Microeconomics - Introduction to Economics Flashcards

Vocabulary flashcards covering introductory microeconomic concepts, production possibility curves, circular flow models, and economic systems based on lecture notes.

Economics

The social science that studies choice under conditions of scarcity, or how individuals and societies choose to employ scarce resources to produce and distribute products and services.

Microeconomics

The branch of economic theory (also known as price theory) dealing with the economic behavior of individual decision-making units such as consumers, resource owners, business firms, and individual markets.

Macroeconomics

The study of aggregate economic behavior, analyzing aggregate levels of output, national income, employment, and prices for the economy viewed as a whole.

Circular Flow Diagram

An economic model that provides an initial insight into how the overall economy works through interactions between consumers and firms.

Circular Flow of Income (Four Sector Economy)

A macroeconomic model detailing income flows between Households, Firms, Government (G), Financial Market, and Foreign Nations, where $\text{National Income} = C + I + G + (X - M)$.

Scarcity

The fundamental economic problem arising because human wants are limitless while available resources to satisfy them are limited.

Demonstration Effect

A phenomenon contributing to limitless human wants, where products are bought for display or wants increase due to marketing initiatives taken by firms.

Consumer Scarcity Constraint

The decision-making constraint where a consumer must decide how to spend limited income to maximize utility or satisfaction.

Firm Scarcity Constraint

The decision-making constraint where a firm must decide how to allocate its limited capital to maximize profit.

Government Scarcity Constraint

The decision-making constraint where a government must decide how to spend limited tax revenue to maximize overall societal welfare.

Choice

The requirement to select among alternatives due to resource scarcity and the fact that resources can be put to alternative uses.

Opportunity Cost

The cost or value of the next best alternative given up or sacrificed when making a choice.

Land

A factor of production representing natural resources, whose corresponding factor payment is rent.

Labour

A factor of production representing human work effort, whose corresponding factor payment is wages.

Capital

A factor of production representing manufactured assets used in production, whose corresponding factor payment is interest.

Entrepreneurial Ability

A factor of production representing risk-taking and managerial initiative, whose corresponding factor payment is profits.

Rent

The factor payment made for the use of land.

Wages

The factor payment earned by labour.

Interest

The factor payment earned on capital.

Profits

The factor payment earned by entrepreneurial ability.

Three Basic Economic Questions

The fundamental questions every society must answer due to scarcity: What to produce? How to produce? For whom to produce?

Production Possibilities

The various combinations of two goods that an economy can produce given its fixed resources and state of technology.

Production Possibility Curve (PPC)

A graphical representation showing the boundary points at which an economy produces goods and services most efficiently with fully employed resources.

Outward Shift of the PPC

A rightward shift of the production possibilities curve resulting from greater resource availability, technological advancement, or institutional improvements.

Inward Shift of the PPC

A leftward shift of the production possibilities curve caused by depletion of natural resources, infrastructure damage from war or disasters, or declining labour productivity.

PPC Point Efficiency (Points A, B, C)

Production combinations located directly on the PPC curve where resources are fully utilized and allocated efficiently.

Point Under the PPC (Point X)

A production combination inside the PPC frontier that is attainable but inefficient due to underutilized resources, such as unemployed workers or idle factories.

Point Above the PPC (Point Y)

A production combination beyond the PPF boundary that is unattainable given current resources and technology.

Law of Increasing Opportunity Cost

The principle stating that as the economy produces more of a good, the opportunity cost of obtaining additional units of that good increases, making the PPC concave to the origin.

Concave PPC Curve

A PPC shape bowed outward from the origin that reflects an increasing opportunity cost when reallocating resources between two goods.

Slope of the PPC

The steepness or inclination of the production possibility curve that measures the opportunity cost of one good in terms of the other good given up.

Assumptions of the PPC Model

The core simplifications of the PPC model: economic resources are fixed, technology is constant, resources are fully employed, and only two products are produced.

Economic System

A system composed of people, institutions, rules, and relationships providing a broad framework for the production, distribution, and exchange of goods.

Free Enterprise Economy

An economic system (or market economy) where decisions regarding the three basic economic questions and resource allocation are determined by the market forces of supply and demand.

Planned Economy

An economic system (or command economy) where the State decides what goods and services are produced and at what price they are sold.

Mixed Economy

An economic system where decisions regarding basic economic questions are made partly by free market forces and partly by government intervention.

Market Mechanism Intervention

State actions in a mixed economy to regulate monopolies, lessen inequality, provide public goods, and manage inflation, unemployment, and economic growth.

Practical Uses of the PPC

Applications of the PPC to demonstrate economic concepts such as scarcity, choice, opportunity cost, efficiency, resource underutilization, and economic growth.

Need vs. Wants

The distinction between basic human necessities for survival and limitless desires that grow through social display and commercial promotion.

Price Theory

An alternative name for microeconomic theory, emphasizing how market prices coordinate consumer choices and firm decisions.