Economics Core Concepts and Principles Flashcards

Vocabulary flashcards covering key concepts from economics foundation, graph analysis, elasticity, market systems, circular flow, and market equilibrium.

Economics

A social science concerned with making optimal choices under conditions of scarcity, where economic wants exceed society's productive capacity.

Opportunity Cost

The amount of other products or choices that must be sacrificed to obtain a unit of a specific product.

Utility

The pleasure, happiness, or satisfaction obtained from consuming a good or service.

Marginal Analysis

The comparison of marginal benefits ($MB$) and marginal costs ($MC$) to make decisions, where marginal means extra or additional.

Ceteris Paribus

The other-things-equal assumption that factors other than those being specified are held constant.

Microeconomics

The study of the individual consumer, firm, or market within an economy.

Macroeconomics

The study of the entire economy or a major aggregate of the economy.

Positive Economics

Economic analysis that focuses on facts and cause-and-effect relationships, making statements that are factual.

Normative Economics

Economic analysis that incorporates value judgments about what the economy should be like.

Economizing Problem

The need to make economic choices because human wants are unlimited while economic income and resources are limited.

Budget Line

A curve showing various combinations of two products a consumer can purchase with a specific money income.

Factors of Production

The four categories of economic resources used to produce goods and services: land, labor, capital, and entrepreneurial ability.

Entrepreneurial Ability

The human resource that combines land, labor, and capital, takes business initiative, makes strategic decisions, innovates, and bears financial risk.

Production Possibilities Curve

An economic model showing different combinations of two goods or services an economy can produce under conditions of full employment, fixed resources, and fixed technology.

Law of Increasing Opportunity Costs

The principle that as the production of a particular good increases, the marginal opportunity cost of producing an additional unit rises.

Direct Relationship

A relationship between two variables where both move in the same direction, depicted by an upward-sloping line.

Inverse Relationship

A relationship between two variables where they move in opposite directions, depicted by a downward-sloping line.

Slope of a Line

The ratio of vertical change to horizontal change between two points on a line, calculated as $\text{Slope} = \frac{\text{Vertical change}}{\text{Horizontal change}}$.

Vertical Intercept

The point at which a line or curve meets the vertical axis of a graph.

Price Elasticity of Demand

A measure of buyers' responsiveness to price changes, calculated as percentage change in quantity demanded divided by percentage change in price.

Elastic Demand

Demand where buyers are sensitive to price changes, resulting in an elasticity coefficient greater than $1$ ($E_d > 1$).

Inelastic Demand

Demand where buyers are insensitive to price changes, resulting in an elasticity coefficient less than $1$ ($E_d < 1$).

Unit Elastic Demand

Demand where quantity demanded changes by the exact same percentage as price, resulting in an elasticity coefficient equal to $1$ ($E_d = 1$).

Perfectly Inelastic Demand

Demand where quantity demanded does not change at all in response to price changes, resulting in an elasticity coefficient of $0$ ($E_d = 0$).

Perfectly Elastic Demand

Demand where a small price change causes quantity demanded to change from zero to infinity, resulting in an elasticity coefficient of infinity ($E_d = \infty$).

Midpoint Formula

A calculation formula for price elasticity of demand that divides the change in quantity by the average of quantities, and the change in price by the average of prices.

Total Revenue Test

A test measuring demand elasticity by observing changes in total revenue ($\text{TR} = P \times Q$) when price changes.

Price Elasticity of Supply

A measure of sellers' responsiveness to price changes, calculated as percentage change in quantity supplied divided by percentage change in price ($E_s$).

Cross Elasticity of Demand

A measure of the responsiveness of quantity demanded of one product ($X$) to a price change in another product ($Y$) ($E_{xy}$).

Substitute Goods (Cross Elasticity)

Goods that have a positive cross elasticity coefficient ($E_{wz} > 0$), where demand for one increases when the price of the other increases.

Complementary Goods (Cross Elasticity)

Goods that have a negative cross elasticity coefficient ($E_{xy} < 0$), where demand for one decreases when the price of the other increases.

Income Elasticity of Demand

A measure of buyer responsiveness to changes in income ($E_i$), calculated as percentage change in quantity demanded divided by percentage change in income.

Normal Goods

Goods whose demand increases as consumer income increases, resulting in a positive income elasticity coefficient ($E_i > 0$).

Inferior Goods

Goods whose demand decreases as consumer income increases, resulting in a negative income elasticity coefficient ($E_i < 0$).

Laissez-Faire Capitalism

An ideal economic system where government intervention is kept to a minimum, focused on protecting private property and enforcing contracts.

Command System

An economic system in which resource ownership is public and economic activities are directed by a central planning board.

Market System

An economic system characterized by a mixture of decentralized decision-making in private markets with limited government control.

Consumer Sovereignty

The power of consumers to determine the types and quantities of goods and services produced in the economy.

Dollar Votes

The spending choices made by consumers that signal to businesses which goods and services to produce.

Creative Destruction

The creation of new technologies and products that destroys the market positions of established firms and older products.

Invisible Hand

The concept introduced by Adam Smith that self-interested individuals in competitive markets simultaneously promote the social interest.

Circular Flow Diagram

An economic model displaying the dual flows of resources, products, income, and revenue between households and businesses.

Resource Market

A market in which households sell economic resources and businesses buy them.

Product Market

A market in which businesses sell finished goods and services and households buy them.

Law of Demand

The principle that, ceteris paribus, as price falls, quantity demanded rises; and as price rises, quantity demanded falls.

Law of Diminishing Marginal Utility

The principle that as a consumer consumes additional units of a specific product, the extra satisfaction gained from each additional unit declines.

Income Effect

A change in quantity demanded resulting from a change in real income caused by a price change.

Substitution Effect

A change in quantity demanded resulting from a change in a product's price relative to other available goods.

Law of Supply

The principle that, ceteris paribus, as price rises, quantity supplied rises; and as price falls, quantity supplied falls.

Market Equilibrium

The price and quantity point where quantity demanded equals quantity supplied ($Q_d = Q_s$).

Productive Efficiency

The production of goods in the least costly way, using the best technology and right mix of resources.

Allocative Efficiency

The production of the specific mix of goods and services most highly valued by society.

Rationing Function of Prices

The ability of market forces to set a price where buying and selling decisions match, eliminating shortages and surpluses.

Price Ceiling

A maximum legal price set by government below the equilibrium price, resulting in a persistent market shortage.

Price Floor

A minimum legal price set by government above the equilibrium price, resulting in a persistent market surplus.