Introducing Economics: Foundations, Microeconomic Theory, and Market Structures

Comprehensive vocabulary flashcards covering fundamental economics, supply and demand, government intervention, utility and consumer choice, production and cost analysis, and market structures ranging from perfect competition to monopoly and oligopolistic game theory.

Scarcity

The fundamental economic problem that human wants are virtually unlimited, whereas the resources available (factors of production) to fulfill them are finite.

Factors of Production

The limited resources available to produce goods and services, grouped into human resources (labour), natural resources (land and raw materials), and manufactured resources (capital).

Microeconomics

The branch of economics that studies the decisions of individual households and firms and how they interact in specific markets.

Macroeconomics

The branch of economics that studies the economy as a whole, focusing on aggregates such as aggregate demand and supply, economic growth, inflation, and unemployment.

Command Economy

An economic system in which the state plans investment, output, production methods, and distribution to direct resources toward national economic and social goals.

Free-Market Economy

An economic system in which individual households and firms make decisions, prices adjust to balance demand and supply, and competition coordinates resource allocation.

Mixed Economy

An economic system that combines market mechanisms with government intervention, differing across countries in the degree and form of that intervention.

Positive Statements

Claims about what is or what will happen, which can be tested against empirical evidence and judged right or wrong.

Normative Statements

Value judgements about what ought to be or what is desirable, which depend on ethics and priorities and cannot be resolved by evidence alone.

Law of Demand

The principle that when the price of a good rises, the quantity demanded falls, which is explained by the income effect and the substitution effect of a price change.

Change in Quantity Demanded

A movement along a fixed demand curve caused exclusively by a change in the good's own price.

Change in Demand

A shift of the entire demand curve (rightward for an increase, leftward for a decrease) caused by changes in non-price determinants such as tastes, substitute goods, complementary goods, income, or expectations.

Identification Problem

The difficulty of determining the position and shape of a demand or supply curve because observed market data represent equilibrium points jointly determined by the intersection of both curves.

Price Elasticity of Demand ($PeD$)

A unit-free measure of how responsive the quantity demanded of a good is to a change in its own price, defined as $\frac{\%\Delta Q_d}{\%\Delta P} = \frac{\Delta Q_d}{Q_d} \div \frac{\Delta P}{P}$.

Income Elasticity of Demand

A measure of how responsive quantity demanded is to changes in consumer income; goods are classified as inferior when the value is negative and normal when positive.

Cross-Price Elasticity of Demand

A measure of the responsiveness of demand for one good to a change in the price of another good; positive values indicate substitutes and negative values indicate complements.

Minimum Price (Price Floor)

A legally imposed price set by the government above the market equilibrium price, resulting in a persistent surplus because supply exceeds demand.

Maximum Price (Price Ceiling)

A legally imposed price set by the government below the market equilibrium price, resulting in a shortage because demand exceeds supply.

Incidence of Taxation

The distribution of the tax burden between buyers and sellers; the consumer's share is larger when demand is less elastic and supply is more elastic, whereas the producer's share is larger when demand is more elastic and supply is less elastic.

Total Utility ($TU$)

The overall satisfaction or benefit a person derives from consuming a given quantity of a good.

Marginal Utility ($MU$)

The additional satisfaction gained from consuming one more unit of a good, calculated as $MU = \frac{\Delta TU}{\Delta Q}$.

Law of Diminishing Marginal Utility

The principle that as more units of a good are consumed, each additional unit provides less additional satisfaction ($MU$ declines as $Q$ increases).

Total Consumer Surplus ($TCS$)

The difference between total willingness to pay (total utility, $TU$) and the total expenditure ($TE = P \times Q$) actually paid, represented by the area below the marginal utility curve and above the price line.

Indifference Curve

A curve showing all combinations of two goods that give a consumer the same level of total utility, leaving the consumer equally satisfied at every point.

Marginal Rate of Substitution ($MRS$)

The rate at which a consumer is willing to give up units of good $Y$ to obtain one additional unit of good $X$ while keeping utility constant, equal to the ratio of their marginal utilities: $MRS = \frac{MU_X}{MU_Y}$.

Budget Line

A line showing all combinations of two goods that exhaust a consumer's money income ($B$), given by $P_X X + P_Y Y = B$, with a slope equal to the negative price ratio, $-\frac{P_X}{P_Y}$.

Substitution Effect of a Price Rise

The change in quantity consumed when the price of a good rises, reflecting the movement along the original indifference curve toward relatively cheaper goods under the new price ratio.

Income Effect of a Price Rise

The change in quantity consumed resulting from the reduction in purchasing power caused by a price rise, illustrated by an inward parallel shift of the compensated budget line to the actual new budget line.

Production Function

The technical relationship showing the maximum amount of output ($TPP$) that can be produced from given quantities of inputs: $Q = f(K, L)$.

Law of Diminishing Returns

The principle that holding technology and other inputs constant, successively adding more of a variable input will eventually yield progressively smaller additions to total output ($MPP$ falls).

Marginal Physical Product ($MPP$)

The additional output resulting from employing one extra unit of a variable factor of production, represented by the slope of the total physical product ($TPP$) curve: $MPP = \frac{\Delta TPP}{\Delta L}$.

Opportunity Cost

The cost of any activity measured in terms of the sacrifice made in doing it, or the value of the next best alternative forgone.

Explicit Costs

The opportunity costs of using factors of production not owned by the firm, which require direct monetary outlays.

Implicit Costs

The opportunity costs of using factors of production already owned by the firm, which do not involve direct payments but sacrifice potential earnings in alternative uses.

Marginal Cost ($MC$)

The addition to total cost resulting from producing one more unit of output, defined as $MC = \frac{\Delta TC}{\Delta Q}$, which represents the slope of the total cost ($TC$) curve.

Economies of Scale

A long-run production condition where long-run average cost ($LRAC$) decreases as the total scale of output increases.

Short-Run Shut-Down Point

The price and output level where market price equals average variable cost ($P = AVC$); if price falls below this, the firm ceases operations immediately to minimize losses.

Concentration Ratio

A metric indicating the degree of market competition, measured as the percentage share of total industry sales or output produced by the largest specified number of firms (e.g., a 5-firm concentration ratio).

Perfect Competition

A market structure characterized by price-taking firms, identical (homogeneous) products, completely free entry and exit, and perfect market knowledge.

Allocative Efficiency

An economic state where price equals marginal cost ($P = MC$), ensuring that consumers' marginal willingness to pay equals the marginal opportunity cost of production.

Productive Efficiency

An economic condition where production occurs at the lowest possible cost per unit, corresponding to the minimum point of the long-run average cost curve ($\min LRAC$).

Natural Monopoly

An industry in which long-run average costs are lowest when a single firm supplies the entire market, typically arising from extensive economies of scale.

Limit Pricing

A pricing strategy where an incumbent monopolist sets its price sufficiently low ($P_L$) to ensure that potential entrants cannot earn supernormal profits, deterring them from market entry.

Monopolistic Competition

A market structure featuring many firms, free entry and exit, and differentiated products, giving each firm a downward-sloping but relatively elastic demand curve.

Oligopoly

A market structure dominated by a small number of large, mutually interdependent firms protected by significant barriers to entry.

Interdependence of Firms

A defining characteristic of oligopoly in which each firm's decisions regarding prices, output, advertising, and investment directly affect the sales and profits of its rivals.

Cartel

A formal collusive agreement among firms in an oligopoly to coordinate prices, output quotas, and market shares to maximize joint industry profit.

Dominant Firm Price Leadership

A form of tacit collusion in which a dominant firm sets the market price based on its residual demand and cost structure, and smaller follower firms act as price takers.

Cournot Model

A non-collusive model of oligopoly in which firms choose their output quantities simultaneously and independently, taking their rivals' output as given, with price determined by market demand.

Bertrand Paradox

The theoretical result that in a non-collusive duopoly where firms compete by simultaneously setting prices for a homogeneous good with identical costs, price is driven down to marginal cost ($P = MC$), eliminating economic profits.

Kinked Demand Curve Theory

An oligopoly model explaining price stability based on asymmetric expectations: rivals match price cuts (causing inelastic demand below current price) but do not match price increases (causing elastic demand above current price).

Nash Equilibrium

A state in game theory where each player chooses a strategy that is a best response to the strategies chosen by rivals, meaning no player can increase their payoff by deviating unilaterally.

Backward Induction

A method of solving sequential-move games in extensive form by starting at the final decision nodes and working backward to determine optimal choices.