Core Principles of Economics, Demand, Supply, and Equilibrium

Flashcards covering core economic principles, demand and supply curves, market structures, and the mechanics of equilibrium based on the lecture notes.

Cost-Benefit Principle

A principle stating that you should consider the costs and benefits of a choice and only pursue it if the benefits outweigh the costs.

Willingness-to-pay (WTP)

The most that an individual would be willing to pay in order to obtain a particular benefit or to avoid a particular cost.

Economic Surplus

The total benefit minus the total cost, which measures how much a decision has improved your well-being.

Opportunity Cost Principle

A principle suggesting that the true cost of something is the next best option that you have to give up to get it.

what problem does the opportunity cost principle highlight?

scarcity

Scarcity

A condition that implies we face trade-offs because resources are limited.

Production Possibility Frontier (PPF)

A graph showing the different sets of outcomes that are attainable with scarce resources; moving along it reveals opportunity costs, while productivity gains shift it outward.

Marginal Principle

A principle that involves thinking in small increments to determine whether a bit more or less of something would be an improvement.

Marginal Benefit ($MB$)

The extra benefit obtained from buying or having one more unit of something.

Marginal Cost ($MC$)

The extra cost associated with an additional unit of something, such as the wage paid to an extra worker.

Diminishing marginal benefit

The phenomenon where each additional item yields a smaller marginal benefit than the previous item.

Rational Rule

A rule stating that one should keep doing something until $MB = MC$ or stop before MC > MB.

Interdependence Principle

A principle stating that your best choice depends on your other choices, the choices others make, changes in other markets, and expectations about the future.

what are the 4 types of interdependencies

• dependencies between your own choices

• dependencies between others

• dependencies between markets

• dependencies overtime

Demand Schedule

A table indicating the quantity of a good or service that would be demanded at various prices.

Quantity Demanded ($Q_D$)

The amount of a good or service that a consumer is willing to buy at a specific price.

individual demand curve

How many of something do you expect to buy at each price, holding all other factors constant

Market demand curve

The sum of all individual demands, derived by adding up the $Q_D$ for all consumers at each price.

Law of Demand

A rule stating that consumers will demand more of a product at lower prices.

marginal benefit curve

demand curve

what causes a movement along the demand curve and supply curve

change in price

what are the causes of a shift in the demand curve

• income

• preference

• price of related goods

• expectations

Substitutes

Goods that serve as replacements for one another; an increase in the price of one results in an increase in the demand for the other.

Complements

Goods that go together; a decrease in the price of one good increases the demand for the other.

Normal goods

Goods that consumers buy more of as their income increases.

Inferior goods

Goods that consumers buy less of as income falls (as defined in transcript).

Rational rule for buyers

A guideline suggesting that buyers should keep buying until $MB = MC$.

Supply Schedule

A table that indicates the quantity of goods that would be supplied at each price.

Quantity supplied ($Q_S$)

The amount of a good that a seller is willing to sell at a specific price.

supply curve

how much a business will change the quantity it supplies if the prices change

individual supply curve

how much do you plan to sell at each price

market supply curve

the total amount of an item you plan to sell

marginal cost curve

supply curve

Law of Supply

A rule stating that the higher the price of a good, the higher the quantity supplied.

Diminishing marginal product of labor

The concept that the extra output produced by an additional worker is smaller than the output produced by the previous worker.

Variable costs

Costs that vary with the quantity of the product produced and are included in the $MC$.

Fixed costs

Costs that do not vary when you change the quantity of the output. Not included in MC

what causes a shift in the supply curve

• input prices

• productivity and technology

• price of related outputs

• expectations

Perfectly competitive markets

Markets where all firms sell an identical good and there are many sellers who are price takers rather than price makers.

Substitutes in production

Alternative uses of a business's resources that allow for manufacturing other products using the same inputs and equipment.

Complements in production

Goods that are produced together as byproducts.

Rational rule for sellers

A guideline suggesting that sellers should keep producing until price equals $MC$.

Planned economies

Economies that rely on the government to make production and consumption decisions.

Market economies

Economies where individuals make their own production and consumption decisions and prices coordinate those decisions.

Equilibrium

The state where supply meets demand ($Q_S = Q_D$) and there is no tendency for the market price to change.

Shortage

A situation where $Q_D$ exceeds $Q_S$ (Q_S < Q_D), which occurs when the price is below the equilibrium.

Surplus

A situation where $Q_S$ exceeds $Q_D$ (Q_S > Q_D), which occurs when the price is above the equilibrium.