Econ 2010: Trade, Supply, Demand, Equilibrium, and the Wealth of Nations

Comprehensive vocabulary flashcards covering international trade, comparative advantage, supply and demand, market equilibrium, government interventions, macroeconomic history, and institutional drivers of economic growth.

Absolute Advantage

The condition in which an individual, firm, or country can produce a good or service with higher productivity or fewer resources than another producer.

Comparative Advantage

The ability of an individual or nation to produce a good or service at a lower opportunity cost than another producer, serving as the basis for gains from trade.

Division of Knowledge

The economic principle that specialization allows society to utilize far more aggregate knowledge than could ever exist within any single individual's mind.

David Ricardo

The classical economist who formulated the modern theory of comparative advantage in his 1817 work, Principles of Political Economy and Taxation.

Infant Industry Argument

A justification for trade barriers asserting that emerging domestic industries require temporary trade protection from established foreign rivals until they become mature and competitive, though it often fares poorly in practice.

Quantity Demanded

The specific amount of a good or service that buyers are willing and able to purchase at a particular price.

Law of Demand

The economic principle stating that, all else being equal, as the price of a good falls, the quantity demanded increases, producing a downward-sloping demand curve.

Normal Good

A good for which demand increases when consumer income rises and decreases when consumer income falls.

Inferior Good

A good for which demand decreases when consumer income rises and increases when consumer income falls.

Substitutes

Pairs of goods where a price increase for one good results in an increase in the demand for the other good.

Complements

Pairs of goods where a price increase for one good leads to a decrease in the demand for the other good.

Consumer Surplus

The economic benefit received by buyers, calculated as the difference between a consumer's maximum willingness to pay and the actual market price paid.

Quantity Supplied

The specific quantity of a good or service that producers are willing and able to offer for sale at a given price.

Law of Supply

The economic principle stating that, holding other factors constant, as the price of a good increases, the quantity supplied increases, producing an upward-sloping supply curve.

Producer Surplus

The economic benefit realized by sellers, measured as the difference between the actual price received and the minimum price the seller would be willing to accept.

Equilibrium Price

The market-clearing price at which the quantity demanded by consumers exactly equals the quantity supplied by producers.

Surplus (Excess Supply)

A market condition where quantity supplied exceeds quantity demanded because the current price is above the equilibrium price, driving competitive pressure to lower prices.

Shortage (Excess Demand)

A market condition where quantity demanded exceeds quantity supplied because the current price is below the equilibrium price, driving competitive pressure to raise prices.

Gains from Trade

The total net welfare generated in a market, calculated as the sum of Consumer Surplus and Producer Surplus: $\text{Total Surplus} = \text{Consumer Surplus} + \text{Producer Surplus}$.

Deadweight Loss

The loss of total economic surplus that occurs when a market produces an inefficient outcome where supply and demand are not in equilibrium.

Price Ceiling

A legally mandated maximum price that sellers may charge for a good or service, such as rent control, which results in shortages when set below the equilibrium price.

Price Floor

A legally mandated minimum price that buyers must pay for a good or service, such as the minimum wage, which results in surpluses when set above the equilibrium price.

Economic Calculation Problem

A critique formulated by Ludwig von Mises (1920) arguing that socialist central planning cannot allocate resources efficiently because it lacks market-determined prices reflecting supply and demand.

Knowledge Problem

Friedrich Hayek's (1945) insight that essential economic information is dispersed among millions of individuals, making it impossible for a central authority to possess the local knowledge needed to coordinate an entire economy.

Market Socialism

An economic framework proposed by Oskar Lange (1936) attempting to achieve competitive market efficiency under public or state ownership of the means of production.

Arrow-Debreu Model

A formal mathematical framework established in the 1950s demonstrating that an efficient general equilibrium can be achieved under competitive markets starting from diverse initial resource endowments.

GDP per Capita

The total economic output of a nation divided by its total population, providing a measure of average income and standard of living per person.

Immediate Factors of Production

The direct physical inputs to national economic output, categorized into physical capital, human capital, technical knowledge, and organization.

Institutions

The formal and informal rules, legal systems, and social norms—such as property rights, regulatory structures, and governance forms—that shape individual incentives within an economy.

Credible Commitment Problem

The challenge faced by autocratic leaders or governments in making trustworthy promises to citizens or foreign entities because there is no external legal recourse to prevent them from reneging on commitments.

Path Dependence

The economic concept that historical decisions, initial institutional arrangements, and past trajectories exert a persistent and lasting impact on modern economic development.