Economics Fundamentals and Principles Flashcards

A comprehensive vocabulary review deck covering basic economic terms, factors of production, production possibilities, comparative advantage, economic systems, and consumer utility theory.

Economics

The study of how people, firms, and societies make choices to allocate scarce resources to satisfy unlimited wants.

Scarcity

The basic economic problem: unlimited human wants but limited resources to satisfy them.

Microeconomics

The branch of economics that studies individual decision-makers — consumers, firms, and specific markets.

Macroeconomics

The branch of economics that studies the economy as a whole — GDP, inflation, unemployment, national growth.

Positive Economics

Fact-based, objective statements about how the economy actually works ("what is"); can be tested and proven true or false.

Normative Economics

Opinion-based statements about how the economy should work ("what ought to be"); involves value judgments.

5 Key Economic Assumptions

Resources are scarce; people act rationally; people respond to incentives; decisions are made at the margin; economic actors seek to maximize utility or profit.

Utility

The satisfaction or happiness a person gets from consuming a good or service.

Marginal

"Additional" — the extra benefit or cost from one more unit of an action (e.g., marginal cost = cost of one more unit).

Allocate

To distribute or assign scarce resources among competing uses.

Price

The amount of money exchanged for a good or service; signals value and guides resource allocation in a market.

Cost

The value given up to obtain something; includes both explicit (money) and implicit (opportunity) costs.

Investment

Spending on capital goods, education, or resources now in order to increase future production or income.

Consumer Goods

Goods produced for direct use/consumption by individuals (e.g., food, clothing, phones).

Capital Goods

Goods used to produce other goods, not consumed directly (e.g., machinery, factories, tools).

Factors of Production

The resources used to produce goods and services: Land, Labor, Capital, and Entrepreneurship.

Land

The natural resource factor of production (e.g., soil, water, minerals, forests); payment is rent.

Labor

The human effort (physical and mental) factor of production; payment is wages.

Physical Capital

Man-made tools, machinery, and equipment used to produce goods and services.

Human Capital

The skills, education, training, and knowledge that make workers more productive.

Entrepreneur

The person who takes on risk to combine land, labor, and capital to produce goods/services; payment is profit.

Productivity

Output produced per unit of input (e.g., per worker or per hour); higher productivity shifts the PPC outward.

Production Possibilities Curve Graph

A graph showing the maximum combinations of two goods an economy can produce with fixed resources and technology.

Points on a PPC of Efficiency

Points ON the curve — all resources are fully and efficiently employed; no more of one good without giving up another.

Inefficiency

A point INSIDE the PPC — resources are unemployed or underused; more of both goods could be produced.

Impossibility

A point OUTSIDE the PPC — not attainable with current resources and technology.

Constant Opportunity Cost

A straight-line PPC where resources are equally suited to producing either good, so opportunity cost doesn't change.

Increasing Opportunity Cost

A bowed-out (concave) PPC where opportunity cost rises as more of one good is produced, since resources aren't perfectly adaptable.

The Law of Increasing Opportunity Cost

As production of a good increases, the opportunity cost of producing additional units rises, because resources are better suited to one good than another.

Shifters of the PPC

Factors that move the whole curve: change in resource quantity/quality, change in technology, change in the size of the labor force.

Trade

The voluntary exchange of goods/services between parties, allowing both to gain.

Specialization

Focusing production on the good(s) a person, firm, or country produces most efficiently, then trading for the rest.

Absolute Advantage

The ability to produce more of a good using the same resources (or the same amount using fewer resources) than another producer.

Comparative Advantage

The ability to produce a good at a LOWER opportunity cost than another producer; this — not absolute advantage — determines what a party should specialize in and trade.

Calculating Comparative Advantage for Output Problems

Given output per input (e.g., units per hour), find opportunity cost by dividing what you give up by what you gain (\text{Good A cost} = \frac{\text{Good B forgone}}{\text{Good A gained}}); lower ratio = comparative advantage.

Calculating Comparative Advantage for Input Problems

Given input needed per unit of output (e.g., hours per unit), the opportunity cost is the ratio of inputs required ($\text{Good A cost} = \frac{\text{Input for A}}{\text{Input for B}}$); lower ratio = comparative advantage.

Terms of Trade (and how to figure it out)

The agreed exchange rate between two goods when trading; a mutually beneficial terms of trade must fall between the two parties' opportunity costs (better than each party's own opportunity cost).

The 3 Economic Questions

What to produce? How to produce it? For whom to produce it? Every economic system must answer these.

Economic System

The method a society uses to allocate scarce resources and answer the 3 economic questions.

Command/Centrally Planned Economy

An economic system where the government owns resources and makes production/allocation decisions.

Free Market/Capitalist Economy

An economic system where private individuals and firms own resources and make decisions based on supply and demand.

Laissez-Faire

A "hands-off" approach where government does not interfere in the market at all.

The Invisible Hand

Adam Smith's idea that individuals pursuing their own self-interest in a free market unintentionally benefit society as a whole.

Mixed Economy

An economic system combining free market elements with some government intervention/regulation (most real-world economies).

Cost-Benefit Analysis

Comparing the additional costs and additional benefits of a decision to determine if it's worth doing.

Trade-Offs

The alternatives given up when a choice is made under scarcity.

Opportunity Cost

The value of the next-best alternative given up when making a choice.

Explicit Costs

Direct, out-of-pocket monetary payments for resources (e.g., rent, wages, materials).

Implicit Costs

The opportunity cost of using resources you already own, with no direct monetary payment (e.g., forgone salary, forgone rent on your own building).

Marginal Analysis

Decision-making by comparing the additional (marginal) benefit and additional (marginal) cost of one more unit of an action.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good.

Law of Diminishing Marginal Utility

As a person consumes more units of a good, the marginal utility from each additional unit eventually decreases.

Calculating Marginal Utility

$MU = \frac{\Delta \text{Total Utility}}{\Delta \text{Quantity}}$ (i.e., $MU_n = TU_n - TU_{n-1}$).

Consumer Utility Maximization

The goal of a rational consumer to allocate a limited budget among goods to get the greatest total satisfaction possible.

Utility Maximizing Rule

A consumer maximizes utility when the marginal utility per dollar spent is equal across all goods: $\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$.

Sunk Costs

Costs that have already been incurred and cannot be recovered; rational decisions should ignore sunk costs and focus only on future marginal costs/benefits.