Scarce & Smart
Clue: This core economic problem — limited resources but unlimited wants — is the root of every choice you make.
What is scarcity?
The price at which quantity supplied equals quantity demanded.
What is equilibrium?
A general, ongoing rise in prices across the whole economy.
What is inflation?
A for-profit financial institution that holds your deposits and makes loans.
What is a bank?
A share of ownership in a company.
What is a stock?
Things you must have to live, versus things you would merely like to have.
What are needs versus wants?
The next-best option you give up whenever you make a choice.
What is opportunity cost?
In the labor market, this is the "price" — workers supply it and employers demand it.
What is the wage?
A measure of how much your money can actually buy.
What is purchasing power?
A not-for-profit, member-owned institution that often offers lower fees and better rates.
What is a credit union?
A loan you make to a company or government, repaid to you with interest.
What is a bond?
Savings set aside specifically to cover unexpected expenses.
What is an emergency fund?
Clue: This curve shows the maximum combinations of two goods an economy can make; any point inside it means resources are being wasted.
What is the Production Possibilities Curve (PPC)?
In the loanable funds market, savers supply money and borrowers demand it. This is the "price."
What is the interest rate?
The index economists use to track the overall price level.
What is the CPI (Consumer Price Index)?
This high-cost, short-term lender carries the greatest risk of trapping borrowers in a cycle of debt.
What is a payday lender?
Spreading your investments across many different assets to reduce risk.
What is diversification?
The ability to absorb a financial shock without sliding into crisis.
What is financial resilience?
A rational decision-maker keeps doing an activity until these two quantities are equal.
What are marginal benefit and marginal cost (MB = MC)?
A wave of new graduates floods the nursing field while hospital demand stays flat. This is what happens to nursing wages.
What is they fall (decrease)?
This is the formula that converts a nominal dollar amount into its real value.
What is Real Value = Nominal Value ÷ Price Level (CPI as a decimal)?
This federal agency insures bank deposits and helps stop panic from spreading.
What is the FDIC?
This tradeoff says that higher potential returns always come paired with more of this.
What is risk (the risk-return tradeoff)?
When your spending exceeds your income, your budget is running one of these.
What is a deficit?
After four cups of coffee, the fifth gives you almost no extra satisfaction. This principle explains why.
What is diminishing marginal utility (diminishing marginal benefit)?
Many businesses suddenly want to borrow while the supply of savings stays the same. This is what happens to interest rates.
What is they rise (increase)?
Your savings account pays 2% interest while inflation runs at 5%. This is your real return.
What is negative — about –3% (you lose buying power)?
Because banks keep only a fraction of deposits and lend the rest, fear can trigger this self-fulfilling event.
What is a bank run?
A 16-year-old saving for retirement can take on more risk than a 64-year-old because of this factor.
What is time horizon (a long time horizon)?
A job loss, a sudden medical bill, and a major car repair hitting at once are all examples of these.
What are financial shocks?
You have $1,000. Inflation is 4%, your savings account pays 1%, and a diversified index fund has averaged 8% a year over the long run. Using purchasing power and the risk-return tradeoff, explain why leaving all your money in savings could actually cost you wealth.
Because inflation (4%) outpaces the savings rate (1%), money in savings loses about 3% of its purchasing power each year — a negative real return. Investing accepts more short-term risk in exchange for a higher expected return that can outrun inflation over a long time horizon, and diversification keeps that risk manageable. So "safe" savings can quietly erode real wealth.