Fundamentals of Economics: Microeconomics, Growth, and Investing

Vocabulary flashcards covering core concepts of microeconomics, supply and demand, economic development, and personal investing.

Scarcity

Limited resources (time, money, materials) cannot satisfy unlimited wants, so every choice has a trade-off.

Opportunity cost

The value of the next best alternative you give up when you make a choice.

Positive incentive

A reward that encourages a behavior.

Negative incentive

A penalty that discourages a behavior.

Tragedy of the commons

A shared resource is overused and depleted because no individual has a reason to conserve it.

Solutions to the commons

Rules that limit use or give someone ownership and responsibility for the resource.

Marginal thinking

Weighing the additional (extra) cost and additional benefit of one more unit or one small change.

Sunken cost

Money or time already spent that cannot be recovered. It should not affect future decisions.

Market equilibrium

The price where quantity demanded equals quantity supplied. The supply and demand curves intersect here.

Shortage

Quantity demanded is greater than quantity supplied. Happens when the price is held below equilibrium.

Surplus

Quantity supplied is greater than quantity demanded. Happens when the price is held above equilibrium.

Shifter

A factor other than the good's own price that moves the entire curve. Right = increase. Left = decrease.

Tastes and preferences

A demand shifter where popularity of a good changes; demand shifts right when a trend, endorsement, or positive news makes people want it more.

Income (demand shifter)

A demand shifter where normal goods' demand rises as income rises, and inferior goods' demand rises as income falls.

Price of related goods

A demand shifter involving substitutes (used in place of each other) and complements (used together); demand shifts right when a substitute's price rises or a complement's price falls.

Number of buyers

A demand shifter based on having more or fewer consumers in the market; demand shifts right when population grows or new customers enter the area.

Expectations (demand shifter)

What buyers believe about future prices, income, or availability; demand shifts right when buyers expect prices to rise soon, so they buy now.

Price of inputs / resource costs

A supply shifter based on cost of materials, labor, or machinery; supply shifts right when input costs fall, while higher input costs shift supply left.

Technology and productivity

A supply shifter where better methods or machines lower costs; supply shifts right when new technology lets producers make more at the same cost.

Government action

A supply shifter where taxes and regulations raise costs while subsidies lower them; supply shifts right when the government gives a subsidy.

Number of sellers

A supply shifter based on having more or fewer producers in the market; supply shifts right when new businesses enter and left when businesses close.

Producer expectations

What sellers expect about future prices; supply shifts right when sellers expect prices to fall later, while expecting prices to rise leads them to hold back supply today.

Demand shifts right

A market shift that causes equilibrium price to rise and equilibrium quantity to rise.

Demand shifts left

A market shift that causes equilibrium price to fall and equilibrium quantity to fall.

Supply shifts right

A market shift that causes equilibrium price to fall and equilibrium quantity to rise.

Supply shifts left

A market shift that causes equilibrium price to rise and equilibrium quantity to fall.

Price ceiling (maximum price)

A price control set below equilibrium that results in a shortage (e.g., rent control leads to a housing shortage).

Price floor (minimum price)

A price control set above equilibrium that results in a surplus (e.g., a high minimum wage leads to a labor surplus).

Poverty trap

An economic state where labor is so cheap that companies are not incentivized to innovate, so the economy stays stuck.

South Korea (economic growth)

Grew its economy through government-led Big Push investments.

U.S. in the 1800s (economic growth)

Grew through a unified national market with no tariffs between states, so goods moved freely across the country.

Education (human capital)

Builds a skilled workforce and raises productivity, which grows the economy.

Banking system

Turns savings into loans that businesses use to expand, invest, and hire.

Growth company

Reinvests its profits into expansion (hiring, research, new facilities) instead of paying dividends.

Value company

A stable company whose stock appears to be priced below its true worth, often paying dividends.

Price-to-Earnings (P/E) ratio

Stock price divided by earnings per share; a high P/E usually means investors expect rapid future growth.

Economic moat

A lasting advantage (brand, patents) that protects a company from competitors, central to value investing.

Value trap

A stock that looks cheap, but the business is failing and will not recover.

Exchange-Traded Fund (ETF)

One fund that holds dozens or hundreds of assets and trades like a single stock, providing instant diversification.

Diversification

Spreading money across many investments, trading off huge single-stock gains in exchange for protection against huge losses.

Asset allocation

The plan for dividing money among categories such as stocks, bonds, and cash.

Stocks

An asset class whose role is long-term growth, with the main drawback of higher volatility and risk.

Bonds (fixed income)

An asset class acting as a stabilizer with predictable income and lower volatility, but lower long-term growth than stocks.

Cash and cash equivalents

An asset class offering maximum safety and liquidity, with the main drawback of low returns that may not keep up with inflation.