Economics Midterm Review – Key Vocabulary

Vocabulary flashcards covering core economic assumptions, guideposts, property rights, trade, institutions, market processes, and policy concepts for the upcoming exam.

The Economic Way of Thinking

Analyzing human behavior as purposeful choice under conditions of scarcity.

Methodological Individualism

The principle that social outcomes arise from individual actions and decisions.

Purposive Behavior

Acting with intentions and goals; does not imply selfishness or greed.

Rational Choice (Economizing Behavior)

Comparing expected costs and benefits to achieve goals at lowest perceived cost.

Scarcity

Limited resources relative to unlimited wants; makes choice unavoidable.

Rationing

Any method of allocating scarce resources (prices, queues, lotteries, force, etc.).

Competition is Ubiquitous

Because resources have alternative uses, competitive behavior exists under any rationing system.

Opportunity Cost

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

Marginal Analysis

Decision-making that weighs marginal benefit (MB) against marginal cost (MC).

Marginal Benefit (MB)

The additional gain from one more unit of an activity.

Marginal Cost (MC)

The additional sacrifice from one more unit of an activity.

Incentives Matter

Changes in benefits or costs alter human behavior and policy outcomes.

Moral Hazard

Riskier behavior that arises when protection from consequences is provided (e.g., bailouts).

The Seen and The Unseen

Bastiat’s idea that good analysis considers both visible effects and hidden consequences.

Value is Subjective

Worth of goods and services depends on individual preferences, not objective measures.

Information is Costly

Gathering data improves choices but requires time and resources, so uncertainty persists.

Spontaneous Order

Coordinated patterns that emerge from decentralized actions without central design.

Price System

Market prices that communicate relative scarcity and coordinate economic activity.

Division of Labor

Specialization of tasks among individuals to raise productivity and output.

Invisible Hand

Adam Smith’s metaphor: self-interested actions unintentionally promote social welfare.

Broken Window Fallacy

Mistaken belief that destruction stimulates the economy by creating visible work while ignoring lost alternatives.

Property Rights

The rights to use, control, and transfer a resource and its services.

Tragedy of the Commons

Overuse of a resource due to lack of exclusive ownership.

Free Rider Problem

Receiving benefits without paying, common with non-excludable goods.

Transaction Costs

Time, effort, and money required to arrange and enforce exchanges.

Institutions

Formal and informal rules that shape incentives and human interaction.

Designed Institution

Top-down, deliberately created rule or organization, such as legislation.

Emergent Institution

Rule or norm that evolves bottom-up through repeated interactions.

Governance vs. Government

Governance is rule enforcement and conflict resolution; government is only one possible provider.

Economic Pie Fallacy (Zero-Sum View)

Belief that total wealth is fixed, ignoring that trade and innovation expand output.

Market

Any arrangement where buyers and sellers voluntarily exchange goods or services.

Market Prices

Monetary signals reflecting relative scarcity and guiding resource allocation.

Profit

Positive difference between revenue and cost, signaling value creation for consumers.

Loss

Negative difference between revenue and cost, signaling resource misallocation.

Entrepreneurial Alertness

Ability to notice and exploit previously overlooked profit opportunities.

Barriers to Entry

Factors that deter or prevent new firms from entering a market (e.g., licenses, patents).

Monopoly

Market with a single seller, high entry barriers, and no close substitutes.

Contestable Market

Market in which the threat of potential entry disciplines existing firms, regardless of firm count.

Price Gouging

Charging markedly higher prices during emergencies, often regulated as ‘unfair.’

Price Ceiling

Legal maximum price; when below equilibrium, creates shortages and misallocation.