Basic Economic Concepts Flashcards

Vocabulary practice flashcards generated from the Basic Economic Concepts lecture notes covering supply and demand, scarcity, opportunity cost, the PPC model, and comparative advantage.

Equilibrium

The price at which the quantity of the product offered is equal to the quantity of the product in demand.

Equilibrium Quantity

The quantity demanded or supplied at the equilibrium price.

Law of Demand

A fundamental economic concept listed under supply and demand that describes how demand changes relative to price.

Law of Supply

A fundamental economic concept listed under supply and demand that describes how supply changes relative to price.

Substitute Good

A term identified as a determinant of demand, referring to a good that can be used in place of another good.

Complimentary Good

A term identified as a determinant of demand, referring to a good used together with another good.

Price Ceiling

A legally mandated maximum price set below or above market price.

Price Floor

A legally mandated minimum price set in a market.

Surplus

A market condition occurring when quantity supplied exceeds quantity demanded.

Shortage

A market condition occurring when quantity demanded exceeds quantity supplied.

Economics

The study of people and choices.

Opportunity Cost

The value of your next best alternative.

Two Most Important Assumptions in Economics

1. People have unlimited wants; 2. Resources are scarce.

Macroeconomics

The study of production, employment, price, and policies on a nationwide scale.

Economic Resources and Factors of Production

Two terms that have essentially the same meaning in economics, which students do not need to differentiate between on quizzes.

Production Possibilities Curve Model

A model designed to improve understanding of trade-offs, scarcity, opportunity cost, and economic growth.

Points Inside the Production Possibilities Curve

Points that are possible but inefficient, meaning some resources are unused.

Points On the Production Possibilities Curve

Points that are possible and efficient, representing resources being fully used.

Points Outside the Production Possibilities Curve

Points that are currently unobtainable with available resources and technology.

Absolute Advantage

The ability to produce more of a product than another entity; for example, the US has absolute advantage in planes, Germany in cars, Korea in motorcycles, Japan in laptops and phones, and Mexico in TVs and salsa.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

Gains from Trade

The economic benefits realized by countries when trading based on comparative advantage.

U.S. vs. France Comparative Advantage Example (Planes)

The U.S. can produce $20$ planes or $2$ cruise ships ($1\text{ plane} = \frac{1}{10}\text{ cruise ship}$), while France can produce $12$ planes or $2$ cruise ships ($1\text{ plane} = \frac{1}{6}\text{ cruise ship}$); the U.S. has the comparative advantage in planes because it has a lower opportunity cost.

U.S. vs. France Comparative Advantage Example (Cruise Ships)

France has the comparative advantage in cruise ships because its opportunity cost is $6$ planes per cruise ship compared to the U.S. opportunity cost of $10$ planes per cruise ship.

U.S. and France Terms of Trade

The terms of trade that benefit both countries, where $1$ cruise ship trades for between $6$ and $10$ planes (or $1$ plane for between $\frac{1}{10}$ and $\frac{1}{6}$ cruise ships).