Economics Chapters 1–6 Vocabulary Flashcards

Vocabulary and equation flashcards covering foundational economics topics across Chapters 1 through 6.

Scarcity

The lack of enough resources to satisfy all desired uses.

Three Core Economic Questions

What to produce, how to produce it, and for whom to produce it.

Factors of Production

Land, labor, capital, and entrepreneurship—the inputs used to produce goods and services.

Land

All natural resources, including crude oil, water, air, and minerals.

Labor

The skills and abilities used to produce goods and services; includes quantity and quality.

Capital

Final goods produced for use in producing other goods, such as equipment and structures.

Entrepreneurship

Assembling resources to produce new or improved products and technologies.

Opportunity Cost

The most desired goods or services forgone to obtain something else.

Production Possibilities

Alternative combinations of final goods and services producible with available resources and technology.

Production Possibilities Curve (PPC)

A graph showing alternative mixes of output that could be produced.

Law of Increasing Opportunity Cost

Getting more of one good requires giving up ever-increasing amounts of another.

Efficiency

Getting the maximum output of a good from the resources used in production.

Inefficiency

Producing less than the potential output shown by the PPC.

Economic Growth (Chapter 1)

An increase in an economy’s productive capacity, shifting the PPC outward.

Mixed Economy

An economy using both market signals and government directives to allocate goods and resources.

Government Failure

Government intervention that fails to improve outcomes or makes them worse.

GDP (Gross Domestic Product)

The total market value of all final goods and services produced within a nation’s borders in a period.

Per Capita GDP

GDP divided by total population; a statistical measure of average output per person.

Economic Growth (Chapter 2)

An increase in output.

Output Mix

The combination of goods and services an economy produces.

Human Capital

The knowledge and skills possessed by the workforce.

Capital-Intensive

A production process using a high ratio of capital to labor inputs.

Labor-Intensive

A production process relying relatively heavily on labor rather than capital.

Productivity

Output per unit of input, such as output per labor-hour.

Factor Mobility

The ability to reallocate factors of production between industries.

Technological Advance

An advance that lets an economy produce more output with existing resources.

Effect of Technological Advance on PPC

It shifts the production possibilities curve outward.

Outsourcing

Sending routine tasks to foreign workers so domestic workers can focus on higher-value jobs.

Comparative Advantage

The ability to specialize in activities where workers have a relative advantage.

Why U.S. Productivity Is High

Highly educated workers combined with capital-intensive production.

GDP Per Capita Equation

$$\text{GDP per capita} = \frac{\text{GDP}}{\text{population}}$$

Productivity Equation

$$\text{Productivity} = \frac{\text{output}}{\text{input}}$$

Utility Maximization

Consumers seek maximum satisfaction from available incomes.

Profit Maximization

Businesses seek maximum profits.

Factor Market

A market where factors of production are traded.

Product Market

A market where finished goods and services are traded.

Supply

The ability and willingness to sell quantities at alternative prices, ceteris paribus.

Demand

The willingness and ability to buy quantities at alternative prices, ceteris paribus.

Demand Schedule

A table showing quantities consumers buy at alternative prices.

Demand Curve

A curve showing quantities consumers buy at alternative prices.

Law of Demand

Quantity demanded increases as price falls, ceteris paribus.

Determinants of Demand

Tastes, income, prices of other goods, expectations, and number of buyers.

Substitute Goods

Goods that replace each other; a price rise in one increases demand for the other.

Complementary Goods

Goods consumed together; a price rise in one decreases demand for the other.

Ceteris Paribus

The assumption that nothing else changes.

Change in Quantity Demanded

Movement along the demand curve caused by a change in the good’s own price.

Change in Demand

A shift of the entire demand curve caused by a determinant changing.

Equilibrium Equation

$$Q_d = Q_s$$

Market Surplus Equation

$\text{Surplus} = Q_s - Q_d$ when $Q_s > Q_d$

Market Shortage Equation

$\text{Shortage} = Q_d - Q_s$ when $Q_d > Q_s$

Optimal Mix of Output

The most desirable combination attainable with existing resources, technology, and social values.

Market Mechanism

The use of market prices and sales to signal desired outputs or resource allocations.

Market Failure

An imperfection in the market mechanism that prevents optimal outcomes.

Four Sources of Market Failure

Public goods, externalities, market power, and inequity.

Private Good

A good or service whose consumption by one person excludes consumption by others.

Public Good

A good or service whose consumption by one person does not exclude consumption by others.

Free Rider

An individual who benefits from someone else’s purchase or consumption of a public good.

Public-Good Underproduction

Markets tend to produce fewer public goods than the optimal amount.

Externality

A cost or benefit borne by a third party.

External Cost

A cost imposed on third parties.

External Benefit

A benefit received by third parties.

Market Power

The ability to alter the market price.

Monopoly

A firm producing the entire market supply.

Inequity

Unequal distribution of income or economic well-being.

Government Intervention for Public Goods

Taxes can fund public goods such as national defense or flood control.

Progressive Tax

A tax system in which tax rates rise as incomes rise.

Regressive Tax

A tax system in which tax rates fall as incomes rise.

National Income Accounting

Measurement of aggregate economic activity, especially national income and its components.

GDP vs. GNP

GDP is based on where production occurs; GNP is based on a nation’s factors of production.

Nonmarket Activities

Production not sold in markets; generally excluded from GDP.

Underground Economy

Market activity not reported to tax or census authorities.

Value Added

The increase in market value at each stage of production.

Value-Added Equation

$$\text{Value added} = \text{market value of product} - \text{cost of intermediate goods}$$

Intermediate Goods

Goods or services purchased as inputs in producing final goods or services.

Nominal GDP

GDP measured using current-period prices.

Real GDP

GDP adjusted for changing prices.

Real GDP Equation

$$\text{Real GDP} = \frac{\text{nominal GDP}}{\text{indexed price change}}$$

Depreciation

The consumption or wearing out of capital in the production process.

NDP Equation

$$\text{NDP} = \text{GDP} - \text{depreciation}$$

Gross Investment

Total investment expenditure in a given time period.

Net Investment Equation

$$\text{Net investment} = \text{gross investment} - \text{depreciation}$$

Net Exports Equation

$$\text{Net exports} = X - M$$

GDP Expenditure Equation

$$\text{GDP} = C + I + G + (X - M)$$

Output-Income Equation

Market value of total income = market value of total output (GDP).

National Income Equation

$$\text{NI} = \text{NDP} + \text{net foreign factor income}$$

Labor Force

People age $16+$ who are employed or actively seeking paid employment.

Nonparticipants

People who are neither employed nor actively seeking jobs.

Labor Force Participation Rate Equation

$$\text{Labor force participation rate} = \left(\frac{\text{labor force}}{\text{working-age population}}\right) \times 100$$

Unemployment

The inability of labor force participants to find jobs.

Unemployment Rate Equation

$$\text{Unemployment rate} = \left(\frac{\text{unemployed}}{\text{labor force}}\right) \times 100$$

Labor Force Equation

$$\text{Labor force} = \text{employed} + \text{unemployed}$$

Okun’s Law

The estimation that $1\%$ more unemployment equals $2\%$ less output.

Okun’s Law Relationship

Approximate relationship: $+1$ percentage point unemployment $\rightarrow -2\%$ output; equivalently, $-1$ percentage point unemployment $\rightarrow +2\%$ output.

Discouraged Worker

A person who is not actively seeking employment but would look for or accept a job if one were available.

Underemployment

People seeking full-time paid employment who work only part-time or are employed below their capability.

Seasonal Unemployment

Unemployment caused by seasonal changes.

Frictional Unemployment

Brief unemployment between jobs or while entering the labor market.

Structural Unemployment

Unemployment caused by a mismatch between worker skills/location and available jobs.

Cyclical Unemployment

Unemployment caused by inadequate aggregate demand and too few job vacancies.

Full Employment

The lowest rate of unemployment compatible with price stability.