Economics - StudyReady

Individual Markets

Microeconomics vocabulary

Term	Meaning
Opportunity cost	The value of the next-best alternative you give up when making a choice
Scarcity	The basic economic problem: unlimited wants, limited resources
Elasticity	How much quantity demanded/supplied changes in response to a price change
Marginal cost / benefit	The cost or benefit of producing/consuming one additional unit
Market equilibrium	The price where quantity supplied equals quantity demanded
Monopoly	A market with a single seller controlling supply and price

Fundamentals

Supply and demand basics

Law of demand: As price rises, quantity demanded falls (all else equal) - the demand curve slopes downward.
Law of supply: As price rises, quantity supplied rises (all else equal) - the supply curve slopes upward.
Shift vs. movement: A price change causes movement along a curve. A change in another factor (income, technology, expectations) shifts the whole curve.
Surplus and shortage: A surplus happens when price is set above equilibrium (supply > demand); a shortage happens when price is set below equilibrium (demand > supply).

The Whole Economy

Macroeconomics vocabulary

Term	Meaning
GDP	Gross Domestic Product - the total value of goods and services produced in a country in a given period
Inflation	A general rise in prices over time, reducing the purchasing power of money
Unemployment rate	The percentage of the labor force actively seeking work but unable to find it
Fiscal policy	Government use of spending and taxation to influence the economy
Monetary policy	Central bank actions (like adjusting interest rates) to influence the money supply and economy
Recession	A significant decline in economic activity, commonly defined as two consecutive quarters of falling GDP

Common Mistakes

Where students go wrong in economics

Patterns we see again and again in student work. Each one is fixable once you know to look for it.

Confusing a shift with a movement along the curve: A change in the good's own price moves you along the demand curve. Anything else (income, tastes, price of substitutes, expectations) shifts the whole curve. This distinction is tested constantly and is the source of most wrong answers on supply and demand questions. Before answering, identify which one has changed.
Forgetting "all else equal": Nearly every economic law assumes other factors are held constant. When a question describes two things changing at once, the laws no longer give a single answer, and the correct response is often "it depends on which effect is larger." Recognizing that is worth marks.
Mixing up nominal and real: Nominal values are measured in current money; real values are adjusted for inflation. A 5% raise during 6% inflation is a real pay cut. Any question involving change over time should prompt the question: is this nominal or real?
Treating micro and macro as the same reasoning: What is true for one household is not always true for the economy. Saving more is good for an individual; if everyone saves more at once, spending falls and so can income (the paradox of thrift). Watch for questions that ask you to scale up an individual decision.
Not drawing the graph: Supply and demand, cost curves, aggregate demand and supply: nearly every economics question is easier with a sketch. Draw it, label the axes, mark the shift, and read the answer off. Students who try to reason verbally about curves they have not drawn make far more errors.