Introduction to Economics

Flashcards on the basics of economics covering topics such as microeconomics, macroeconomics, supply, demand, and market structures.

A social science that studies about efficient allocation of scarce resources to attain the maximum fulfillment of unlimited human needs.

What is Economics?

Human's material wants are unlimited and economic resources are limited (scarce).Scarcity

What are the two fundamental facts that provide a foundation for economics?

Scarcity and choice due to limited resources and unlimited wants.

What is the basic economic problem?

The economic behavior of individual decision-making units such as households, firms, markets, and industries.

What is microeconomics concerned with?

The interrelations among various aggregates, their determination, and the causes of fluctuations in them, looking at the economy as a whole.

What does macroeconomics examine?

Analysis of facts that attempts to describe the world as it is.

What is positive economics?

Deals with questions like, what ought to be? Or what the economy should be? Evaluates the desirability of alternative outcomes based on one’s value judgments.

What is normative economics?

A logical method of reaching a general statement or theory based on several independent and specific correct statements; moving from facts to theories.

What is inductive reasoning?

A logical way of arriving at a particular or specific correct statement starting from a correct general statement; moving from general to particular.

What is deductive reasoning?

The fact that all economic resources that a society needs to produce goods and services are finite or limited in supply relative to human wants.

What does scarcity refer to?

Resources available to a society in an amount greater than what people desire at zero price.

What are free resources?

Resources available to a society in an amount less than what people want to have at zero price.

What are scarce (economic) resources?

The Physical as well as mental efforts of human beings in the production and distribution of goods and services.

What is labour as an economic resource?

Natural resources or all the free gifts of nature usable in the production of goods and services.

What is land as an economic resource?

All the manufactured inputs that can be used to produce other goods and services (e.g., equipment, machinery).

What is capital as an economic resource?

A special type of human talent that helps organize and manage other factors of production to produce goods and services and takes the risk oflosses.

What is entrepreneurship as an economic resource?

The amount or value of the next best alternative that must be sacrificed (forgone) in order to obtain one more unit of a product.

What is opportunity cost?

A curve that shows the various possible combinations of goods and services that the society can produce given its resources and technology.

What is the Production Possibilities Frontier (PPF)?

What to produce? How to produce? For whom to produce?

What are the three basic economic questions?

A set of organizational and institutional arrangements established to answer the basic economic questions.

What is an economic system?

An economic system in which all means of production are privately owned, and production takes place at the initiative of individual private entrepreneurs who work mainly for private profit.

What is a capitalist economy?

An economic system where the economic institutions that are engaged in production and distribution are owned and controlled by the state.

What is a command economy?

An economic system that attempts to combine the advantages of both the capitalistic economy and the command economy.

What is a mixed economy?

Households, firms, and the government.

What are the three decision making units in a closed economy?

A market where goods and services are transacted/exchanged.

What is the product market?

A market where economic units transact/exchange factors of production (inputs).

What is the factor market (input market)?

Price and quantity demanded are inversely related, ceteris paribus.

What is the law of demand?

A mathematical relationship between price and quantity demanded, all other things remaining the same.

What is the demand function?

Price of the product, taste or preference of consumers, income of the consumers, price of related goods, consumers expectation of income and price, and number of buyers in the market.

What are determinants of demand?

Goods whose demand increases as income increases.

What are normal goods?

Goods whose demand is inversely related to income.

What are inferior goods?

Goods that satisfy the same desire of the consumer.

What are substitute goods?

Goods that are jointly consumed.

What are complimentary goods?

The degree of responsiveness of quantity demanded of a good to a change in its price, or change in income, or change in prices of related goods.

What is elasticity of demand?

As price of a product increases, quantity supplied of the product increases, and as price decreases, quantity supplied decreases, ceteris paribus.

What is the law of supply?

Price of inputs, technology, prices of related goods, sellers‘ expectation of the price of the product, taxes & subsidies, number of sellers in the market, weather, etc.

What are the determinants of supply?

When market demand equals market supply.

What is market equilibrium?

Satisfaction or pleasure derived from the consumption of a good or service.

In consumer theory, what is utility?

The total satisfaction a consumer gets from consuming some specific quantities of a commodity at a particular time.

What is total utility?

The extra satisfaction a consumer realizes from an additional unit of the product.

What is marginal utility?

As the quantity consumed of a commodity increases, the utility derived from each successive unit decreases, consumption of all other commodities remaining constant.

What does the Law of Diminishing Marginal Utility state?

A curve that shows different combinations of two goods which yield the same utility (level of satisfaction) to the consumer.

What is an indifference curve?

A set of the commodity bundles that can be purchased if the entire income is spent.

What is a budget line?

The process of transforming inputs into outputs.

What is production?

A technical relationship between inputs and outputs. It shows the maximum output that can be produced with fixed amount of inputs and the existing technology.

What is a production function?

As successive units of a variable input are added to a fixed input, beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline.

What does the law of variable proportions state?

The monetary value of all purchased inputs used in production; it ignores the cost of non-purchased (self-owned) inputs.

What is accounting cost?

Considers the monetary value of all inputs (purchased and non-purchased).

What is economic cost?

A market structure characterized by a complete absence of rivalry among the individual firms.

What is a perfectly competitive market?