ECON 101: Principles of Economics, Demand, Supply, and Equilibrium

Comprehensive vocabulary flashcards covering basic economic principles, the foundations of demand and supply, market structures, and competitive equilibrium from ECON 101.

Cost-Benefit Principle

The core economic principle stating that for every decision, one must weigh the costs and benefits, pursuing an action only if the benefits are greater than or equal to the costs ($\text{benefits} \ge \text{costs}$) after converting all financial and non-financial consequences into monetary terms.

Economic Surplus

The net value created by a decision, calculated as total benefits minus total costs ($\text{Economic Surplus} = \text{benefits} - \text{costs}$).

Opportunity Cost Principle

The principle that because resources (such as money, time, attention span, and labour) are limited, the true cost of any action is what must be given up to do it, defined as the value of the next best alternative.

Sunk Cost

A cost that has already been incurred and is non-refundable, which should be ignored when making subsequent economic decisions.

Production Possibility Frontier (PPF)

A graphical frontier displaying the different combinations of output that can be produced given a fixed amount of inputs/resources and current technology.

Marginal Principle

The principle of breaking down quantity decisions into smaller increments by evaluating whether to buy or produce "one more" unit.

Marginal Benefit (MB)

The change in total benefit derived from purchasing or consuming one additional unit of a good or service.

Marginal Cost (MC)

The additional cost incurred from producing or purchasing one additional unit of a good or service.

Interdependence Principle

The principle stating that an individual's best choice depends on their other choices, choices made by others, developments in other markets, and expectations about the future.

Individual Demand

The quantity of a good or service that an individual consumer plans to purchase at each potential price.

Quantity Demanded

The specific quantity that consumers plan to purchase at a specific given price, represented as a single point on a demand curve.

Law of Demand

The economic rule stating that there is an inverse relationship between price and quantity demanded: when price increases, quantity demanded decreases ($P \uparrow \rightarrow Q^D \downarrow$), and when price decreases, quantity demanded increases ($P \downarrow \rightarrow Q^D \uparrow$).

Ceteris Paribus

A Latin phrase meaning "holding all else constant," used to isolate the effect of a price change by assuming non-price factors remain unchanged.

Rational Rule for Buyers

The rule stating that a consumer should continue to buy additional units as long as marginal benefit is greater than or equal to price ($\text{MB} \ge P$).

Diminishing Marginal Benefit

The economic observation that as an individual consumes more and more units of a good, the additional benefit received from each successive unit declines.

Market Demand

The total quantity demanded by all consumers in a market at each given price.

Horizontal Summation

The mathematical and graphical process of adding up the individual quantities demanded (or supplied) by all market participants at each given price to construct the market curve.

Normal Good

A good for which demand increases when consumer income rises ($\text{Income} \uparrow \rightarrow \text{Demand} \uparrow$) and decreases when consumer income falls.

Inferior Good

A good for which demand decreases when consumer income rises ($\text{Income} \uparrow \rightarrow \text{Demand} \downarrow$) and increases when consumer income falls.

Substitutes (in Consumption)

Goods that can replace each other in consumption, such that an increase in the price of Good $X$ leads to an increase in demand for Good $Y$ ($P_X \uparrow \rightarrow \text{Demand}_Y \uparrow$).

Complements (in Consumption)

Goods that are consumed together, such that an increase in the price of Good $X$ leads to a decrease in demand for Good $Y$ ($P_X \uparrow \rightarrow \text{Demand}_Y \downarrow$).

Network Effect

A phenomenon where other people using a good makes the good more valuable to each user (e.g., social media).

Congestion Effect

A phenomenon where other people using a good makes the good less valuable to each user (e.g., toll roads).

Perfectly Competitive Market

A market characterized by three essential features: many buyers and sellers, identical (standardized) goods, and free entry and exit.

Price Taker

A firm that cannot influence the prevailing market price ($P^*$) and must take it as given, leaving quantity to sell as its only decision.

Individual Supply

The relationship between price and quantity supplied, showing the quantity of a good that an individual business plans to sell at each price.

Law of Supply

The rule stating that there is a direct/positive relationship between price and quantity supplied: as price rises, quantity supplied rises ($P \uparrow \rightarrow Q^S \uparrow$), and as price falls, quantity supplied falls ($P \downarrow \rightarrow Q^S \downarrow$).

Rational Rule for Sellers

The decision rule stating that a seller should sell an additional unit of a good as long as the market price is greater than or equal to marginal cost ($P \ge \text{MC}$).

Diminishing Marginal Product

The operational property that causes marginal cost to increase ($\text{MC} \uparrow$) as output quantity rises, explaining why supply curves slope upward.

Market Supply

The total quantity of a good that all firms in a market are willing and able to sell across all possible price levels.

Substitutes in Production

Alternative goods a producer could manufacture with the same resources, such that an increase in the price of one causes a decrease in the supply of the other.

Complements in Production

Goods that are naturally produced together as by-products (e.g., lumber and sawdust), such that an increase in the price of one increases the supply of the other.

Equilibrium

The market state where quantity supplied equals quantity demanded ($Q^S = Q^D$), establishing the market-clearing equilibrium price ($P^*$) and equilibrium quantity ($Q^*$).

Absorbing State

A property of equilibrium where any deviation in price triggers competitive market forces that automatically restore price and quantity back to $(P^*, Q^*)$.

Surplus

A market condition occurring when price is set above equilibrium ($P > P^*$), resulting in quantity supplied exceeding quantity demanded ($Q^S > Q^D$) and prompting sellers to cut prices to reduce accumulating inventory.

Shortage

A market condition occurring when price is set below equilibrium ($P < P^*$), resulting in quantity demanded exceeding quantity supplied ($Q^D > Q^S$) and prompting sellers to raise prices as shelves empty.