TASC Economics Level 3 key terms

The condition in which limited resources cannot satisfy all the wants and needs of people. Because resources are finite, individuals and societies must choose among competing uses for them.

The value of the next best alternative given up when a choice is made. It includes both the money spent and the benefits forgone from the option not selected.

A situation in which gaining more of one good or goal requires accepting less of another. Every decision involving scarce resources involves a trade-off between competing options.

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed. Points beyond the curve are unattainable with current resources and technology.

Comparing the additional benefit of one more unit of an action with its additional cost. Decisions are rational when the marginal benefit meets or exceeds the marginal cost.

An economic system in which prices, profits, and private ownership guide most decisions about what to produce, how to produce it, and for whom. Government plays a limited direct role.

An economic system in which a central authority owns most resources and sets production targets and prices. Individual consumers and firms have little influence over economic decisions.

An economic system combining private markets with government ownership, regulation, and public programs. Most modern economies, including the United States, are mixed to varying degrees.

A good or service that is difficult to exclude people from using and whose use by one person does not reduce availability to others. National defense and street lighting are common examples.

A cost or benefit of an economic activity that falls on third parties who did not choose to be involved. Pollution is a negative externality; education spillovers are a positive one.

The various quantities of a good or service that buyers are willing and able to purchase at different prices during a given period, all other things held constant.

The principle that, all else equal, quantity demanded falls as price rises and rises as price falls. The inverse relationship reflects income and substitution effects.

The various quantities of a good or service that sellers are willing and able to offer at different prices during a given period, with other influences held constant.

The principle that, all else equal, quantity supplied rises as price rises and falls as price falls. Higher prices generally make production more profitable at the margin.

The price and quantity at which quantity demanded equals quantity supplied. At this point there is neither a shortage nor a surplus, and the price tends to stay put.

A situation in which quantity demanded exceeds quantity supplied at the current price. Shortages usually push the price upward toward equilibrium.

A situation in which quantity supplied exceeds quantity demanded at the current price. Surpluses usually push the price downward toward equilibrium.

A legally imposed maximum price for a good or service. Set below equilibrium, it creates a shortage and may require rationing or lead to black markets.

A legally imposed minimum price for a good or service. Set above equilibrium, it creates a surplus, as with minimum wage laws in labor markets.

A measure of how responsive quantity demanded is to a change in price, income, or another factor. Demand is elastic when quantity changes proportionally more than price.

A good that can replace another for a similar purpose, such as tea and coffee. When the price of one rises, demand for its substitute typically increases.

A good used together with another, such as printers and ink cartridges. When the price of one rises, demand for the other usually falls.

The principle that each additional unit of a good consumed provides less extra satisfaction than the previous unit. This helps explain downward-sloping demand curves.

The amount a seller receives from selling a good, calculated as price multiplied by quantity sold. Whether revenue rises or falls after a price change depends on elasticity.

A cost that does not change with the level of output in the short run, such as rent on a factory. Fixed costs must be paid even when production is zero.

A cost that changes directly with the quantity of output produced, such as wages for hourly labor and raw materials. Variable costs rise as production expands.

The additional cost of producing one more unit of output. Profit-maximizing firms generally expand output until marginal cost equals marginal revenue.

A market structure with many small sellers, identical products, easy entry and exit, and full information. Individual firms are price takers facing a horizontal demand curve.

A market structure in which a single seller supplies a good with no close substitutes and barriers keep rivals out. The monopolist is a price maker and typically restricts output.

A market structure dominated by a few large sellers whose decisions are interdependent. Firms may compete aggressively or coordinate prices, and entry is difficult.

The portion of the population that is either employed or actively seeking work. People who are not working and not looking for work are not counted in it.

The percentage of the labor force that is jobless and actively seeking work. It excludes discouraged workers and people working part time who want full-time jobs.

Short-term joblessness that occurs as workers move between jobs or enter the labor market. It is generally considered normal and exists even in a healthy economy.

Joblessness caused by a mismatch between the skills workers have and the skills employers need, or by jobs moving to new locations. It tends to last longer than frictional unemployment.

The knowledge, skills, training, and health that workers possess and that raise their productivity. Investment in education and training increases human capital and typically raises wages.

A legally required lowest hourly pay rate for covered workers. Set above the market equilibrium wage, it can create a surplus of labor, meaning fewer jobs for low-skilled workers.

The total market value of all final goods and services produced within a country's borders during a given period, usually a year or a quarter. It is the main measure of economic output.

Gross domestic product adjusted for changes in the price level, so it reflects actual changes in output. Unlike nominal GDP, it is not inflated by rising prices.

A sustained rise in the general price level of goods and services, which reduces the purchasing power of money. It is commonly measured by changes in a consumer price index.

A measure of the average change over time in the prices paid by households for a fixed basket of consumer goods and services. It is widely used to gauge inflation.

The recurring pattern of expansion and contraction in overall economic activity over time. Its phases include expansion, peak, recession, and trough.

A significant decline in economic activity lasting more than a few months, typically marked by falling output, rising unemployment, and reduced spending. In the United States it is often defined as two consecutive quarters of declining GDP.

The amount of goods and services a unit of money can buy at current prices. It falls when prices rise faster than incomes.

Any item generally accepted as payment for goods and services or in settlement of debts. It serves as a medium of exchange, a unit of account, and a store of value.

The institution that manages a nation's money supply, issues currency, and oversees its banking system. In the United States this role belongs to the Federal Reserve.

Actions taken by a central bank to influence the money supply, interest rates, and credit conditions in order to pursue goals such as price stability and full employment.

The buying and selling of government securities by a central bank to adjust bank reserves and the money supply. Buying securities expands the money supply; selling contracts it.

The share of customer deposits that banks must hold rather than lend out, set by the central bank. A higher requirement reduces the money supply by limiting new lending.

The use of government spending and taxation to influence the economy. Expansionary policy raises spending or cuts taxes; contractionary policy does the opposite.

The amount by which government spending exceeds its revenue in a given year. Persistent deficits accumulate into the national debt.

The total amount of money a government owes to lenders as a result of past borrowing. It is the accumulation of past budget deficits net of surpluses.

A tax that takes a larger share of income from higher-income earners than from lower-income earners. The U.S. federal income tax is a common example.

A tax that takes a larger share of income from lower-income earners than from higher-income earners. Sales taxes are often regressive because the poor spend a larger share of income.

The ability of a country or producer to make a good using fewer resources than another producer. It is distinct from comparative advantage, which focuses on relative costs.

The ability to produce a good at a lower opportunity cost than another producer. Specializing according to comparative advantage allows trading partners to gain from exchange.

Concentrating production on a limited range of goods or tasks in which a producer is relatively efficient. It increases total output and makes trade between parties beneficial.

A tax imposed on imported goods. Tariffs raise the domestic price of imports, protect domestic producers, and can provoke retaliation from trading partners.

The price of one country's currency expressed in units of another country's currency. It affects the cost of imports and exports and shifts with supply and demand for currencies.

The growing integration of national economies through trade, investment, migration, and information flows. It can lower consumer prices while pressuring some domestic industries and workers.