24 Glossary: Economic Thinking
circular flow diagram a diagram indicating that the economy consists of households and firms interacting in a goods-and-services market and a labor market
direct relationship a relationship between two variables such that both either increase or decrease together; also called a “positive relationship”
division of labor the way in which the work required to produce a good or service is divided into tasks performed by different workers
economic model is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior
economics is the study of how humans make choices under conditions of scarcity in an attempt to satisfy their unlimited wants
economies of scale when the average cost of producing each individual unit declines as total output increases
function a relationship or expression involving one or more variables
goods-and-services market a market in which firms are sellers of what they produce, and households are buyers
independent relationship a relationship between two independent variables such that when one changes, the other does not change, and vice versa; also called a “constant relationship”
intercept the point on a graph where a line crosses the vertical axis or horizontal axis
interception point the point on a graph where two lines cross
inverse relationship a relationship between two variables such that when one increases, the other decreases, or vice versa; also called “negative relationship”
labor market the market in which households sell their labor as workers to businesses or other employers
macroeconomics the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
microeconomics the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and businesses
monetary policy policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
negative slope indicates that two variables are negatively related; when one variable increases, the other decreases, and when one variable decreases, the other increases
opportunity cost is the value of the next best alternative
positive slope indicates that two variables are positively related; when one variable increases, so does the other, and when one variable decreases, the other also decreases
productive resources the inputs used in the production of goods and services to make a profit: land, economic capital, labor, and entrepreneurship; also called “factors of production”
scarcity exists when human wants for goods and services exceed the available supply
slope the change in the vertical axis divided by the change in the horizontal axis
slope of zero indicates that there is a constant relationship between two variables: when one variable changes, the other does not change
specialization when workers or firms focus on particular tasks for which they are well suited within the overall production process
variable a quantity that can assume a range of values
x-axis the horizontal line on a graph
y-axis the vertical line on a graph
