Economics Chapter 1-3 Review Notecards

Flashcards covering key vocabulary from Chapters 1, 2, and 3 of the Microeconomics lecture notes, including foundations of economics, model building, gains from trade, and supply and demand principles.

Microeconomics

The study of individual units that make up our economy, focusing on households, firms, industries, and specific markets.

Economics

The study of individual and firm decisions, and the forces and trends that affect the overall economy.

Macroeconomics

The study of the overall aspects and workings of an economy, focusing on 'big picture' elements like national output growth.

Incentives

Anything that motivates people to act.

Positive incentives

Encourage action by offering rewards or payment.

Negative incentives

Discourage action by providing undesirable consequences or punishment.

Direct incentives

Clear motivators aimed at influencing a specific behavior.

Indirect incentives

A secondary change of behavior brought on by the original incentive, often creating unintended consequences.

Trade-offs

The necessity of giving up one thing to get something else due to scarcity of time, resources, or energy.

Opportunity cost

What you must give up to get something, representing the value of the next best alternative.

Marginal thinking

Weighing the benefits against the costs of one additional unit of something.

Trade creates value

The principle that trade can generally make everyone better, enabling specialization and fostering voluntary exchange.

Circular Flow Diagram

A visual model of the economy that shows a flow of money and goods between economic agents (households and firms) in two exchange markets.

Market for goods

An exchange market where households are buyers and firms are sellers.

Market for resources

An exchange market where households are sellers (supplying factors of production) and firms are buyers.

Labor

Physical efforts exerted by workers, a factor of production.

Capital

Man-made objects used in production, such as factories and tools, a factor of production.

Land

The geographical site of production and natural resources, a factor of production.

Human capital

Workers’ knowledge and expertise, a factor of production.

Entrepreneurship

Organizing other resources (labor, capital, land, human capital) to produce goods and services, a factor of production.

Variable

A quantity that can take on more than one value.

Constant

A quantity that does not change; the opposite of a variable.

Inflation

An increase in the aggregate price level.

Economics

The study of how individuals and society allocate their scarce resources.

Scarcity

The condition that there is a limited amount of resources to satisfy unlimited wants and needs.

Rationality (assumption)

The assumption that people make purposeful decisions based on their self-interest.

Efficiency (societal)

Society maximizing its use of scarce resources.

Prosperity (definition)

The concept that welfare or wealth is divided uniformly among society’s members.

Welfare

Redistribution of money from the wealthy to the poor.

Assumptions (in models)

Premises taken to be true without proof that simplify real-world concepts for study.

Models

Simplified representations of a more complicated reality, often relying on assumptions.

Ceteris Paribus

A Latin phrase meaning 'other things being equal' or 'all else constant,' an assumption that only one variable changes while everything else is held constant.

Time Series Graph

A graph that displays information about a variable across time.

Production Possibility Frontier (PPF)

A model that shows the combinations of two goods an economy can produce given available resources and technology.

Allocative efficiency

A state of the economy in which the production of goods and services meets consumer preferences.

Efficiency (PPF)

Occurs when all resources are fully utilized, maximizing output, represented by points on the PPF line.

Inefficiency (PPF)

Occurs when resources are not fully utilized, represented by points inside the PPF.

Law of increasing opportunity costs

The principle that the opportunity cost of producing a good rises as society makes more of it, resulting in a bowed-out PPF.

Autarky

A state of an economy without international trade, where production equals consumption.

Absolute advantage

The ability to produce a good using fewer resources than another producer.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Specialization

Limiting one’s work to a particular area, often based on comparative advantage.

Exports

Goods made domestically and sold abroad.

Imports

Goods made abroad and sold domestically.

Consumer goods

Goods that are produced for present consumption.

Capital goods

Goods that help produce other goods in the future.

Investment

The process of using resources to create or buy new capital.

Economists as Scientists

The role of economists who explain the world using positive statements.

Positive statements

Claims that objectively describe the world as it is; they are testable and can be true or false.

Economists as Policy Advisors

The role of economists who try to improve the world using normative statements.

Normative statements

Claims that state a value judgment or a preference; they are hard to assess and evaluate.

Adam Smith

A Scottish economist (1700s) who wrote 'The Wealth of Nations' and introduced the concept of the 'invisible hand.'

Invisible hand

A metaphor for how self-interested individuals interacting in the market unintentionally promote the general benefit of society by guiding resources to their highest-valued use.

Market

A group of buyers and sellers of a particular good or service.

Market Economy

An economy that allocates resources through the private decisions of households and firms as they interact in markets, with little to no government interference.

Competitive Market

A market with many buyers and many sellers, where each has a negligible influence over prices and output.

Monopoly

A market structure where a single company supplies the entire market for particular goods.

Quantity demanded (Qd)

The amount of a good that buyers are willing and able to purchase.

Market Price (P)

The price at which goods are sold in a market.

Law of Demand

All else equal, the quantity demanded of a good falls when its price rises, indicating a negative relationship between price and quantity demanded.

Negative relationship

A relationship between two variables where they move in opposite directions.

Positive relationship

A relationship between two variables where they move in the same direction.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded.

Demand Curve (D)

A graph of the relationship between the price of a good and the quantity demanded.

Market demand

The sum of all individual demand curves for a particular good.

Decrease in demand

A change that decreases the quantity demanded at any given price, causing the demand curve to shift left.

Increase in demand

A change that increases the quantity demanded at any given price, causing the demand curve to shift right.

Normal goods

Most goods, for which demand increases as income and wealth increase.

Inferior goods

Goods for which demand decreases as income and wealth increase.

Substitutes

A pair of goods that are used in place of each other; an increase in the price of one increases demand for the other.

Complements

A pair of goods that are used together; a decrease in the price of one increases demand for the other.

Subsidy

A financial support typically made by the government to encourage the consumption or production of goods.

Quantity supplied (Qs)

The amount of a good that sellers are willing and able to sell.

Law of Supply

All else equal, the quantity supplied of a good increases as its price rises, indicating a positive relationship between price and quantity supplied.

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied.

Supply Curve (S)

A graph of the relationship between the price of a good and the quantity supplied.

Decrease in supply

A change that decreases the quantity supplied at any given price, causing the supply curve to shift left.

Increase in supply

A change that increases the quantity supplied at any given price, causing the supply curve to shift right.

Supply shifter: Prices of inputs

An increase in input prices decreases supply, while a decrease in input prices increases supply.

Supply shifter: Production technology

Improvement in technology increases supply by producing the same output with fewer inputs or more output with the same inputs.

Equilibrium

A state in which no individual is better off from taking different actions.

Market equilibrium

A state in which the market price balances quantity demanded and quantity supplied, occurring at the intersection of the demand and supply curves.

Equilibrium price

The price at which quantity supplied equals quantity demanded.

Equilibrium quantity

The quantity at which quantity supplied equals quantity demanded.

Shortage

A situation of excess demand, where quantity demanded is greater than quantity supplied (Qd > Qs).

Surplus

A situation of excess supply, where quantity supplied is greater than quantity demanded (Qs > Qd).