Principles of Economics Midterm Review

Comprehensive vocabulary flashcards covering Principles of Economics, focusing heavily on Section 2 topics (market failures, externalities, government intervention, goods classification, and the labor market) alongside essential Section 1 fundamentals.

Cost-benefit principle

The core economic principle stating that you should only make a decision if the benefits outweigh the costs.

Opportunity cost principle

The principle that the true cost of something is defined by what you must give up based on the best alternative choice.

Marginal principle

The principle advising decision-makers to make each decision individually and gradually.

Interdependence

The principle that our decisions are impacted by our own choices, other people's choices, and our expectations.

Economic Surplus

The total gains from trade, calculated as $\text{Total Benefits} - \text{Total Costs}$.

Consumer Surplus

The net benefit obtained by consumers, calculated as $\text{Marginal Benefit} - \text{Price}$.

Producer Surplus

The net benefit obtained by producers, calculated as $\text{Price} - \text{Marginal Cost}$.

Dead Weight Loss

The reduction in total economic surplus resulting from market inefficiency, calculated as $\text{Total Surplus at efficient outcome} - \text{Total Surplus at inefficient outcome}$.

Accounting Profits

Total monetary revenue minus explicit costs, calculated as $\text{Total Revenue} - \text{Explicit Costs}$.

Economic Profits

The total gains above all costs, calculated as $\text{Total Revenue} - \text{Explicit Costs} - \text{Opportunity Cost}$ (e.g., forgone wages).

Fixed Costs

Costs that do not change with the level of output produced (e.g., a building lease or foregone wages).

Variable Costs

Costs that fluctuate directly with the level of output produced (e.g., materials for production).

Normal good

A good for which demand increases when consumer income rises (e.g., restaurants, electronics).

Inferior good

A good for which demand decreases when consumer income rises (e.g., bus passes, ramen).

Price Elasticity of Demand (PED)

A measure of what percentage change in quantity demanded occurs from a $1\%$ change in price ($\text{PED} = \frac{\% \Delta \text{ in Qty demanded}}{\% \Delta \text{ in Price}}$).

Cross-Price Elasticity of Demand (CPED)

A measure of the percentage change in quantity demanded for good A in response to a percentage change in the price of good B ($\frac{\% \Delta \text{ in } Q_D \text{ for good A}}{\% \Delta \text{ in } P \text{ for good B}}$).

Income Elasticity of Demand (IED)

A measure of the percentage change in quantity demanded for a good in response to a percentage change in consumer income ($\frac{\% \Delta \text{ in } Q_D}{\% \Delta \text{ in income}}$).

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to changes in price ($\text{PES} = \frac{\% \Delta \text{ in } Q_S}{\% \Delta \text{ in Price}}$).

Rational Rule for Buyers

The rule advising consumers to buy another unit only if $\text{Marginal Benefit} > \text{Price}$.

Rational Rule for Producers

The rule advising suppliers to produce another unit if $\text{Marginal Cost} < \text{Price}$.

Perfectly competitive market

A market environment where all firms sell identical goods, there are no barriers to entry, information is perfect, and every buyer and seller is a price taker.

Externality

A side effect of an economic activity that impacts bystanders who are not directly involved in the transaction.

Marginal Social Benefit

The overall benefit to society of consuming one additional unit, calculated as $\text{Marginal Private Benefit} + \text{Marginal External Benefit}$.

Negative Externality

An externality that imposes uncompensated costs on others (e.g., gasoline emissions causing air pollution and subsequent health care or relocation costs).

Positive Externality

An externality that generates benefits for others without compensation (e.g., planting flowers, which provides better air and scenery).

Cap and Trade system

A quantity-fixing regulatory system where emissions are capped, prompting firms that reduce emissions to sell their excess credits to other companies.

Output effect

The increase in total revenue that results directly from selling one additional unit of a good.

Discount effect

The decrease in total revenue that occurs when selling an additional unit forces a cut in price on all units sold.

Rational rule for entry

The principle that a firm should enter a new market if it expects to earn positive economic profits.

Rational rule for exit

The principle that a firm should exit an existing market if it expects to earn negative economic profits.

Imperfect Information

A market situation where economic agents lack full awareness or complete knowledge of all costs and benefits associated with their actions.

Price floor

A government-imposed minimum legal price allowed in a market (e.g., for dairy), which leads to an excess supply or surplus ($Q_S - Q_D$).

Price ceiling

A government-imposed maximum legal price allowed in a market, which leads to an excess demand or shortage ($Q_D - Q_S$) and may foster black market activity.

Statutory burden

The legal obligation dictating which side of the market is responsible for remitting the tax payment directly to the government.

Economic burden

The ultimate distribution of the real financial cost of a tax between buyers and sellers, regardless of who legally pays it.

Tax incidence

The division and allocation of the economic burden of a tax between buyers and sellers in a market.

Horizontal equity

The principle that individuals conducting the same activities should receive equal tax treatment without arbitrary discrimination.

Vertical equity

The principle that individuals who have a greater ability to pay should contribute a higher amount of taxes.

Rival good

A good whose consumption by one individual precludes or prevents concurrent consumption by another.

Excludable good

A good for which individuals can be prevented or blocked from accessing and consuming it.

Private goods

Goods that are both excludable and rival in consumption (e.g., food and clothing).

Common ressources

Goods that are non-excludable and rival in consumption (e.g., natural resources).

Club goods

Goods that are excludable and non-rival in consumption (e.g., Netflix, public transit).

Public goods

Goods that are non-excludable and non-rival in consumption (e.g., national defence).

Free rider problem

A market failure where individuals consume public goods without paying for them, causing the private sector to under-provide the good.

Tragedy of the commons

The tendency of common resources to suffer from over-consumption and depletion because individuals lack an incentive to preserve non-excludable goods (e.g., deforestation).

Monopsony Power

Market power occurring when a single buyer faces little to no competition from other buyers for a good, service, or factor of production.

Marginal Factor Cost

The increase in variable costs from purchasing one additional unit of an input, including paying the higher wage plus raising the wages of existing workers.

Marginal Product of Labor

The additional physical output or production generated by hiring an additional worker.

Marginal Revenue Product

The additional revenue generated by hiring an additional worker, calculated as $MRP = MPL \times \text{Price}$.

Rational Rule for Employers

The hiring rule instructing an employer to keep hiring workers as long as $MRP \ge \text{Wage}$.

Scale effect

In labor demand, a situation where a drop in the price of capital reduces overall production costs, leading to expanded output and higher labor demand.

Substitution effect (Labor Demand)

In labor demand, a situation where a drop in the price of capital makes machinery relatively cheaper, leading firms to replace workers and reducing labor demand.

Income effect (Labor Supply)

The response where higher wages raise a worker's total income, prompting them to purchase more leisure and reduce their hours of labor supplied.

Substitution effect (Labor Supply)

The response where higher wages raise the opportunity cost of leisure, incentivizing a worker to supply more hours of labor.

Extensive margin

An explanation for an upward-sloping market labor supply curve where higher wages induce non-participating individuals to enter the labor force.

Intensive margin

An explanation for an upward-sloping market labor supply curve where higher wages cause existing workers to increase their working hours because the substitution effect dominates.