Key Terms

circular flow diagram
a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market
command economy
an economy where economic decisions are passed down from government authority and where resources are owned by the government
division of labor
the way in which the work required to produce a good or service is divided into tasks performed by different workers
the study of how humans make choices under conditions of scarcity
economies of scale
when the average cost of producing each individual unit declines as total output increases
products (goods and services) made domestically and sold abroad
fiscal policy
economic policies that involve government spending and taxes
the trend in which buying and selling in markets have increasingly crossed national borders
goods and services market
a market in which firms are sellers of what they produce and households are buyers
gross domestic product (GDP)
measure of the size of total production in an economy
products (goods and services) made abroad and then sold domestically
labor market
the market in which households sell their labor as workers to business firms or other employers
the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
interaction between potential buyers and sellers; a combination of demand and supply
market economy
an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand
the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
see theory
monetary policy
policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
private enterprise
system where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals
when human wants for goods and services exceed the available supply
when workers or firms focus on particular tasks for which they are well-suited within the overall production process
shares of ownership of companies
a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation
traditional economy
typically an agricultural economy where things are done the same as they have always been done
Underground economies
markets where the buyers and sellers make transactions without the government’s approval.