Principles of Economics: Comprehensive Lecture & Reading Review

Vocabulary practice flashcards covering microeconomic principles, trade, market equilibrium, theory of the firm, macroeconomic growth, public goods, externalities, and political economy.

Gatekeepers

Dominant digital platforms designated by the European Commission (such as Booking, Meta, Apple, and Microsoft) that hold a dominant position in their specialty market area.

Positive Network Externalities

A phenomenon where a platform becomes more valuable to every user as the total number of participants increases (e.g., more reviews on Booking or more live traffic reports on Google Maps).

Attention Economy

An economic perspective recognizing that human time and mental focus are scarce resources, leading digital platforms to design engagement features (such as autoplay and 'likes') to maximize user retention.

Incentives

Rewards and penalties that motivate human behavior in predictable ways across market and non-market settings.

Invisible Hand

Adam Smith's concept that individuals pursuing their own private self-interest in competitive, well-functioning markets unintentionally promote the broader social interest as if guided by an unseen force.

Opportunity Cost

The value of the opportunities lost when making a choice, specifically the value of the next-best alternative forgone.

Drug Lag

The delay during which a potentially life-saving pharmaceutical is withheld from the market while undergoing prolonged safety testing, leading to harm or death among patients who could have benefited from it.

Drug Loss

The loss that occurs when the cost and duration of regulatory safety testing discourage pharmaceutical companies from investing in research and development, preventing beneficial drugs from ever being created.

Absolute Advantage

The ability of a producer or country to produce the same quantity of a good using fewer inputs (or produce more output with the same inputs) compared to another producer.

Comparative Advantage

The ability of a country or individual to produce a particular good at a lower opportunity cost than another producer.

Production Possibility Frontier (PPF)

A graphical representation showing all combinations of goods that an economy can produce given its available inputs, technology, and productivity constraints.

Division of Labor

The separation of a production process into distinct, specialized tasks performed by different workers, increasing total productivity through increased worker dexterity, reduced task-switching time, and machine innovation.

Work Alienation

A sociological and economic limit of extreme division of labor identified by Karl Marx, where repetitive and monotonous work strips laborers of self-responsibility, pride, and broad knowledge of the production process.

Law of Demand

The fundamental economic principle that, holding other factors constant, the quantity demanded of a good increases as its price decreases, creating a downward-sloping demand curve.

Consumer Surplus (CS)

The consumer's gain from exchange, calculated as the difference between the maximum price a buyer is willing to pay and the market price actually paid; graphically represented by the area below the demand curve and above the market price.

Law of Supply

The economic principle that, holding other factors constant, the quantity supplied of a good increases as its price increases, yielding an upward-sloping supply curve.

Producer Surplus (PS)

The producer's gain from exchange, calculated as the difference between the market price received and the minimum price at which a seller is willing to sell; graphically represented by the area above the supply curve and below the market price.

Market Equilibrium

The stable state where the quantity demanded equals the quantity supplied at the intersection of the market demand and supply curves.

Surplus (Excess Supply)

A market disequilibrium condition where the market price is above the equilibrium price, causing the quantity supplied to exceed the quantity demanded and inducing sellers to lower prices.

Shortage (Excess Demand)

A market disequilibrium condition where the market price is below the equilibrium price, causing the quantity demanded to exceed the quantity supplied and prompting buyers to bid prices upward.

The Great Economic Problem

The challenge of efficiently arranging scarce resources with alternative uses to satisfy as many human wants as possible without central direction.

Arbitrage

The practice of buying a good at a low price in one market and simultaneously selling it at a higher price in another market to exploit price differences, equalizing prices across space.

Speculation

An attempt to profit from anticipated future price changes by buying goods or financial instruments when prices are low today and selling them when prices rise in the future (arbitrage through time).

Futures

Standardized financial contracts obligating the buyer to purchase, and the seller to deliver, specified quantities of a commodity or asset at an agreed-upon price with delivery set at a predetermined future date.

Prediction Market

A speculative market designed so that market prices represent probabilities of future events, aggregating dispersed private information into accurate predictions (e.g., the Iowa Electronic Markets or the Hollywood Stock Exchange).

The Firm (Coase's Definition)

The system of relationships that comes into existence when resource allocation is directed consciously by an entrepreneur rather than through decentralized transactions on the price mechanism.

Transaction Costs (Marketing Costs)

The collective expenses incurred when using the market price mechanism, including negotiating prices, drafting contracts, inspecting goods, and resolving business disputes.

Price Taker

A firm operating in a perfectly competitive market that faces a perfectly elastic horizontal demand curve and must accept the prevailing market price because its individual output does not affect total market supply.

Sunk Cost

A cost that has already been incurred and cannot be recovered; according to rational choice theory, it must be ignored in forward-looking decision-making.

Fixed Costs ($FC$)

Production expenses that do not vary with the quantity of output produced in the short run, which become variable in the long run.

Variable Costs ($VC$)

Expenses that change directly as the volume of production varies (such as fuel, electricity, raw materials, and additional labor).

Explicit Cost

A direct monetary outlay paid out to acquire resources or factors of production.

Implicit Cost

The opportunity cost equal to what a firm gives up by using an owned factor of production in one activity rather than in its next-best alternative, requiring no direct cash expenditure.

Accounting Profit

Total revenue minus explicit, out-of-pocket costs ($\text{Accounting Profit} = TR - \text{Explicit Costs}$).

Economic Profit

Total revenue minus all opportunity costs of production, including both explicit monetary outlays and implicit costs ($\text{Economic Profit} = TR - \text{Total Opportunity Costs}$).

Marginal Revenue ($MR$)

The change in total revenue resulting from the sale of an additional unit of output ($MR = \frac{\Delta TR}{\Delta Q}$), which equals market price ($P$) for a competitive price-taking firm.

Marginal Cost ($MC$)

The change in total production cost that arises from producing one additional unit of output ($MC = \frac{\Delta TC}{\Delta Q}$).

Average Cost ($AC$)

The total cost of production divided by the total quantity produced ($AC = \frac{TC}{Q}$); it intersects the marginal cost curve ($MC$) at its minimum point.

Average Variable Cost ($AVC$)

Total variable cost divided by the quantity of output produced ($AVC = \frac{VC}{Q}$), serving as the critical benchmark for short-run shutdown decisions.

Shutdown Rule

The short-run decision guideline stating that a firm should immediately cease operations and shut down if the market price falls strictly below average variable cost ($P < AVC$).

Increasing-Cost Industry

An industry whose long-run supply curve is upward-sloping because expanded industry production drives up the prices of specialized inputs or forces the use of higher-cost extraction sites (e.g., the oil industry).

Constant-Cost Industry

An industry whose long-run supply curve is flat and highly elastic because its scale of operation is small relative to input markets, allowing entry and expansion without raising input prices (e.g., domain name registration).

Decreasing-Cost Industry

A rare industry characterized by a downward-sloping long-run supply curve, where industry-wide expansion generates external economies of scale, clusters of specialized suppliers, and lower production costs (e.g., carpet manufacturing in Dalton, Georgia).

Price Discrimination

The business practice of selling identical products or services to different buyers at different prices, requiring market power and the ability to prevent arbitrage.

Invisible Hand Property 1

The economic theorem that in a competitive market, self-interested profit maximization ensures that all firms produce where price equals marginal cost ($P = MC_1 = MC_2 = \dots = MC_N$), equalizing marginal costs across all producers and minimizing total industry production costs.

Invisible Hand Property 2

The competitive principle that entry and exit guide labor and capital out of low-profit (low-value) industries into high-profit (high-value) industries until the rate of profit across competitive sectors equalizes at zero economic profit, maximizing the total value of social production.

Elimination Principle

The market principle that above-normal economic profits are eliminated by the entry of new competitors, while below-normal profits are eliminated by the exit of struggling firms, making above-normal profits temporary unless sustained by continuous innovation.

Creative Destruction

Joseph Schumpeter's concept describing the incessant product and process innovation by which new production methods and superior goods replace outdated industries and firms.

Pareto Improvement

A reallocation of resources that makes at least one individual strictly better off without making any other individual worse off.

Kaldor-Hicks Criterion

A policy evaluation criterion stating that a policy is welfare-enhancing if those who gain could theoretically compensate those who lose and still remain better off, even if compensation does not actually occur.

Factors of Production

The primary inputs used in producing goods and services to generate gross domestic product: physical capital, human capital, technological knowledge, and organization.

Physical Capital

The accumulated stock of tangible tools, equipment, structures, and machinery used to produce economic output.

Human Capital

The productive skills, expertise, and knowledge acquired by workers through formal education, specialized training, and on-the-job experience.

Technological Knowledge

The society's understanding of how the physical world works and how best to combine inputs to create goods and services.

Institutions

The formal laws, regulations, legal systems, and informal customs that structure social interactions and establish the economic incentives to invest, innovate, and accumulate capital.

Free Rider

An individual who enjoys the benefits of a shared, non-excludable resource or public good without contributing a proportionate share to its cost or upkeep.

Rule of 70

A mathematical formula used to estimate the number of years required for a growing variable to double, calculated by dividing $70$ by the annual percentage growth rate ($\text{Doubling Time} = \frac{70}{x}$).

Time Preference

The human preference to consume goods and services sooner rather than later, which influences personal savings behavior and requires an interest rate reward to induce waiting.

Lifecycle Theory of Savings

An economic theory explaining that individuals borrow during young adulthood, save during their prime working years, and dissave during retirement to maintain a stable, smoothed consumption path over their entire lives.

Market for Loanable Funds

The financial market where savers trade funds with borrowers, with the equilibrium interest rate adjusting to equate the supply of savings with the demand to borrow.

Financial Intermediaries

Institutions (including commercial banks, bond markets, and stock exchanges) that lower transaction and search costs by pooling savings from individual depositors and channeling them to productive investment projects.

Default Risk

The risk that a borrower will fail to make scheduled interest payments or principal repayments on an issued debt instrument.

Collateral

An asset of value pledged by a borrower that legally becomes the property of the lender if the borrower defaults on a loan.

Technological Unemployment

John Maynard Keynes's term for temporary structural unemployment caused by discoveries in labor-saving technical efficiency outrunning the pace at which new economic uses for labor can be found.

Absolute Needs vs. Relative Needs

Keynes's distinction between basic subsistence needs that humans feel irrespective of the situation of their fellows (satiable) and status-seeking needs that depend on feeling superior to others (insatiable).

Private Cost

The direct expense paid by a consumer or producer when buying, producing, or consuming a good in a market transaction.

External Cost

A cost imposed on third-party bystanders who are not directly involved in the transaction or consumption of a good.

Social Cost

The total cost to society of producing or consuming a good, calculated as the sum of private costs and external costs ($\text{Social Cost} = \text{Private Cost} + \text{External Cost}$).

External Benefit

A beneficial spillover received by third-party bystanders who are not direct consumers or producers in a market transaction (e.g., flu vaccinations).

Pigouvian Tax

A corrective tax levied on each unit of output of a good generating negative externalities, set equal to the external cost to shift the supply curve to the social cost curve and eliminate deadweight loss.

Pigouvian Subsidy

A corrective subsidy provided for goods that create positive externalities, set equal to the marginal external benefit to align private demand with social value and achieve the efficient output quantity ($Q_{\text{Efficient}}$).

Internalizing an Externality

Modifying economic incentives through taxes, subsidies, property rights, or negotiation so that private decision-makers account for all the social benefits and social costs of their actions.

Coase Theorem

The proposition formulated by Ronald Coase that if transaction costs are sufficiently low and property rights are clearly defined, private bargaining between affected parties will yield an efficient market equilibrium regardless of the initial legal allocation of property rights.

Command and Control

Direct government regulatory mandates ordering firms and individuals to adopt specific technologies or adhere to explicit production ceilings, which often lack the flexibility and cost-effectiveness of market-based pricing mechanisms.

Tradable Allowances (Cap-and-Trade)

An environmental policy instrument where a governing authority sets a total ceiling on allowable pollution and distributes transferable permits that firms can trade, ensuring emissions reductions are accomplished at the lowest total industry abatement cost.

Excludable Good

A good from whose consumption non-paying consumers can be easily and effectively prevented.

Rival Good

A good whose consumption or use by one person strictly diminishes or precludes its simultaneous consumption by another person.

Private Good

A good that is both excludable and rival in consumption (such as a hamburger or a pair of jeans).

Public Good

A good that is both non-excludable and non-rival in consumption, making private market provision prone to free riding and underproduction (such as asteroid deflection or national defense).

Club Good

A good that is excludable but non-rival in consumption (such as subscription streaming services or encrypted satellite television broadcasts).

Common Resource

A resource that is non-excludable but rival in consumption, making it susceptible to overexploitation and neglect in the absence of property rights or collective management (such as oceanic tuna).

Tragedy of the Commons

The tendency for unowned, non-excludable, and rival resources to be overexploited and undermaintained because users reap the full private benefits of extraction while diffusing the depletion costs across society.

Individual Transferable Quotas (ITQs)

A property rights-based solution to fishery overexploitation, pioneered by New Zealand in 1986, where fishermen are allocated legally enforceable, tradable property rights to harvest a specific percentage of the government-determined total allowable catch.

Public Choice

The subfield of economics that applies economic models of rational, self-interested human behavior to study political actors, voters, bureaucrats, and democratic decision-making.

Behavioral Symmetry

The analytical assumption that individuals operate under the same self-interested motivations whether acting in commercial markets as consumers and producers or in the political sphere as voters, politicians, and regulators.

Rational Ignorance

The decision by a voter to remain uninformed about political platforms or public policy details because the personal cost of acquiring information outweighs the negligible expected personal benefit of casting a single, non-decisive ballot.

Diffuse Costs and Concentrated Benefits

A political dynamic where policy benefits are concentrated among a small, highly motivated special interest group while policy costs are diffused across millions of taxpayers, leading politicians to enact economically inefficient legislation (such as sugar quotas).

Voter Myopia

The tendency of voters to evaluate political incumbents primarily on the basis of economic performance (such as inflation and growth in personal disposable income) during the immediate election year rather than over their entire tenure.

Median Voter Theorem

The political economy theorem stating that when political candidates compete along a one-dimensional spectrum and voters choose the candidate closest to their ideal point, candidates will converge on the position of the median voter to win a majority-rule election.

Consumer Behavior

The totality of decisions made by human decision-making units over time regarding the acquisition, consumption, and disposition of goods, services, experiences, people, and ideas.

Attitude-Intention-Behavior Gap

The empirical divergence between consumers' stated ethical or environmental beliefs and their actual marketplace purchasing behavior (e.g., $65\%$ claiming they prefer sustainable brands while only $26\%$ actively purchase them).

Cognitive Dissonance

The psychological discomfort experienced by an individual when their cognitions, expressed attitudes, and observed behaviors are contradictory, triggering strategies such as attitude adjustment, behavior alteration, or information avoidance.

Licensing Effect

A behavioral phenomenon where engaging in a virtuous, environmentally friendly action provides an individual with a psychological justification or 'license' to act less responsibly in other areas.

Rebound Effect

A phenomenon in energy economics where gains in the efficiency of an energy-consuming technology reduce the effective cost of use, leading to increased usage that offsets $30\%$ to $50\%$ of the initial energy savings.