Introductory Economics Study Guide

A set of vocabulary flashcards to help understand key concepts in introductory economics, focusing on market efficiency, government intervention, consumer theory, and market structures.

Allocative Efficiency

Occurs when resources in a market are used in the most valuable way possible, producing goods and services that match society’s preferences.

Marginal Benefit (MB)

The additional benefit received from consuming one more unit of a good, reflected by the demand curve.

Marginal Cost (MC)

The additional cost of producing one more unit of a good, represented by the supply curve.

Consumer Surplus (CS)

The extra benefit consumers receive when they pay less for a product than the maximum they were willing to pay.

Producer Surplus (PS)

The extra benefit producers receive when they sell a product at a price higher than the minimum they were willing to accept.

Total Economic Surplus

The sum of consumer surplus and producer surplus at the market equilibrium.

Price Ceiling

A maximum legal price that can be charged for a good or service, often leading to shortages when set below equilibrium.

Price Floor

A minimum legal price for a good or service, which can create surpluses when set above equilibrium.

Deadweight Loss (DWL)

A loss of total economic surplus that occurs when a market is not operating at allocative efficiency due to intervention.

Externalities

Costs or benefits of a transaction that affect third parties not involved in the transaction.

Pigouvian Tax

A tax imposed to correct the effects of a negative externality by making the cost equal to the external cost.

Pigouvian Subsidy

A subsidy provided to encourage activities that have positive externalities.

Indifference Curve

A graph showing combinations of two goods that provide a consumer with the same level of satisfaction.

Budget Constraint

Represents all combinations of goods a consumer can afford given their income and the prices of goods.

Marginal Utility (MU)

The additional satisfaction gained from consuming one more unit of a good.

Diminishing Marginal Utility

The principle that as consumption increases, the additional satisfaction gained from each additional unit decreases.

Market Structure

The competitive environment in which firms operate, ranging from perfect competition to monopoly.

Oligopoly

A market structure in which a small number of firms dominate the market.

Monopolistic Competition

A market structure characterized by many firms offering differentiated products.

Perfect Competition

A market structure with many firms selling identical products with no barriers to entry.

Monopoly

A market structure where a single firm is the sole producer of a product with no close substitutes.

Four Firm Concentration Ratio

A measure of market concentration that indicates the proportion of market output produced by the four largest firms.

Herfindahl-Hirschman Index (HHI)

An index that measures market concentration by summing the squares of the market shares of all firms in the market.