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

division of labor  the way in which different workers divide required tasks to produce a good or service

economics  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

goods and services market  a market in which firms are sellers of what they produce and households are buyers

labor market  the market in which households sell their labor as workers to business firms 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 business firms

model  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

normative statement  a statement which describes how the world should be

opportunity cost  measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative

positive statement  a statement which describes the world as it is

production possibilities frontier (PPF)  a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

scarcity  when human wants for goods and services exceed the available supply

specialization  when workers or firms focus on particular tasks for which they are well-suited within the overall production process

theory  a simplified representation of how two or more variables interact with each other