The Big Ideas in Economics – Vocabulary Flashcards

A set of vocabulary flashcards covering the core concepts, terms, and definitions introduced in the notes across The Big Ideas in Economics, Trade and Comparative Advantage, and the Basics of Supply and Demand and Exchange Rates.

Incentives

Rewards and penalties that motivate behavior.

Incentives Matter

The Big Idea that incentives shape choices and outcomes in economic systems.

Self-interest

Pursuit of one’s own benefits, which can align with the social interest under the right institutions.

Social Interest

The well-being of society as a whole; often affected by how incentives are structured.

Invisible Hand

Adam Smith’s metaphor for how individuals pursuing their own interests can unintentionally promote the social good.

Good Institutions Align Self-Interest with Social Interest

Institutions (e.g., property rights, stable legal systems) that help markets channel private incentives toward socially desirable outcomes.

Incentives vs Benevolence

Economists believe people respond to incentives, not just to benevolence or sentiment.

Big Idea One: Incentives Matter

The fundamental insight that rewards and penalties influence behavior.

Big Idea Two: Good Institutions Align Self-Interest with the Social Interest

Institutions can make market outcomes more socially desirable by aligning private motives with public welfare.

Incentives Everywhere

Incentives operate in all walks of life, including markets, charities, and everyday choices.

Market Institutions

Rules, norms, and organizations that structure economic activity (e.g., property rights, contracts, competition).

Scarcity

Limited resources to satisfy unlimited wants; the great economic problem.

The Great Economic Problem

How to allocate scarce resources to satisfy as many wants as possible.

Opportunity Cost

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

Opportunity Cost of College

The foregone earnings (and other opportunities) from attending college rather than working.

Trade-offs Are Everywhere

Choosing one option often means giving up another due to scarcity.

Think on the Margin

Making decisions by comparing marginal benefits and marginal costs.

Marginal Cost

The additional cost of producing one more unit.

Marginal Revenue

The additional revenue from producing one more unit.

Marginal Revolution

The 1871 shift in economic thought by Jevons, Menger, and Walras toward marginal analysis.

Division of Knowledge

Spread of knowledge across many people; a basis for productivity gains through trade.

Specialization

Focusing on a narrow set of tasks to increase productivity.

Economies of Scale

Cost advantages from producing at large scale; mass production lowers per-unit costs.

Gains from Trade

Higher total welfare from exchange due to specialization and comparative advantage.

Trade Makes People Better Off

Exchange and specialization raise welfare by reallocating resources to their most valued uses.

Division of Labor

Breaking production into specialized tasks to increase efficiency.

Wealth and Economic Growth Are Important

Growth raises living standards, health, education, and freedom; wealth enables better outcomes.

Institutions Matter

Institutional quality (rule of law, property rights, governance) shapes economic performance.

Big Idea Three: Trade-offs Are Everywhere

The inevitability of trade-offs due to scarcity and limited resources.

Opportunity Cost and Scarcity

Key link: scarcity drives opportunity costs in choices.

Think on the Margin: Marginal Thinking

Assessing whether to do a little more or a little less of something.

Trade and Specialization

Trade allows countries to specialize based on comparative advantage, increasing overall production.

Comparative Advantage

Producing goods at a lower opportunity cost than others; enables mutually beneficial trade.

Absolute Advantage

Producing more output with the same inputs than others.

Production Possibilities Frontier (PPF)

Curve showing all efficient production combinations given resources; demonstrates scarcity and trade-offs.

Comparative Advantage vs Absolute Advantage

Comparative refers to lower opportunity cost; absolute refers to overall productivity advantage.

Specialization and Trade Benefits from Division of Knowledge

Trade expands knowledge use across many minds, increasing output.

Demand Curve

A graph showing the quantity demanded at different prices; typically downward-sloping (law of demand).

Law of Demand

As price falls, quantity demanded rises; as price rises, quantity demanded falls.

Supply Curve

A graph showing the quantity supplied at different prices; typically upward-sloping (law of supply).

Law of Supply

As price rises, quantity supplied increases; as price falls, quantity supplied decreases.

Consumer Surplus

The difference between what a consumer is willing to pay and what they actually pay; area under the demand curve above price.

Producer Surplus

The difference between the market price and the minimum price a producer would accept; area above the supply curve below price.

Total Surplus

Sum of consumer and producer surplus; a measure of welfare in a market.

Deadweight Loss

Loss of total surplus from market distortions such as taxes, tariffs, or price controls.

Equilibrium

The price-quantity pair where quantity supplied equals quantity demanded; market clears.

Surplus

Excess supply at a given price; producers would have to lower prices to clear the market.

Shortage

Excess demand at a given price; prices rise to restore equilibrium.

Demand Shifters

Factors that shift the entire demand curve: income, population, substitutes, complements, expectations, tastes.

Supply Shifters

Factors that shift the entire supply curve: technology, input prices, taxes/subsidies, expectations, entry/exit, opportunity costs.

Tariff

A tax on imports; raises domestic price and can generate government revenue but may cause deadweight loss.

Protectionism

Policies (tariffs, quotas, subsidies) aimed at protecting domestic industries from foreign competition.

Quota

A numerical limit on imports; restricts quantity and can reduce welfare.

World Price

The price at which a good can be bought or sold in the world market; can differ from domestic price in a no-trade world.

Balance of Payments

A yearly summary of all economic transactions between a country and the rest of the world.

Current Account

Part of the balance of payments: trade balance, net income on capital abroad, and net transfers.

Capital Account (Financial Account)

Part of the balance of payments: changes in foreign ownership of domestic assets (FDI, portfolio investment, other).

Official Reserves Account

Part of the balance of payments: government-held foreign currencies, gold, and SDRs.

Inflation

A sustained increase in the general price level; often described as monetary phenomenon when money supply grows too fast.

Monetary Policy

Actions by a central bank to influence money supply and interest rates to stabilize the economy.

Central Banking Is a Hard Job

Fed-like institutions face lags and imperfect foresight; policy decisions involve trade-offs and uncertainty.

The Big Idea Nine: Inflation Is Caused by Increases in the Supply of Money

Inflation results from sustained growth in the money supply relative to goods/services in the economy.

The Big Idea Ten: Central Banking Is a Hard Job

Policy-making with imperfect information, lags, and trade-offs; balancing inflation and unemployment.

Globalization

The increasing interconnectedness of economies through trade, investment, and ideas.

Markets Maximize Gains from Trade

In competitive markets, price signals align incentives to maximize total surplus.