuses on producing goods or services within a limited area of expertise.

Stock

A share in the ownership of a company.

Subsidies

Government payments or other support that decrease an industry’s production costs based on political considerations rather than economic factors. They may or may not decrease the consumer’s price of the industry’s goods.

Substitution effect

As price increases, consumers will replace pricier items with less pricey alternatives.

Supply

Quantities of a good or service that producers are willing and able to sell at different prices at a particular time.

Supply chain

The process or sequence used to produce and distribute a product; the network between a business and its suppliers.

Supply Curve

A graphic expression of the relationship between product price and quantity of product that a seller is willing and able to supply.

Supply schedule

A chart listing the quantity supplied for a good or service at various prices per unit.

Supply shifters

Factors other than price that change the supply of a good or service.

Surplus

The difference between quantity supplied and quantity demanded when the actual price is higher than the market-clearing price. There is excess supply.

Taxes

Required payments from individuals and businesses made to a government to pay for public goods and services.

Unintended consequences

The unforeseen outcomes of a decision, regardless of the original intentions.

Voluntary exchange

Buyers and sellers willingly trading goods, services, effort, and money with an expectation of being better off than before.

Wants

Items or services that you would like, but that you can live without.