Core Economic Concepts

Absolute advantage is the ability of a party to produce a greater amount of a good or service than other parties using the same amount of resources.

Allocative efficiency is an economic state where no resources are wasted and the best possible resource allocation has been achieved.

Ceteris paribus is a Latin phrase meaning 'all else being equal' or 'holding all else constant'.

The circular flow model represents the flow of goods, services, and payments between households and firms in a simplified economy.

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.

Factors of production are the resources used in the production of goods and services, including land, labor, capital, and entrepreneurship.

Marginal analysis is the process of analyzing the additional benefits and costs arising from a change in an activity, used to make optimal decisions.

Marginal benefit is the additional satisfaction or utility a consumer enjoys from consuming one more unit of a good or service.

Microeconomics focuses on individual economic units like households and firms, while macroeconomics studies the economy as a whole.

Opportunity cost is the value of the next-best alternative you give up when you make a choice.

Positive economics is the study of what is, while normative economics is the study of what ought to be.

The Production Possibilities Curve (PPC) is a graphical representation showing the maximum combination of two goods or services that can be produced in an economy with a given set of resources and technology, assuming full and efficient use of those resources.

Productive efficiency is an economic state where a firm produces a given level of output at the lowest possible cost.

Rational self-interest is the assumption that individuals make decisions by comparing the expected marginal benefits and marginal costs of an action.

Scarcity is the fundamental economic problem of having limited resources but unlimited wants and needs.

Specialization is the concentration of an individual, firm, or country on the production of a limited scope of goods and services.

Terms of trade refers to the relative price of imports in terms of exports and is defined as the ratio of export prices to import prices.

A trade-off is the exchange of one thing for another, reflecting the reality that choosing more of one thing means having less of something else.

The fallacy of composition is the error of assuming that what is true for one individual or part must also be true for the whole group or economy.