Economics Terms



A market describes the place or infrastructure in which people exchange goods or services.  It is a very broad term that includes exchanging goods or services for other goods or services, which is called barter.  A market can also involve the selling of goods and services for money.




Incentives are anything that motivates someone to do something.  In economics, incentives are what motivates people to spend money.  Incentives are often the idea that the spender is getting a good value for their money.


Monopoly and Competition


When two businesses offer the same goods or service, they are in competition.  Competition encourages businesses to lower prices or add other incentives.  When a business has no competition, it has a monopoly.  With a monopoly, a business can raise prices and limit incentives like good service.


Labor and Capital


When a business produces goods, there are some resources it needs.  Capital refers to the goods needed to start the business, such as equipment and labor refers to people needed to produce the goods.


Opportunity Cost


When a consumer makes a choice, the opportunity cost is what they lose by not choosing the item they chose not to take.  For example, if a person is choosing between buying a sports car or a minivan, the opportunity cost of buying the minivan would be losing the ability to drive very fast.  The opportunity cost of the sports car is not being able to carry many passengers.




Profit is the difference between the purchase price of goods or services and the cost to the business in producing the goods and services.




Entrepreneurship is the process of starting a business.  An entrepreneur develops a business model, invests in capital and hires labor.  An entrepreneur is responsible for the risk that the business may succeed or fail.


Comparative Advantage


If one business can produce a similar good to other businesses at a lower cost or lower opportunity cost, they have a comparative advantage.  They can then charge a lower price than their competition.




Specialization is a way for businesses to increase production by dividing their operations into departments that make specific goods. 




Productivity is a measurement of how efficiently a business can produce goods or services. 




Interdependence in economics refers to businesses that depend on each other to exist.  A factory that produces goods may rely on suppliers for raw materials and stores to sell the product.  The stores and suppliers rely on the factory to manufacture the goods.


Supply, Demand and Price


Supply and demand refers to the relationship between the availability of goods, the desire for people to buy goods, and the price of the goods.  If the demand for a good increases and the supply is limited, the price will increase.  Also, if supplies of a good decrease, that will also cause prices to rise. Too much of a good on the market can cause prices to drop.


Fiscal and Monetary Policy


The government can have some control over the economy.  Fiscal policy refers to how much money the government brings in, usually as taxes.  Monetary policy refers to how much money the government produces.  The government can also control the economy through the regulating or easing regulations on institutions like banks.


Inflation and Deflation


In an economy, rising prices are called inflation and falling prices are called deflation.  The inflation rate is the rate at which prices are generally rising on goods over a long period of time.


Gross Domestic Product (GDP)


GDP is the total amount of goods and services produced by a country.  It is used as a sign of a country’s economic health.




Unemployment is the percentage of people who want to have a job but do not.  Those unable or not trying to work are not a part of unemployment. 




Tariffs are taxes on goods being imported to a country from another country.  They provide revenue for the government and help the economy by giving a comparative advantage to producers of goods in the country. 





Factory Photo:  Andres Praefke