ECO 2026: Microeconomics Core Concepts

Vocabulary flashcard set reviewing international trade, rational decision-making, consumer behavior, utility optimization, and market efficiency mechanics from ECO 2026.

Autarky

A national economic state of total self-sufficiency with zero international trade.

World Price ($P_W$)

The price at which a good is traded on the global market.

Comparative Advantage

A condition where a nation's opportunity cost of producing a good is lower than other nations.

Import Condition

The market state occurring when the World Price is less than the Autarky Price ($P_W < P_A$), leading to increased consumer surplus and total domestic surplus.

Export Condition

The market state occurring when the World Price is greater than the Autarky Price ($P_W > P_A$), leading to expanded producer surplus and increased total domestic surplus.

Tariff

A tax imposed on imported goods that raises domestic price, reduces imports, increases producer surplus, decreases consumer surplus, generates government revenue, and creates Deadweight Loss.

Import Quota

A legal restriction on the maximum quantity imported, which matches a tariff's price and surplus effects, but transfers revenue to foreign license holders as Quota Rents.

Quota Rents

Revenues generated from an import quota that are collected by foreign license holders rather than the domestic government.

National Security Argument

A trade policy rationale advocating protection for domestic producers of vital goods (e.g., defense, steel) to ensure self-sufficiency during crises.

Infant Industry Argument

A trade policy rationale granting temporary protection to new industries until they establish global competitiveness.

Explicit Cost

An out-of-pocket cost requiring a direct monetary expenditure, such as college tuition or textbook costs.

Implicit Cost

A non-monetary cost measured by the dollar value of forgone benefits, such as salary lost while attending school full-time.

Total Opportunity Cost

The overall economic cost of a decision, calculated as: $\text{Opportunity Cost} = \text{Total Explicit Costs} + \text{Total Implicit Costs}$.

Accounting Profit

Total Revenue minus Total Explicit Costs.

Economic Profit

Total Revenue minus Total Opportunity Cost (the sum of Explicit and Implicit Costs).

Implicit Cost of Capital

The opportunity cost of using one's own capital, measured by the income that capital would have earned in its next-best alternative employment.

Either-Or Choice

A decision framework involving a choice between two mutually exclusive options, guided by the rule to choose the option with positive economic profit.

How-Much Choice

A decision framework evaluating marginal trade-offs, where an activity should continue as long as Marginal Benefit is greater than or equal to Marginal Cost ($MB \ge MC$).

Rational Choice

A decision that yields a non-negative net benefit, where total benefit is greater than or equal to total cost ($\text{total benefit} \ge \text{total cost}$).

Utility

A measure of personal satisfaction derived from a consumption bundle, quantified in units called utils.

Budget Line

A line representing all affordable consumption bundles given a consumer's total income and good prices.

Indifference Curve

A graphical curve showing all consumption bundles that yield equal total utility.

Marginal Rate of Substitution (MRS)

The slope of the indifference curve, representing the rate a consumer trades Good Y for Good X while keeping utility constant: $\text{MRS} = -\left(\frac{MU_X}{MU_Y}\right) = \frac{\Delta Q_Y}{\Delta Q_X}$.

Tangency Condition

The condition where the optimal consumption bundle occurs at the point where the budget line is tangent to the highest reachable indifference curve.

Equi-Marginal Principle

The optimization rule stating that at the optimal bundle, the marginal utility per dollar spent is equal across all goods: $\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$.

Perfect Substitutes

Goods whose indifference curves are straight lines characterized by a constant slope or Marginal Rate of Substitution (MRS).

Perfect Complements

Goods that must be consumed in fixed proportions, resulting in L-shaped indifference curves with $90^\circ$ right angles.

Pareto Improvement

An action that makes at least one person better off without making anyone worse off.

Pareto Efficient Allocation

An economic allocation where no further Pareto improvements are possible.

Tax Wedge

The price separation of size $t$ created by a tax between the consumer price ($P_D$) and seller price ($P_S$), defined by $P_D = P_S + t$.

Elasticity Rule (Tax Incidence)

The principle stating that the economic burden of a tax falls predominantly on the side of the market that is less price-elastic (more inelastic).

Deadweight Loss (Excess Burden)

Losses in consumer and producer surplus not captured by tax revenue, caused by a reduction in market transaction volume.