Introductory Economics: Principles, Markets, and Strategic Behavior

Comprehensive vocabulary flashcards covering introductory microeconomics principles across 12 lecture topics: core decision principles, supply and demand, elasticity, taxes and government intervention, market failures and externalities, taxation and redistribution, market structures, profit maximization, price discrimination, and game theory.

Gross Domestic Product (GDP)

A measure of the total income and output of the economy in a given period, often expressed in per-capita terms as an average income.

Disposable Income

The total personal income remaining after subtracting taxes and adding government transfers ($\text{Disposable income} = \text{Total Income} - \text{taxes} + \text{government transfers}$).

Hockey Stick Diagram

Curves representing the sustained, rapid growth in GDP per capita experienced by countries worldwide following centuries of relatively flat economic performance.

Industrial Revolution

A wave of technological advances starting in Britain in the 18th century that transformed an agrarian and craft-based economy into a commercial and industrial economy.

Capitalism

An economic system where the main institutions are private property, markets, and firms.

Capital Goods

The non-labour inputs used in production, representing an important type of private property.

Markets

A way for people to exchange products and services for their mutual benefit through reciprocated, voluntary transfers usually characterized by competition.

Firm

A business organisation that uses inputs to produce outputs, sets prices to at least cover production costs, and uses markets to sell outputs, usually aiming to make a profit.

Absolute Advantage

The condition where a person or entity can produce more units of a good than other people using the same amount of resources.

Comparative Advantage

The condition where a person's opportunity cost of producing a good is less than the opportunity costs incurred by other people.

Cost-Benefit Principle

The core economic principle stating that decision makers should evaluate the full set of costs and benefits associated with a choice and pursue it only if the benefits are at least as great as the costs.

Willingness to Pay

The maximum monetary amount an individual is willing to pay to obtain a benefit, used to convert nonfinancial costs and benefits into monetary equivalents.

Economic Surplus

The total benefits minus the total costs flowing from a decision, which measures how much a decision has improved well-being.

Opportunity Cost

The true cost of something, defined as the value of the next best alternative that must be given up to get it.

Sunk Cost

A cost that has already been incurred and cannot be reversed, which exists regardless of future choices and should be ignored in current decision making.

Production Possibilities Frontier (PPF)

A curve that illustrates the different sets of output attainable with scarce resources and the trade-offs confronted when allocating those resources.

Marginal Principle

The principle that decisions about quantities are best made incrementally by breaking them down into 'one more unit' choices.

Marginal Benefit

The extra benefit received from consuming or producing one additional unit.

Marginal Cost

The extra cost incurred from producing or consuming one additional unit.

Rational Rule

The rule stating that if something is worth doing, you should keep doing it until your marginal benefit equals your marginal cost ($\text{Marginal Benefit} = \text{Marginal Cost}$).

Interdependence Principle

The principle that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future.

Complementary Goods

Products that people use together, where an increase in demand for one item leads to an increase in demand for the other item.

Substitute Goods

Goods that compete against each other, such that a lower price for one good results in a lower demand for the other good.

Law of Demand

The tendency for the quantity demanded of a good to be higher when its price is lower, implying a downward-sloping demand curve.

Diminishing Marginal Benefit

The economic principle that each additional item consumed yields a smaller marginal benefit than the previous item.

Market Demand Curve

A graph plotting the total quantity of an item demanded by all buyers in the entire market at each price, formed by horizontal summation of individual demand curves.

Law of Supply

The tendency for the quantity supplied of a good to be higher when its price is higher.

Perfect Competition

A market structure where all firms sell an identical good, there are many small buyers and sellers, and participants are price-takers with no market power.

Diminishing Marginal Product

The phenomenon where the marginal product of an input declines as more of that input is used, leading to rising marginal costs of production.

Rational Rule for Sellers

Sell one more unit if the price is greater than or equal to marginal cost, and keep selling until $\text{Price} = \text{Marginal Cost}$.

Market Equilibrium

The point at which there is no tendency for change, occurring where the quantity willingly demanded by buyers equals the quantity willingly supplied by sellers.

Shortage

A market condition occurring when the quantity demanded exceeds the quantity supplied at the prevailing price.

Surplus

A market condition occurring when the quantity supplied exceeds the quantity demanded at the prevailing price.

Price Elasticity of Demand

A measure of buyer responsiveness to price changes, calculated as the percent change in quantity demanded divided by the percent change in price ($\frac{\%\Delta Q}{\%\Delta P}$).

Elastic Demand

A condition where the absolute value of the percent change in quantity demanded is greater than the percent change in price ($|\%\Delta Q| > |\%\Delta P|$), yielding an absolute elasticity greater than $1$.

Inelastic Demand

A condition where the absolute value of the percent change in quantity demanded is smaller than the percent change in price ($|\%\Delta Q| < |\%\Delta P|$), yielding an absolute elasticity less than $1$.

Cross-Price Elasticity of Demand

A measure of responsiveness of the quantity demanded of one good to a change in the price of another good ($\frac{\%\Delta Q_A}{\%\Delta P_B}$); positive for substitutes and negative for complements.

Income Elasticity of Demand

A measure of responsiveness of quantity demanded to changes in consumer income ($\frac{\%\Delta Q}{\%\Delta \text{Income}}$), which is positive for normal goods and negative for inferior goods.

Statutory Burden

The legal obligation assigned by the government designating which party (buyer or seller) is responsible for remitting a tax payment.

Economic Burden

The actual division of the burden created by changes in post-tax prices faced by buyers and sellers, determined by the relative elasticities of supply and demand.

Subsidy

A payment made by the government to those who make a specific choice; acts as a negative tax that lowers consumer prices, increases prices received by sellers, and increases quantities traded.

Price Ceiling

A maximum legal price set by the government that sellers can charge for a good or service; it is binding only when set below the market equilibrium price.

Price Floor

A minimum legal price set by the government that sellers can charge; it is binding only when set above the market equilibrium price.

Positive Analysis

An objective approach that describes what is happening, explains why it occurs, and forecasts what will happen under specific policies without value judgments.

Normative Analysis

An analysis that prescribes what should happen and involves subjective value judgments about policy outcomes.

Consumer Surplus

The economic surplus gained by a buyer, calculated as marginal benefit (willingness to pay) minus the actual price paid ($\text{Marginal Benefit} - \text{Price}$).

Producer Surplus

The economic surplus gained by a seller, calculated as the price received minus the marginal cost incurred ($\text{Price} - \text{Marginal Cost}$).

Deadweight Loss (DWL)

The reduction in total economic surplus below the efficient outcome, resulting from market distortions such as taxes, price controls, underproduction, or overproduction.

Knowledge Problem

The economic challenge where the information needed to make efficient centralized production and distribution decisions is dispersed and unavailable to any single decision maker.

Externality

A side effect of an activity that affects bystanders whose interests are not taken into account or mediated by market transactions.

Marginal Social Cost (MSC)

The total marginal cost imposed on society from producing one extra unit, calculated as the sum of Marginal Private Cost (MPC) and Marginal External Cost (MEC).

Marginal Social Benefit (MSB)

The total marginal benefit accruing to all members of society from one extra unit, calculated as Marginal Private Benefit (MPB) plus Marginal External Benefit (MEB).

Socially Optimal Quantity

The quantity of output that maximizes society's total economic surplus, identified where marginal social benefit equals marginal social cost ($\text{MSB} = \text{MSC}$).

Coase Theorem

The proposition that if private property rights are clearly assigned and enforced, and bargaining is costless, private parties can negotiate solutions to externalities and achieve the socially optimal outcome without government intervention.

Pigouvian Tax

A corrective tax set equal to the marginal external cost, designed to induce decision makers to internalize the negative externality they produce.

Cap and Trade

A regulatory system that sets a maximum aggregate quantity of permissible pollution (the cap) and distributes tradeable permits allowing efficient firms to buy and sell pollution allowances.

Four Classifications of Goods

A taxonomy categorizing goods into Private Goods, Common Resources, Club Goods, and Public Goods based on whether they are rival and/or excludable.

Tragedy of the Commons

The tendency for common resources—which are nonexcludable but rival—to be overconsumed and depleted because private gains accrue to individuals while costs are shared across society.

Gini Coefficient

A statistical measure of income inequality that summarizes the distribution of income across a population, ranging from $0$ (perfect equality) to $1$ (total inequality).

Progressive Tax

A tax system in which individuals with higher incomes pay a higher marginal tax rate on each additional dollar earned.

Regressive Tax

A tax where lower-income individuals pay a larger share of their total income compared to higher-income individuals, commonly observed with sales and consumption taxes.

Utilitarianism

The political philosophy asserting that government policy should strive to maximize the total utility and well-being of all members of society.

Effective Marginal Tax Rate

The fraction of each extra dollar of earned income that is lost to a combination of higher taxes and the phasing out of income-tested government support benefits.

Monopoly

A market structure consisting of a single seller of a product with no close substitutes, giving the firm substantial market power to act as a price-maker.

Oligopoly

A market structure dominated by a small number of large sellers selling differentiated or similar products, characterized by strategic interaction among competitors.

Monopolistic Competition

A market structure characterized by many small firms competing by selling differentiated products, providing each firm with some degree of market power.

Sources of Market Power

A continuum illustrating how market power increases as the number of competitors decreases (from many to none) and product differentiation rises (from identical to unique).

Marginal Revenue

The change in total revenue generated from selling one additional unit of output ($\Delta \text{Total Revenue} / \Delta Q$).

Output Effect

The increase in total revenue resulting from selling a larger quantity of items when a firm expands output.

Discount Effect

The loss in revenue on all existing units sold when a firm lowers its price to sell an additional unit of output.

Natural Monopoly

An industry where a single business can supply the entire market at a lower average cost than two or more firms could due to extensive economies of scale.

Economic Profit

Total revenue minus both explicit financial costs and implicit opportunity costs, such as forgone wages and forgone investment interest ($\text{Total Revenue} - \text{Explicit Costs} - \text{Implicit Opportunity Costs}$).

Profit Margin

The profit earned per unit of output, defined as price (or average revenue) minus average total cost ($\text{Price} - \text{Average Cost}$).

Switching Costs

Impediments or expenses that make it costly for a consumer to switch from one supplier to another, locking in existing customers.

Price Discrimination

The practice of charging different customers different prices for the exact same good or service in order to capture consumer surplus as producer surplus.

Group Pricing

A form of price discrimination where different prices are charged to identifiable segments of customers based on observable characteristics that correlate with their willingness to pay.

Hurdle Method

A price discrimination mechanism that offers a discount only to consumers who are willing to jump over an obstacle, such as clipping coupons or waiting for sales, thereby self-selecting by reservation price.

Bundling

The practice of selling multiple distinct goods together as a single package for a lower overall price than if they were purchased separately.

Game Theory

The science of making strategic decisions in settings where the optimal outcome depends on the choices of other decision makers.

Best Response

The strategy that yields the highest individual payoff for a player given the specific action chosen by their rival.

Dominant Strategy

A strategy that yields a strictly higher payoff than any other alternative strategy, regardless of what the other player decides to do.

Nash Equilibrium

A state in game theory where each player chooses an action that is a best response to the actions chosen by all other players, giving no player an incentive to unilaterally deviate.

Prisoner's Dilemma

A game where dominant strategies lead both players to defect, resulting in an equilibrium payoff that is strictly worse for each player than if they had both cooperated.

Coordination Game

A game characterized by multiple Nash equilibria where players achieve superior payoffs by making complementary or identical choices.

Game Tree

A visual diagram representing a sequential game, mapping decision nodes across successive time periods from the root move to all subsequent branches and terminal payoffs.

Grim Trigger Strategy

A strategy in repeated games where a player cooperates until the rival defects once, after which the player punishes the rival by defecting forever.