35 Key Economic Concepts

A comprehensive set of vocabulary flashcards covering basic economic systems, market structures, and the laws of supply and demand based on the lecture notes.

Economic System

The way a society answers the five basic economic questions: What should be produced? How much should be produced? How should it be produced? Where should it be produced? For whom should it be produced?

Institutions

The four major participants in an economy, often remembered by the acronym HFGF: Households, Firms, Government, and the Foreign Sector.

Central Planning

An economic system where the government controls resources and decides what to produce, how much to produce, prices, and wages; an example is North Korea.

Capitalism

An economic system where private individuals and businesses make most economic decisions based on private property, competition, the profit motive, and consumer sovereignty.

Traditional Society

An economy based on customs, traditions, and beliefs, characterized by little technology, little specialization, and jobs passed through families.

Product Market

Where goods and services are bought and sold; Households are the buyers and Businesses are the sellers.

Resource Market

Where resources like Labor, Land, Capital, and Entrepreneurship are bought and sold; Businesses are the buyers and Households are the sellers.

Financial Capital Market

Where money is borrowed and lent through instruments like bank loans, stocks, bonds, and student loans.

Circular Flow Model

A model showing how households sell resources to firms and firms produce goods for households, with money flowing in one direction and goods/resources in the opposite.

Voluntary Exchange

A trade where both buyer and seller believe they are better off afterward, creating value because participants value what they receive more than what they give up.

Efficient Exchange

A situation where goods and services go to the people who value them the most, facilitated by prices in a market.

Marginal Cost

The cost of producing one more unit, calculated with the formula $MC = \frac{\triangle TC}{\triangle Q}$.

Relative Prices

The price of one good compared with another, used by consumers to choose between alternatives.

Marginal Benefit

The additional benefit received from consuming one more unit; buyers follow the rule to buy more if $MB > MC$ and stop if $MB < MC$.

Marginal Utility

The extra satisfaction gained from consuming one additional unit, which decreases as consumption increases according to the Law of Diminishing Marginal Utility.

Total Utility

The total satisfaction from consuming a product; it reaches its maximum when $MU = 0$ and decreases if $MU$ becomes negative.

Supply

The relationship between price and the quantity producers are willing and able to sell, represented by an upward sloping curve.

Quantity Supplied

The amount producers sell at one specific price, represented by a single point on the supply curve.

Change in Quantity Supplied

A movement along the supply curve caused ONLY by changes in the price of the good.

Change in Supply

A shift of the entire supply curve caused by factors such as technology, taxes, resource prices, or number of sellers, but NOT by the price of the good itself.

Law of Supply

The principle that, ceteris paribus, a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied.

Determinants of Supply

Factors that shift the supply curve, including Technology, Resource Prices, Taxes, Government Regulation, Number of Sellers, and Expectations.

Demand

The relationship between price and the quantity consumers are willing and able to buy, represented by a downward sloping curve.

Quantity Demanded

The amount consumers buy at one specific price, represented by a movement along the demand curve when price changes.

Change in Quantity Demanded

A movement along the demand curve caused ONLY by a change in the price of the good.

Change in Demand

A shift of the entire demand curve caused by factors like Income, Preferences, Population, and prices of related goods.

Law of Demand

The principle that a higher price leads to a lower quantity demanded and a lower price leads to a higher quantity demanded, explained by the Income and Substitution effects.

Determinants of Demand

Factors that shift the demand curve, including Income, Preferences, Number of Buyers, Price of Substitutes, Price of Complements, and Expectations.

Substitutes vs. Complements

Substitutes are goods that replace each other (e.g., Coke and Pepsi), while Complements are goods used together (e.g., Peanut Butter and Jelly).

Normal Goods vs. Inferior Goods

For a Normal Good, demand increases as income increases; for an Inferior Good, demand decreases as income increases.

Substitution Effect

The tendency of consumers to switch toward a good that becomes relatively less expensive, explaining why the demand curve slopes downward.

Income Effect

The increase in purchasing power when prices fall, making consumers feel richer and increasing the quantity demanded.

Market Equilibrium

The point where the quantity demanded equals the quantity supplied ($QD = QS$), occurring where the demand and supply curves intersect.

Market Shortage vs. Market Surplus

A Shortage occurs when price is below equilibrium ($QD > QS$); a Surplus occurs when price is above equilibrium ($QS > QD$).

Changes in Market Equilibrium

The outcomes for price and quantity when curves shift; if both Demand and Supply increase or decrease simultaneously, the outcome for either price or quantity becomes indeterminate.