Economics Fundamentals and Principles

Comprehensive vocabulary flashcards covering basic economic definitions, money and banking, measurement, growth, business cycles, and supply/demand models.

Economics

The study of how humans make choices under conditions of scarcity.

Scarcity

The condition where human wants for goods, services, and resources exceed what is available.

Division of labor

An economic arrangement where individuals do not all have the same job.

Comparative advantage

Producing something at a lower cost than anyone else.

Specialization

The process where people learn more about their tasks and get better and faster by building up knowledge.

Extent of the market

The principle that gains can only be obtained if producers are within a market large enough to make use of all that is produced.

Production

The making of goods.

Inputs

Things needed to produce goods and services, categorized as land, capital, labor, and entrepreneurship.

Outputs

The final product resulting from production.

Consumption

The act of converting useful things into present satisfaction.

Households and firms

The main 'actors' in microeconomic models.

Exchange/Trade

A deal made between parties.

Markets

Whenever and wherever trade occurs.

Cost

What we give up in order to have the thing that we choose to have.

Price

The amount of money for which a good or service is exchanged.

Wealth

An example of a stock, representing being rich or poor.

Income

An example of a flow, representing how much we earn per a period of time.

Stock

A quantity that we measure as of a point in time.

Flow

A quantity that we measure over a period of time.

Dollar bills

An IOU from the central bank, mostly to consumers in the economy.

Deposits

An IOU from commercial banks to consumers; these are considered liabilities for banks.

Reserves

An IOU from the central bank or Federal Reserve to commercial banks.

Bonds

An IOU from a company to the bondholder.

Assets

Something that is valuable because it can be used to produce other goods or services, or the things a business owns.

Present value

The price a number would sell for if it were sold today.

Net worth

Total assets minus total debts.

National income

The total value of all goods and services produced by a country's residents in a period of time.

Gross Domestic Product (GDP)

The value of output of all final goods and services produced within a country in a year.

Market exchange rate

The ratio of value used when one currency is being traded directly for another.

Purchasing power parity methods

A method to find the ratio of the sums of prices for items purchased in both countries.

Economic growth rate

The change in real GDP per capita.

Price level

The measurement of prices of goods and services in general.

Mercantilism

An economic system characterized by high tariffs and high barriers to entry aimed at helping existing producers in a country.

Capitalism

An economic system focused on reducing or eliminating tariffs and barriers to entry.

Central planning

A system where the government decides what is to be produced.

Demographic transition

A phenomenon where birth rates have declined in developed countries.

Recessions

Economic periods characterized by lower real GDP and high unemployment rates.

Aggregate demand

Total spending of dollars during a time period on goods and services produced by an economy, which is equal to nominal GDP.

National income identity

The equation $Y + M = C + I + G + X$ used to think about aggregate demand.

Keynesian Multiplier Effect

A change in total spending or income without a corresponding change in the price level.

Monetary policy

The management of the quantity of money in an economy.

Fiscal policy

The management of taxes and government spending.

Real business-cycle theory

The theory that recessions are caused by events that restrict production.

Model

A representation of thoughts about how some part of the world works.

Demand

People's plans, intentions, or willingness to buy goods or services.

Law of demand

The principle that at a higher price, all else being equal, the quantity demanded is lower, and vice versa.

Demand curve

A downward-sloping gash on a chart used by economists to represent the law of demand.

Explicit costs

Costs that involve paying money.

Implicit costs

Costs that do not involve paying money.

Short run

A time period in which a firm is committed to major decisions.

Long run

A time period in which a firm can change its major decisions.

Fixed costs

The costs of inputs that a firm is committed to during the short run.

Variable costs

The costs associated with variable inputs or decisions a firm makes for the short run.

Marginal product of labor

The change in quantity of output when adding a certain quantity of labor, divided by that added quantity of labor.

Law of diminishing returns

The principle that as firms increase a variable input while keeping a fixed input unchanged, the marginal product of the variable input will eventually decline.

Marginal cost

The change in total cost resulting from making one additional unit of output.

Competitiveness

The extent to which other firms in an industry are able to produce a very similar product at similar costs.

Perfectly competitive markets

An idealized model where many small firms sell identical products, no single company influences prices, and buyers have full information.

Price takers

Buyers or sellers in perfectly competitive markets that are unable to affect the market price.

Equilibrium

The intersection of the supply and demand curves, determining the equilibrium price and equilibrium quantity traded.

Aggregate supply

The relationship between the price level and the quantity of real GDP supplied.

Short-run aggregate supply curve

A model showing that an increase in price level raises firm costs only partially (excluding wages), prompting a greater quantity of production.

Long-run aggregate supply curve

A model showing that an increase in the price level raises all costs including wages, resulting in no change in the quantity produced.

Determinants of potential GDP

Technology, capital, and full employment.

Full employment

A state with zero cyclical unemployment, although frictional and structural unemployment still exist.

Frictional unemployment

Unemployment occurring when someone is momentarily between jobs or searching for the right fit.

Structural unemployment

Unemployment occurring when the type of work someone is trained for is in decline, requiring retraining.

Cyclical unemployment

Unemployment resulting from a recession where the individual expects to return to a similar job in the future.

Wealth effect

The principle that at a lower price level, a fixed amount of money (e.g., $300$ dollars) can purchase more than it could at a higher price level.