Economics Exam 1 Vocabulary Flashcards

A list of key economics vocabulary terms and definitions derived from the provided lecture notes and diagrams.

Scarcity

The limited nature of society's resources, meaning society cannot produce all the goods and services people want.

Economics

The study of how society manages its scarce resources.

Efficiency

The property of society getting the most it can from its scarce resources, representing the size of the economic pie.

Equality

The property of distributing economic prosperity uniformly among the members of society.

Opportunity Cost

Whatever must be given up to obtain some item.

Rational People

People who systematically and purposefully do the best they can to achieve their goals, given the available opportunities.

Marginal Change

A small incremental adjustment to an existing plan of action.

Incentive

Something that induces a person to act, evaluated by rational people comparing costs and benefits.

Invisible Hand

The idea that individuals pursuing their own self-interest in a market economy unintentionally promote overall economic well-being through voluntary exchange and competition.

Market Economy

An economy that allocates resources through the decentralized decisions of millions of firms and households as they interact in markets for goods and services.

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 unduly influence 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.

Business Cycle

Fluctuations in economic activity, such as employment and production.

Circular Flow Diagram

A visual model of the economy that shows how dollars flow through markets among households and firms.

Production Possibilities Frontier

A graph that shows the various combinations of outputs that the economy can possibly produce given the available factors of production and production technology.

Allocative Efficiency

A state of resource allocation where resources are distributed to produce the specific mix of goods and services that society most desires.

Microeconomics

The study of how households and firms make decisions and how they interact in markets.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, national debt, tariffs, GDP, exports, and imports.

Positive Statements

Descriptive claims about how the world is, which can be confirmed or refuted by examining evidence.

Normative Statements

Prescriptive claims about how the world ought to be, requiring values as well as facts to evaluate.

Absolute Advantage

The ability to produce a good using fewer inputs or achieving higher productivity than another producer.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

Competitive Market

A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.

Monopoly

A market structure in which there is only one seller who sets the price.

Law of Demand

The claim that, other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises.

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a given price.

Law of Supply

The principle that, all else equal, as the price of a good rises, the quantity supplied increases, and as the price falls, the quantity supplied decreases.

Market Equilibrium

A situation in which the market price has reached the level where quantity supplied equals quantity demanded.

Price Ceiling

A legal maximum on the price at which a good can be sold.

Price Floor

A legal minimum on the price at which a good can be sold.

World Price

The price of a good that prevails in the world market for that good.

Tariff

A tax levied on goods produced abroad and sold domestically.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time, expressed by the expenditure identity $Y = C + I + G + \text{NX}$.

Consumption (C)

Spending by households on goods and services, with the exception of purchases of new housing.

Investment (I)

Spending on business capital, residential capital, and inventories, representing purchases of goods that will be used to produce other goods and services in the future.

Government Purchases (G)

Spending on goods and services by local, state, and federal governments, excluding transfer payments.

Net Exports (NX)

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports), calculated as $\text{NX} = \text{Exports} - \text{Imports}$.

Nominal GDP

The production of goods and services valued at current prices.

Real GDP

The production of goods and services valued at constant base-year prices.

GDP Deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP times $100$, represented as $\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100$.

Gross National Product (GNP)

The total market value of all final goods and services produced by a country's residents and businesses during a given period, regardless of where production occurs.

Net National Product (NNP)

The total value of a nation's final goods and services after subtracting depreciation, represented by the formula $\text{NNP} = \text{GNP} - \text{Depreciation}$.

GDP per Capita

A country's gross domestic product divided by its total population, measuring average economic output per person.

Consumer Price Index (CPI)

A measure of the average change over time in the prices paid by consumers for a fixed basket of goods and services.