Common Sense Economics Vocabulary Flashcards

A comprehensive collection of vocabulary based on the Fourth Edition of Common Sense Economics, covering basic principles, economic growth, government economics, and personal finance.

Scarcity

A condition in which people would like to have more of a good or resource than is freely available from nature; almost nothing we value is not also scarce.

Opportunity Cost

The highest valued alternative good or activity that must be sacrificed as a result of choosing an option.

Marginal

A term used to describe the effects of a change in the current situation, such as the cost of producing an additional unit of a product.

Economic Efficiency

A situation that occurs when all activities generating more benefit than cost are undertaken and no activities are undertaken for which the cost exceeds the benefit.

Transaction Costs

The time, effort, and other resources needed to search out, negotiate, and consummate an exchange of goods or services.

Middlemen

People who buy and sell goods or services or arrange trades, thereby reducing transaction costs for others.

Invisible Hand

The tendency of market prices to direct individuals pursuing their own self-interests into activities that promote the economic well-being of society.

Secondary Effects

Consequences of an economic change that are not immediately identifiable but are felt only with the passage of time.

Private Property Rights

Property rights that are exclusively held by an owner and can be transferred to others at the owner’s discretion.

Creative Destruction

The replacement of old products and production methods by innovative new ones that consumers judge to be superior.

Law of Comparative Advantage

A principle stating that individuals or nations can produce a larger output by specializing in goods they can produce at a low opportunity cost and trading for others.

Inflation

A continuing rise in the general level of prices of goods and services, leading to a decline in the purchasing power of the monetary unit.

Consumer Price Index (CPI)

A government-issued indicator that compares the cost of purchasing a market basket of goods bought by a typical consumer to its cost in an earlier period.

Money Supply

The total of a nation's currency, checking account funds, and traveler's checks.

Marginal Tax Rate

The percentage of an extra dollar of income that must be paid in taxes.

Tariff

A tax levied on goods imported into a country.

Import Quota

A specific limit or maximum quantity of a good that is permitted to be imported into a country during a given period.

Public Choice

The study of decision-making as it affects the formation and operation of collective organizations such as governments.

Protective Function (of Government)

The government's role in maintaining a framework of security and order by enforcing rules against theft, fraud, and violence.

Productive Function (of Government)

The government's role in supplying a few select goods that are difficult to provide through markets, such as national defense or urban roads.

Public Goods

Goods characterized by jointness in consumption (provision to one makes them available to others) and nonexcludability (difficult to exclude nonpaying customers).

Externalities

Spillover effects of an activity that influence the well-being of nonconsenting external parties, either as external costs or external benefits.

Market Failure

A situation where the structure of incentives is such that markets encourage individuals to undertake activities inconsistent with economic efficiency.

Rational Ignorance Effect

Voter ignorance caused by the perception that an individual vote is unlikely to be decisive, leading to a lack of incentive to seek information on candidates or issues.

Special-Interest Effect

The bias of the political process toward programs that provide substantial benefits to well-organized interest groups at a small individual cost to the bulk of voters.

Logrolling

The practice of vote trading between politicians to obtain necessary support for desired legislation.

Pork-Barrel Legislation

Government spending projects that benefit local areas but are paid for by taxpayers at large, often with costs exceeding benefits.

Shortsightedness Effect

The tendency of elected officials to favor projects that generate immediate, visible benefits at the expense of future costs that are less visible.

Rent-seeking

Actions by individuals and interest groups designed to use the political process to restructure policy in a manner that redistributes more income to themselves.

Compound Interest

Interest that is earned not only on the principal but also on the interest previously earned.

Stocks (Equities)

Ownership shares of a corporation that entitle holders to a proportional share of the firm’s future net revenues.

Bonds

A method of borrowing where the issuer promises to repay the principal plus interest at a specified time in the future.

Mutual Funds

An entity that pools the funds of investors and channels them into various categories of investments such as stocks, bonds, or real estate.

Indexed Equity Mutual Fund

A mutual fund that holds a portfolio of stocks matching a broad stock market index, such as the S&P 500, typically featuring low overhead costs.

Random-Walk Theory

The theory that current stock prices reflect all known information, and future price movements will be determined by unpredictable surprise occurrences.

Roth IRA

A retirement plan where contributions are not tax-deductible, but investment earnings grow tax-free and can be withdrawn without tax at retirement.

Traditional IRA

A retirement plan where contributions may be tax-deductible and taxes on earnings are deferred until withdrawal.

Deductible

The initial amount the customer must pay for a loss before any insurance coverage kicks in.

Moral Hazard

A situation wherein providing protection against a risk increases the occurrence of the risky behavior because it reduces the potential adverse consequences.