Econ 101: Introduction to Microeconomics - Ten Principles of Economics

This set of vocabulary flashcards covers the fundamental concepts and ten principles of economics introduced in the Econ 101 lecture at CMU.

Economics

The study of how society allocates its scarce resources to provide goods and services for people with unlimited wants.

Oikonomos

A Greek word meaning 'one who manages households,' which is the root of the word 'Economics.'

Scarcity

The limited nature of society’s resources.

Efficiency

When society gets the most from its scarce resources; often referred to as the size of the economic 'pie.'

Equality

When prosperity is distributed uniformly among society’s members.

Opportunity Cost

Whatever must be given up to obtain an item; the value of the next best alternative foregone.

Rational People

Individuals who systematically and purposefully do the best they can to achieve their objectives by evaluating costs and benefits of marginal changes.

Marginal Changes

Small, incremental adjustments to an existing plan of action.

Incentive

Something that induces a person to act, such as the prospect of a reward or punishment.

Market

A group of buyers and sellers that does not need to be in a single location.

Market Economy

An economy that allocates resources through the decentralized decisions of many households and firms as they interact in markets.

Invisible Hand

The famous insight by Adam Smith in $1776$ stating that households and firms interact in markets as if led by a guide to promote general economic well-being through the price system.

Property Rights

The ability of an individual to own and exercise control over scarce resources, which the government must enforce through police and courts.

Market Failure

A situation in which the market fails to allocate society’s resources efficiently on its own.

Externality

A cause of market failure where the production or consumption of a good affects bystanders, such as pollution.

Market Power

A cause of market failure where a single buyer or seller, such as a monopoly, has substantial influence on market prices.

Productivity

The amount of goods and services produced per unit of labor ($1$ hour of work), serving as the primary determinant of living standards.

Inflation

Increases in the general level of prices in the economy.

Quantity of Money

The growth of this factor is almost always the cause of long-run inflation; as the government creates it faster, the value of money falls.

Short-run Trade-off

A period of $1-2$ years where many economic policies push inflation and unemployment in opposite directions.