Economics Fundamentals Flashcards

Comprehensive set of 202 flashcards covering introductory microeconomics, macroeconomics, market structures, labor markets, and international trade terminology.

Choices

The ability of a consumer or a producer to decide which product or service to purchase or provide from a range of options.

Consumer Choice

The ability of a consumer to decide which product or service to purchase from a range of options.

Producer Choice

The ability of a producer to decide which product or service to provide from a range of options.

Comparative Advantage

When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production.

Factors of Production

The resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs.

Inputs

The resources such as labor, materials, and machinery that are used to produce goods and services; also called factors of production.

Law of Increasing Opportunity Costs

An economic principle that states opportunity costs increase as you allocate more factors of production to each additional product or service being produced.

Margin

The amount by which one more product or service is being increased or decreased.

Opportunity Cost

Measures cost by what we give up or forfeit in exchange; opportunity cost measures the value of the forgone alternative.

Production Possibilities Model

An economic model that examines how much of a product or service can be produced based upon the factors of production.

Scarcity

When human wants for goods and services exceed the available supply.

Trade

The voluntary exchange of products and services between economic agents such as consumers, producers, or nations.

Economic Agents

Entities such as consumers, producers, or nations that participate in voluntary economic trade.

Change in Demand

When a change in some economic factor (other than price) causes a different quantity to be demanded at every price.

Change in Quantity Demanded

When the price of a good or service changes and it induces a change in the amount of the good or service being demanded; a movement along a demand curve.

Movement Along a Demand Curve

A change in the quantity demanded resulting directly from a change in the price of a good or service.

Change in Quantity Supplied

When the price of a good or service changes and it induces a change in the amount of the good or service being supplied; a movement along a supply curve.

Movement Along a Supply Curve

A change in the quantity supplied resulting directly from a change in the price of a good or service.

Change in Supply

When a change in some economic factor (other than price) causes a different quantity to be supplied at every price.

Complements

Goods that are often used together so that consumption of one good tends to enhance consumption of the other.

Demand Shifters

A change in an economic factor that is not the price, which creates a change in demand.

Elasticity

An economics concept that measures responsiveness of one variable to changes in another variable.

Equilibrium Price

The price where quantity demanded is equal to quantity supplied.

Equilibrium Quantity

The quantity at which quantity demanded and quantity supplied are equal for a certain price level.

Inelastic

When the percentage change in quantity is less than the percentage change in the price of the good or service.

Inferior Goods

A good in which the quantity demanded falls as income rises, and in which quantity demanded rises as income falls.

Quantity Demanded of Inferior Goods (Income Rises)

The quantity demanded falls as income rises.

Quantity Demanded of Inferior Goods (Income Falls)

The quantity demanded rises as income falls.

Law of Demand

The common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant.

Higher Price Effect on Quantity Demanded

Leads to a lower quantity demanded of a good or service under the Law of Demand.

Lower Price Effect on Quantity Demanded

Leads to a higher quantity demanded of a good or service under the Law of Demand.

Law of Supply

The common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant.

Higher Price Effect on Quantity Supplied

Leads to a greater quantity supplied of a good or service under the Law of Supply.

Lower Price Effect on Quantity Supplied

Leads to a lower quantity supplied of a good or service under the Law of Supply.

Normal Goods

A good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls.

Quantity Demanded of Normal Goods (Income Rises)

The quantity demanded rises as income rises.

Quantity Demanded of Normal Goods (Income Falls)

The quantity demanded falls as income falls.

Price Elasticity of Demand

Percentage change in the quantity demanded of a good or service divided by the percentage change in price.

Price Elasticity of Demand Calculation

Determined by dividing percentage change in quantity demanded by percentage change in price.

Substitutes

A good that can replace another to some extent, so that greater consumption of one good can mean less of the other.

Supply Shifters

A change in an economic factor that is not the price, creating a change in supply.

Total Revenue for Elasticity of Demand

A test that demonstrates the relationship between total revenue and the price elasticity of demand.

Constant Returns to Scale

Expanding all inputs proportionately does not change the average cost of production.

Diminishing Marginal Returns and/or Product

As you increase the variable factor of production (typically labor) you observe increases to total output by a decreasing number.

Variable Factor of Production (Diminishing Returns)

Typically labor, which when increased leads to changes in total output.

Diseconomies of Scale

The long-run average cost of producing output increases as total output increases.

Economies of Scale

The long-run average cost of producing output decreases as total output increases.

Fixed Cost

Cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level.

Fixed Cost Timing Requirement

An expenditure that a firm must make before production starts.

Increasing Marginal Returns and/or Product

As you increase the variable factor of production (typically labor) you observe increases to total output by an increasing number.

Input, Resource, and Factors of Production Definition

The resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs.

Marginal Cost

The additional cost of producing one more unit; mathematically, $MC = \frac{\Delta TC}{\Delta L}$.

Marginal Cost Formula

$MC = \frac{\Delta TC}{\Delta L}$, where $\Delta TC$ is change in total cost and $\Delta L$ is change in labor.

Marginal Decision Rule

If the marginal benefits of an activity exceed the marginal costs the activity should be increased, subsequently if the marginal benefits of an activity are less than the marginal costs the activity should be decreased.

Activity Expansion Condition (Marginal Decision Rule)

When the marginal benefits of an activity exceed its marginal costs ($MB > MC$).

Activity Reduction Condition (Marginal Decision Rule)

When the marginal benefits of an activity are less than its marginal costs ($MB < MC$).

Marginal Product

Change in a firm's output when it employs more labor; mathematically, $MP = \frac{\Delta TP}{\Delta L}$.

Marginal Product Formula

$MP = \frac{\Delta TP}{\Delta L}$, where $\Delta TP$ is change in total product and $\Delta L$ is change in labor.

Marginal Revenue

The additional revenue gained from selling one more unit.

Negative Marginal Returns and/or Product

As you increase the variable factor of production (typically labor) you observe decreases to total output.

Perfect Competition

A market structure where each firm faces many competitors that sell identical products.

Identical Products (Perfect Competition)

Products sold by competitors in perfect competition that are exactly the same.

Short Run Loss

A situation where total revenue is less than total costs, at least one of the factors of production is fixed, making this short run loss not long run loss.

Short Run Loss Condition (Revenue vs Cost)

Total revenue is less than total costs ($TR < TC$).

Short Run Profit

A situation where total revenue exceeds total costs, at least one of the factors of production is fixed, making this short run profit not long run profit.

Short Run Profit Condition (Revenue vs Cost)

Total revenue exceeds total costs ($TR > TC$).

Shutdown Point

Level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately.

Shutdown Point Location (Curves Intersection)

The level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC.

Immediate Shutdown Condition

When price falls below the shutdown point (the minimum point of AVC).

Total Cost

The sum of fixed and variable costs of production.

Total Product or Output

Total amount of the product or service that a business produces within a given time period.

Variable Cost

Factors of production that a firm can easily increase or decrease in a short period of time.

Zero Economic Profit

A situation where total revenue equals total costs, at least one of the factors of production is fixed, making this short run decision not a long run decision.

Zero Economic Profit Condition (Revenue vs Cost)

Total revenue equals total costs ($TR = TC$).

Advertising

The process of calling attention to a product or service in an effort to increase demand for the product or service.

Purpose of Advertising

Calling attention to a product or service in order to increase demand for it.

Monopolistic Competition Characteristics

Market characteristics that define a monopolistically competitive market: (1) similar products, (2) barriers to entry and exit from the market, (3) many sellers in the market, and (4) producers having some price setting power.

Monopolistic Competition Characteristic 1

Similar products.

Monopolistic Competition Characteristic 2

Barriers to entry and exit from the market.

Monopolistic Competition Characteristic 3

Many sellers in the market.

Monopolistic Competition Characteristic 4

Producers having some price setting power.

Monopoly Characteristics

Market characteristics that define a monopoly market: (1) a unique product, (2) barriers to entry and exit from the market, (3) one seller, and (4) price setting power.

Monopoly Characteristic 1

A unique product.

Monopoly Characteristic 2

Barriers to entry and exit from the market.

Monopoly Characteristic 3

One seller.

Monopoly Characteristic 4

Price setting power.

Monopoly Profit

When total revenue exceeds total costs for a monopoly producer.

Product Differentiation

Any action that firms do to make consumers think their products are different from their competitors'.

Shutdown Point for Monopoly

When total revenue is less than total costs but equal to the variable costs. As long as price is above the average variable cost, the monopolist will stay open and minimize the loss.

Monopolist Loss Minimization Condition

Staying open and operating as long as price is above the average variable cost ($P > AVC$).

Sources of Monopoly Power

Three major ways in which a business can become a monopoly: (1) economies of scale, (2) monopoly resources, and (3) government granted, such as a patent.

Monopoly Power Source 1

Economies of scale.

Monopoly Power Source 2

Monopoly resources.

Monopoly Power Source 3

Government granted power, such as a patent.

Patent

An example of a government-granted source of monopoly power.

Total Revenue

The amount of money generated from the selling of a product or service, calculated as price multiplied by quantity.

Total Revenue Calculation Formula

$TR = P \times Q$, calculated as price multiplied by quantity.

Change in Labor Demand

A shift of the entire labor demand curve, brought on by a change in a ceteris paribus condition.

Driver of Change in Labor Demand

A change in a ceteris paribus condition that shifts the entire labor demand curve.

Change in Labor Supplied

A shift of the entire labor supply curve, brought on by a change in a ceteris paribus condition.