Efficiency means that society is getting the maximum benefits from its scarce resources.

Equality means that those benefits are distributed uniformly among society's members.

The opportunity cost of an item is what you give up to get that item.

Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.

Economists use the term marginal change to describe a small incremental adjustment to an existing plan of action.

An incentive is something that induces a person to act, such as the prospect of a punishment or reward.

One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources.

market failure a situation in which a market left on its own fails to allocate resources efficiently

externality the impact of one person’s actions on the well-being of a bystander

market power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

productivity the quantity of goods and services produced from each unit of labor input

inflation an increase in the overall level of prices in the economy

Most economists describe the short-run effects of money growth as follows: • Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services. • Higher demand may over time cause firms to raise their prices, but in the meanwhile, it also encourages them to hire more workers and produce a larger quantity of goods and services. • More hiring means lower unemployment.

This simply means that, over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.