Economics Exam 1: Fundamentals of Micro and Macroeconomics

Comprehensive vocabulary flashcards covering basic economic principles, Production Possibilities, Trade, and Supply and Demand based on the lecture transcript.

Scarcity

The condition where resources are limited but human wants are unlimited, forcing people to make choices.

Opportunity Cost

The value of the next best alternative that is given up when a choice is made; mathematically calculated as $\frac{\text{what is given up}}{\text{what is gained}}$.

Marginal Thinking

Making decisions by comparing the additional benefits and additional costs of one more unit of a good or service.

Land

A factor of production consisting of natural resources used to produce goods and services.

Labor

A factor of production consisting of the human effort used in the production process.

Capital

A factor of production consisting of tools, machinery, buildings, and equipment used to produce goods.

Entrepreneurship

The willingness to organize resources, innovate, and take risks in the pursuit of production.

Microeconomics

The study of individual consumers, businesses, and specific markets.

Macroeconomics

The study of the economy as a whole, including topics like interest rates, national unemployment, and inflation.

Positive Economic Statement

A statement based on facts that can be tested, such as "The unemployment rate increased from $5\%$ to $7\%$".

Normative Economic Statement

A statement based on opinions or value judgments, often signaled by the word "should" (e.g., "The government should reduce taxes").

Ceteris Paribus

A Latin phrase meaning "all other relevant variables are held constant," used by economists to isolate the effect of one variable.

Production Possibilities Curve (PPC)

A graph showing the maximum output combinations of two goods that can be produced with available resources and technology.

Efficient Production

Represented by any point located exactly on the Production Possibilities Curve ($PPC$).

Inefficient Production

Represented by a point inside the Production Possibilities Curve ($PPC$), indicating unused resources.

Unattainable Production

Represented by a point outside the Production Possibilities Curve ($PPC$), which cannot currently be achieved with available resources.

PPC Outward Shift

Caused by more resources, better technology, or economic growth.

PPC Inward Shift

Caused by a loss of resources, natural disasters, or war.

Present Good

A good that is consumed today.

Future Good

A good that helps produce more goods in the future, such as a factory or production equipment.

Market

Any arrangement where buyers and sellers exchange goods or services; does not have to be a physical location.

Income Effect

When a lower price increases purchasing power, allowing consumers to buy more of a good.

Absolute Advantage

The ability to produce more total output than another producer using the same amount of resources.

Comparative Advantage

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

Market Economy

An economic system where consumers and businesses make most economic decisions.

Command Economy

An economic system where the government makes most economic decisions.

Mixed Economy

An economic system, such as that of the United States, which combines private markets with government involvement.

Law of Demand

The economic principle stating that as price rises, the quantity demanded falls, all else equal.

Law of Supply

The economic principle stating that as price rises, the quantity supplied rises, all else equal.

Equilibrium

The point where quantity supplied ($QS$) equals quantity demanded ($QD$).

Shortage

A situation where quantity demanded is greater than quantity supplied, often caused by a price ceiling.

Surplus

A situation where quantity supplied is greater than quantity demanded, often caused by a price floor.

Price Ceiling

A legal maximum price set below the equilibrium price, such as rent control.

Price Floor

A legal minimum price set above the equilibrium price, such as minimum wage.

Budget Line

A line representing all combinations of two goods a consumer can afford based on their income and the prices of the goods.

Purchasing Power

The amount of goods and services a consumer can buy with their income; increased by higher income or lower prices.

Concave (Bowed-Out) PPC

A shape caused by increasing opportunity costs because resources are not equally efficient at producing every good.

Specialization

Focusing production on the goods where a producer has the lowest opportunity cost (comparative advantage).

Product Differentiation

Making products unique through quality, branding, or location to distinguish them from competitors.

Free Trade

Trade with few government restrictions, which economists generally support for increasing efficiency and economic welfare.

Capital Goods

Tangible assets used in the production of other goods, such as factories and equipment.

Consumer Goods

Goods intended for final use by individuals, such as bread and clothing.

Normal Goods

Goods for which demand shifts right as household income increases.

Substitute Good

A good that can be used in place of another; if its price increases, the demand for the original good increases.

Binding Price Ceiling

A maximum legal price set below equilibrium that creates a persistent shortage.

Binding Price Floor

A minimum legal price set above equilibrium that creates a persistent surplus including unemployment in labor markets.