Introductory Economics Review Flashcards

Comprehensive vocabulary flashcards covering fundamental economic concepts, industrial history, supply and demand, elasticity, market efficiency, and welfare metrics based on the lecture transcript.

Economics

The science that studies how people and societies make decisions to get the most out of their limited resources.

Postulate of Economics

The core principle that changes in incentives influence human behavior in predictable ways.

Microeconomics

The branch of economics focusing on individual decision-making units, such as the needs of a firm.

Macroeconomics

The branch of economics focusing on the economy as a whole, covering topics like inflation and recession.

Historical Standard of Living (250–350 Years Ago)

An era when life expectancy was $25$ to $30$ years, newborns frequently did not reach age $5$, and people lived at subsistence levels without social mobility.

Factors of the Industrial Revolution

Five key growth drivers in 18th-century England: widespread literacy/education, patent rights, democracy, property rights, and the rule of law.

Patent Rights

Legal protections that safeguard inventors and provide financial incentives to create new technology.

Property Rights

Legal rights that incentivize people to produce, retain, and specialize in their own goods and services.

Utility

A measure of happiness or satisfaction that allows economists to predict trends and market movements.

Opportunity Cost

The value of the next best forgone alternative given up when choosing one option over another due to scarce resources.

Accounting Profit

Total revenue minus explicit costs, calculated as $\text{Revenue} - \text{Cost}$.

Economic Profit

Total revenue minus explicit costs and opportunity costs, calculated as $\text{Revenue} - \text{Cost} - \text{Opportunity Cost}$.

Means of Production

The four economic inputs used to make goods and services: land, labor, capital, and entrepreneurial ability.

Capital

Human-made physical assets, such as machines, tools, and buildings, used to produce goods and services.

Entrepreneurial Ability

The resource that combines land, labor, and capital to create new goods, services, or business processes.

Choice Model

An economic model of human behavior where individuals evaluate options for utility, consider constraints and trade-offs, and choose the option that maximizes overall happiness.

Allocatively Efficient

A market outcome where firms produce the specific goods and services that consumers desire.

Productively Efficient

A market outcome where goods and services are produced at the lowest possible cost.

Invisible Hand

Adam Smith's concept from The Wealth of Nations (1776) describing how free markets incentivize self-interested individuals to produce what is socially necessary.

Marginal Analysis

The decision-making process of comparing additional marginal benefits ($MB$) with additional marginal costs ($MC$) to select options where $MB \ge MC$.

Marginal Cost

The additional cost incurred when producing one additional unit, calculated as $\frac{\Delta \text{Cost}}{\Delta \text{Quantity}}$.

Law of Diminishing Marginal Utility

The economic principle stating that as an individual consumes additional units of a good, the added satisfaction gained from each subsequent unit decreases.

Demand

The desire, willingness, and ability of consumers to buy specific quantities of a good or service at various prices.

Law of Demand

The principle stating an inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases.

Elasticity Curve Slopes

Diagram illustrating how different demand curve slopes reflect varying levels of consumer price responsiveness, from inelastic to elastic.

Inelastic Demand

A condition where buyers are less responsive to price changes because the good lacks close substitutes (e.g., gasoline, coffee, electricity).

Elastic Demand

A condition where buyers are highly responsive to price changes because many close substitutes are available (e.g., peanuts).

Perfectly Inelastic Demand

Demand where buyers will pay any price for a fixed quantity, represented visually by a vertical demand line (e.g., life-saving care).

Perfectly Elastic Demand

Demand where buyers purchase any quantity at a specific price, but demand drops to zero at any higher price, represented visually by a horizontal demand line.

Law of Supply

The principle stating that higher prices induce suppliers to offer more units for sale to cover increasing supply costs.

Market Equilibrium

The point where quantity demanded equals quantity supplied, leaving both consumers and producers content without excess demand or supply.

Price Ceiling

A legally mandated maximum price set below market equilibrium that results in excess demand, causing a shortage (e.g., rent control).

Price Floor

A legally mandated minimum price set above market equilibrium that results in excess supply, causing a surplus.

Market Distortion and Shortage Diagram

Diagram showing supply curve shifts, price ceiling/floor impacts, market shortages, and deadweight loss triangles.

Traits of a Properly Functioning Market

Six market conditions: complete information, clearly defined property rights, supply curves capturing all production costs, demand curves capturing all benefits, numerous buyers and sellers, and unconstrained price adjustments.

Socially Optimal Market Equilibrium Diagram

Supply and demand diagram showing the point where marginal benefit equals marginal cost, establishing the market price and market quantity.

Consumer Surplus

The net gain to consumers when they purchase a good at a market price lower than the maximum price they were willing to pay.

Producer Surplus

The net gain to firms when they sell output at a market price higher than the minimum price they were willing to accept.

Total Surplus

The sum of consumer surplus and producer surplus, measuring the total welfare gain to society from market production and trade.

Deadweight Loss

The annihilation or loss of total economic surplus caused by market interventions or distortions such as price controls, embargoes, or monopolies.