25 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

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Microeconomics by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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