Economic Principles Review

These flashcards cover key terms and concepts related to elasticity, resource allocation methods, market efficiency, and market failures as discussed in the lecture notes.

Elasticity

A measure of how much the demand or supply of a good changes in response to a price change.

Price Elasticity

A measure of elasticity that shows how demand changes when the price of a good changes; calculated by ignoring the minus sign.

Elastic Demand

Demand is considered elastic when price elasticity is greater than 1.

Inelastic Demand

Demand is considered inelastic when price elasticity is less than 1.

Income Elasticity

Measures how the quantity demanded of a good changes in response to a change in income.

Inferior Good

A good where demand decreases as consumer income rises, typically having income elasticity less than 0.

Substitute Good

A good that can replace another; indicated by a positive cross-price elasticity.

Complement Good

A good that is used together with another; indicated by a negative cross-price elasticity.

Marginal Benefit

The additional benefit received from consuming one more unit of a good or service.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay.

Producer Surplus

The difference between the amount received from selling a good and the cost of producing it.

Market Failure

A situation in which the market does not allocate resources efficiently.

Utilitarianism

The principle that suggests maximizing happiness for the greatest number of people.

Tragedy of the Commons

A situation where individuals use a shared resource in their self-interest leading to its depletion.

Command System

A method of resource allocation where decisions are made by a central authority.

Majority Rule

A decision-making process where the choice of the majority is followed.

Force

An allocation method where resources are distributed by coercive means rather than voluntary agreement.

Externality

A cost or benefit that affects a third party not directly involved in an economic transaction.

Public Good

A good that is non-excludable and non-rivalrous, leading to the free-rider problem.

Monopoly

A market structure where a single seller controls the entire supply of a good or service.

Transaction Costs

The costs associated with making an economic exchange.

Efficiency

The optimal allocation of resources where the total surplus is maximized.