Economics Study Guide: Chapters 1, 3, and 6 Flashcards

Vocabulary flashcards covering foundational concepts of microeconomics, macroeconomics, supply and demand dynamics, market equilibria, and price elasticity of demand.

Microeconomics

The study of individual units and small-scale economic decision-making.

Macroeconomics

The study of the economy as a whole, focusing on the big picture.

Opportunity Cost

The value of the single next-best alternative that you gave up when making a choice.

Positive Economics

Economic statements that are testable based on facts and data.

Normative Economics

Economic statements describing what somebody should do, based on opinion or value judgments.

Slope

The measure of steepness calculated as the change in $Y$ divided by the change in $X$ ($\text{rise over run}$).

Production Possibilities Frontier

A graph that shows the maximum combinations of two goods an economy can produce given its resources.

Incentive Problem

The reason to work more efficiently, improve quality, and reduce costs within an economic system.

Creative Destruction

Difficulty organizing all economic decisions.

Invisible Hand

The concept that people act in their own self-interest, but market competition helps coordinate decisions to fulfill societal wants.

Coordination Problem

The difficulty faced by a central planner who must coordinate millions of interconnected economic decisions.

Economics

The study of how people make choices when resources are scarce.

Scarcity

The condition of having unlimited human wants alongside limited resources.

Greater than or equal to.

you should do the action when MB is what to MC

MB is less than MC

When marginal benefit is less than marginal cost, you should not do the action.

Market System

An economic system that is privately owned, where markets and prices coordinate decisions.

Command System

An economic system where the government owns nearly all resources.

Laissez-faire

A hypothetical economic system where the government's main role is limited to protecting private property.

Five Fundamental Questions

1. What's produced? 2. How it's produced? 3. Who will get it? 4. How will the system accommodate change? 5. How will the system promote progress?

Specialization

Focusing on a particular task rather than doing everything yourself.

Circular Flow Model

A model showing interaction between Households (which sell resources and buy products) and Businesses (which buy resources and sell products).

Demand

A schedule showing a buyer's willingness to buy a good at various prices.

Supply

A schedule showing a seller's willingness to sell a good at various prices.

Shortage

A situation where quantity demanded exceeds quantity supplied, which pushes the price up.

Surplus

A situation where quantity supplied exceeds quantity demanded, which pushes the price down.

Normal Good

A good for which demand rises when consumer income rises.

Inferior Good

A good for which demand falls when consumer income rises.

Substitutes

Goods where a higher price for one raises the demand for the other.

Complements

Goods where a higher price for one lowers the demand for the other.

Demand Curve

A downward-sloping curve showing an inverse relationship between price and quantity demanded for any product.

Determinants of Demand

Factors that shift the demand curve: consumer tastes, consumer income, price of related goods, consumer expectations, and number of buyers.

Determinants of Supply

Factors that shift the upward-sloping supply curve: resource prices, technology, taxes, prices of other goods, producer expectations, and number of sellers in the market.

Shift of vs. Movement Along Curve

A change in overall demand/supply is presented by a shift of the curve, while a change in quantity demanded/supplied is a movement along the curve caused by own price.

Equilibrium

The point where supply and demand curves cross, meaning quantity supplied equals quantity demanded, resulting in no shortage or surplus.

Price Ceiling

A legal maximum price set by the government; when placed below equilibrium, it creates a lasting shortage.

Price Floor

A legal minimum price set by the government; when placed above equilibrium, it creates a lasting surplus.

Price Elasticity of Demand ($E_d$)

A unitless measure of responsiveness of quantity demanded to a price change, calculated as $E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$.

Elastic Demand

Condition where $E_d > 1$; price and total revenue move in opposite directions.

Unit-Elastic

Condition where price elasticity of demand $E_d = 1$.

Inelastic Demand

Condition where $E_d < 1$; price and total revenue move in the same direction.

Total Revenue ($TR$)

The total money generated from sales, calculated as $TR = P \times Q$.

Perfectly Inelastic Demand

Represented by a vertical demand curve where price elasticity of demand is $E_d = 0$.

Perfectly Elastic Demand

Represented by a flat demand curve where price elasticity of demand is $E_d = \infty$.

Determinants of Demand Elasticity

Demand is more elastic with more substitutes, a bigger share of income, luxury items, and more time. Demand is more inelastic for necessities.