Principles of Economics: Scope, Methods, Microeconomics, Macroeconomics, Demand, Supply, and Elasticity

Vocabulary flashcards covering core microeconomic and macroeconomic definitions, concepts, and market principles from Chapters 1 through 4 of Principles of Economics (6th Edition) by Case and Fair.

Economics

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Opportunity Cost

The best alternative that we forgo, or give up, when we make a choice or a decision.

Marginalism

The economic concept of weighing only the additional costs and benefits that arise directly from a decision, rather than sunk costs.

Sunk Costs

Costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

Efficient Market

A market in which profit opportunities are eliminated almost instantaneously due to many individuals actively searching for them.

Microeconomics

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units, specifically business firms and households.

Macroeconomics

The branch of economics that examines the economic behavior of aggregates—such as income, output, and employment—on a national scale.

Normative Economics

An approach to economics (also called policy economics) that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action.

Positive Economics

An approach to economics that studies economic behavior without making judgments, describing what exists and how it works.

Descriptive Economics

A branch of positive economics involving the compilation of data that describe economic phenomena and facts.

Economic Theory

A component of positive economics involving the building of models of behavior, where a theory is a statement or set of related statements about cause and effect.

Empirical Economics

The collection and use of data to test economic theories.

Model

A formal statement of a theory that describes the quantitative or logical relationship between two or more variables.

Ockham's Razor

The principle that irrelevant details should be cut away so that models simplify rather than complicate reality.

Variable

A measure that can change from observation to observation.

Ceteris Paribus

A device (meaning "all else equal") used by economists to study the relationship between two variables while holding all other variables unchanged.

Post Hoc Fallacy

The erroneous belief that if event $A$ happened before event $B$, then event $A$ caused event $B$.

Fallacy of Composition

The erroneous belief that what is true for a part is necessarily true for the whole.

Efficiency (Allocative Efficiency)

A criterion for judging economic policy where an economy produces what people want at the least possible cost.

Economic Growth

An increase in the total output of an economy, occurring when society acquires new resources or learns to produce more using existing resources.

Economic Stability

The condition in which national output is steady or growing, accompanied by low inflation and full employment of resources.

Production

The process by which resources are transformed into useful forms.

Resources (Inputs)

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants, categorized into capital, human, and natural resources.

Theory of Comparative Advantage

David Ricardo's theory stating that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.

Absolute Advantage

The advantage in production enjoyed by a nation or producer when it can produce more of a product using fewer total resources (or more output per day) than another producer.

Comparative Advantage

The advantage enjoyed by a country or producer in producing a good if it can produce that product at a lower opportunity cost than another producer.

Investment

The process of using resources to produce new capital.

Consumer Goods

Goods produced for present consumption.

Capital Goods

Goods used to produce other goods or services over time.

Production Possibility Frontier (PPF)

A graph showing all combinations of goods and services that can be produced if all of society's resources are used efficiently.

Marginal Rate of Transformation (MRT)

The slope of the production possibility frontier curve, which measures the trade-off society faces between two goods.

Law of Increasing Opportunity Cost

The principle reflected in the concave shape of the PPF curve, stating that as production of one good increases, society sacrifices progressively more of the other good.

Command Economy

An economic system in which a central government either directly or indirectly sets output targets, incomes, and prices.

Laissez-Faire Economy

An economic system (literally meaning "allow (them) to do") in which individual people and firms pursue their own self-interests without central direction or regulation.

Market

The institution through which buyers and sellers interact and engage in exchange.

Consumer Sovereignty

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

Free Enterprise

A system under a free market where individual producers plan, organize, and coordinate the production of products and services.

Firm

An organization that transforms resources (inputs) into products (outputs), acting as the primary producing unit in a market economy.

Entrepreneur

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or new product and turning it into a successful business.

Households

The primary consuming units in an economy.

Circular Flow of Economic Activity

A visual model showing the continuous flow of goods, services, resources, and payments between firms and households in input and output markets.

Output Markets

Markets (also called product markets) in which goods and services produced by firms are exchanged.

Input Markets

Markets in which resources—labor, capital, and land—used to produce products are exchanged.

Labor Market

An input market in which households supply work for wages to firms that demand labor.

Capital Market

An input market in which households supply savings for interest or claims to future profits to firms that demand funds to buy capital goods.

Land Market

An input market in which households supply land or other real property in exchange for rent.

Quantity Demanded

The amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.

Demand Schedule

A table showing how much of a given product a household would be willing to buy at different prices.

Demand Curve

A graph illustrating how much of a given product a household would be willing to buy at different prices.

Law of Demand

The law stating that there is a negative, or inverse, relationship between price and the quantity of a good demanded, causing demand curves to slope downward.

Income

The sum of all household wages, salaries, profits, interest payments, rents, and other earnings in a given period of time; a flow measure.

Wealth (Net Worth)

The total value of what a household owns minus what it owes; a stock measure.

Normal Goods

Goods for which demand goes up when income is higher and goes down when income is lower.

Inferior Goods

Goods for which demand falls when income rises.

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up.

Complements

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other, and vice versa.

Market Demand

The sum of all the quantities of a good or service demanded per period by all households buying in the market for that good or service.

Quantity Supplied

The number of units of a product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Supply Schedule

A table showing how much of a product firms will supply at different prices.

Supply Curve

A graph illustrating how much of a product a firm will supply at different prices.

Law of Supply

The rule stating that there is a positive relationship between price and quantity of a good supplied, giving supply curves a positive slope.

Market Supply

The horizontal summation of individual firms' supply curves, representing total quantity supplied across all sellers at each price.

Equilibrium

The condition that exists when quantity supplied and quantity demanded are equal, leaving no tendency for market price to change.

Excess Demand (Shortage)

The condition that exists when quantity demanded exceeds quantity supplied at the current price, causing price to rise.

Excess Supply (Surplus)

The condition that exists when quantity supplied exceeds quantity demanded at the current price, causing price to fall.

Price Rationing

The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

Price Ceiling

A maximum legal price set by government that sellers may charge for a good or service.

Queuing

A nonprice rationing system that uses waiting in line as a means of distributing scarce goods and services.

Favored Customers

Consumers who receive special treatment from dealers during periods of excess demand.

Ration Coupons

Tickets or coupons issued to entitle individuals to purchase a specified amount of a given product per month.

Black Market

A market in which illegal trading takes place at market-determined prices.

Elasticity

A general economic concept used to quantify the percentage response in one variable when another variable changes.

Price Elasticity of Demand

The ratio of the percentage change in quantity demanded to the percentage change in price, measuring consumer price sensitivity.

Elastic Demand

A demand relationship where the percentage change in quantity demanded is larger than the percentage change in price ($\epsilon > |1|$).

Inelastic Demand

A demand relationship where the percentage change in quantity demanded is smaller than the percentage change in price ($\epsilon < |1|$).

Unitary Elastic Demand

A demand relationship where the percentage change in quantity demanded equals the percentage change in price ($\epsilon = |1|$).

Perfectly Inelastic Demand

Demand in which quantity demanded does not respond at all to price changes ($\epsilon = 0$), represented by a vertical demand curve.

Perfectly Elastic Demand

Demand in which quantity demanded drops to zero with any price increase ($\epsilon = \infty$), represented by a horizontal demand curve.

Income Elasticity of Demand

A measure of the responsiveness of demand to changes in income, computed as percentage change in quantity demanded divided by percentage change in income.

Cross-Price Elasticity of Demand

A measure of the response of the quantity of one good demanded to a change in the price of another good.

Elasticity of Supply

A measure of the response of the quantity of a good supplied to a change in the price of that good.

Elasticity of Labor Supply

A measure of the response of labor supplied to a change in the price of labor (wage rate).