Foundations of Economics (Chapters 1–5)

Vocabulary flashcards covering key terms and foundational ideas from Chapters 1–5 of the economics course.

Economics

The study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

Scarcity

The fundamental condition of limited resources and unlimited human wants.

Microeconomics

The branch of economics that analyzes the behavior of individual consumers, firms, and specific markets.

Macroeconomics

The branch of economics that examines economy-wide phenomena such as inflation, unemployment, and growth.

Model

A simplified representation of reality used by economists to explain and predict economic behavior.

Circular Flow Diagram

A model showing the movement of money, goods, services, and resources between households and firms.

Traditional Economy

An economic system in which decisions are based on customs, beliefs, and historical precedent.

Command Economy

An economic system where a central authority makes all production and distribution decisions.

Market Economy

An economic system in which supply, demand, and price signals determine production and allocation with minimal government intervention.

Budget Constraint

All possible combinations of goods a consumer can buy given income and prevailing prices.

Opportunity Cost

The value of the next-best alternative that is forgone when a choice is made.

Marginal Analysis

Decision-making that compares the additional benefits and additional costs of an action.

Law of Diminishing Marginal Utility

The principle that additional satisfaction declines as more units of a good are consumed.

Sunk Costs

Past expenses that cannot be recovered and should not influence current decisions.

Production Possibilities Frontier (PPF)

A curve showing the maximum feasible combinations of two goods that can be produced with given resources and technology.

Demand

The relationship between various prices and the quantities consumers are willing and able to purchase.

Quantity Demanded

The specific amount of a good that buyers are willing and able to purchase at a particular price.

Supply

The relationship between various prices and the quantities producers are willing and able to sell.

Quantity Supplied

The specific amount of a good that sellers are willing and able to offer at a particular price.

Market Equilibrium

The price and quantity at which quantity demanded equals quantity supplied.

Price Ceiling

A legal maximum price that can be charged for a good or service.

Price Floor

A legal minimum price that must be paid for a good or service.

Surplus

A situation where quantity supplied exceeds quantity demanded at the current price.

Shortage

A situation where quantity demanded exceeds quantity supplied at the current price.

Labor Market

The market in which workers supply labor and firms demand labor.

Wage

The price of labor, usually expressed on an hourly, weekly, or annual basis.

Human Capital

The knowledge, skills, and experience that enhance a worker’s productivity and earnings.

Financial Market

A marketplace where financial assets such as stocks, bonds, and loans are created and traded.

Interest Rate

The price of borrowing money, expressed as a percentage of the amount borrowed.

Credit

The ability to obtain goods, services, or funds now and pay for them in the future.

Loanable Funds Market

The market that matches savers (supply of funds) with borrowers (demand for funds), determining the equilibrium interest rate.

Price Elasticity of Demand

A measure of how much the quantity demanded responds to a change in price.

Elastic

Describes demand or supply with an absolute elasticity greater than 1; quantity responds strongly to price changes.

Inelastic

Describes demand or supply with an absolute elasticity less than 1; quantity responds weakly to price changes.

Unit Elastic

Describes demand or supply with an absolute elasticity equal to 1; proportional change in quantity equals change in price.

Total Revenue

Total money received from sales, calculated as price multiplied by quantity sold.

Cross-Price Elasticity

The responsiveness of the quantity demanded of one good to a change in the price of another good.

Income Elasticity

The responsiveness of quantity demanded to a change in consumer income.

Price Elasticity of Supply

A measure of how much the quantity supplied responds to a change in price.