Honors Economics Study Guide Overview

Economics

The study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

Microeconomics

The branch of economics that deals with the behavior of individuals and firms in making decisions regarding the allocation of resources.

Scarcity

The condition that arises because resources are limited and cannot satisfy all human wants.

Opportunity Cost

The next best alternative to forgo when making a decision.

Incentives

Motivations or rewards that influence people's decisions and behaviors.

Market Economy

An economic system in which decisions regarding production, investment, and distribution are guided by the price signals created by supply and demand.

Command Economy

An economic system where the government makes all decisions about the production and distribution of goods and services.

Mixed Economy

An economic system that combines elements of market economies and command economies.

Demand

The quantity of a good or service that consumers are willing and able to purchase at different prices.

Law of Demand

The principle that as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises, ceteris paribus.

Supply

The quantity of a good or service that producers are willing and able to sell at different prices.

Law of Supply

The principle that as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls, ceteris paribus.

Equilibrium

The point at which the quantity demanded equals the quantity supplied at a certain price.

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good.

Marginal Utility

The additional satisfaction or benefit received from consuming one more unit of a good or service.

Production Function

A mathematical relationship that describes how inputs are transformed into outputs.

Fixed Costs

Costs that do not change with the level of output produced.

Variable Costs

Costs that change with the level of output produced.

Perfect Competition

A market structure characterized by a large number of small firms, identical products, and easy entry and exit.

Monopoly

A market structure where a single seller dominates the market and sets prices.

Oligopoly

A market structure characterized by a small number of firms that have significant market power.

Monopolistic Competition

A market structure where many firms sell products that are similar but not identical.

Market Failure

A situation in which the allocation of goods and services is not efficient.

Externalities

Costs or benefits of a market activity borne by a third party.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning they are available to all without direct payment.

Market Clearing Price

The price at which the quantity demanded equals the quantity supplied.

Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good responds to a change in its price.

Price Elasticity of Supply (PES)

A measure of how much the quantity supplied of a good responds to a change in its price.

Cross-Price Elasticity of Demand

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

Income Elasticity of Demand

A measure of how the quantity demanded of a good responds to a change in consumer income.

Utility

The satisfaction or pleasure derived from consuming a good or service.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good or service.

Diminishing Marginal Utility

The principle that as more units of a good are consumed, the additional satisfaction from consuming each additional unit decreases.

Total Utility

The overall satisfaction derived from consuming a given quantity of goods and services.

Budget Constraint

The limitation on the consumption choices of a consumer based on their income and the prices of goods.

Indifference Curve

A curve showing combinations of two goods that give the consumer equal satisfaction and utility.

Substitution Effect

The change in quantity demanded of a good due to a change in its price, making it more or less attractive compared to other goods.

Income Effect

The change in quantity demanded due to a change in the consumer's real income or purchasing power.

Production

The process of combining inputs to make goods and services.

Factors of Production

The resources used to produce goods and services, including land, labor, capital, and entrepreneurship.

Fixed Costs

Costs that do not vary with the level of output produced.

Variable Costs

Costs that change with the level of output.

Total Costs

The sum of fixed and variable costs.

Marginal Cost

The additional cost of producing one more unit of output.

Average Cost

The total cost divided by the number of units produced.

Explicit Costs

Direct, out-of-pocket payments for resources.

Implicit Costs

The opportunity costs of using resources owned by the firm, such as the foregone salary of the business owner.

Perfect Competition

A market structure characterized by many firms, identical products, no barriers to entry, and perfect information.

Monopoly

A market structure where a single firm is the sole producer of a good or service with no close substitutes.

Oligopoly

A market structure dominated by a small number of firms, each of which has some control over price.

Monopolistic Competition

A market structure where many firms sell similar but not identical products, with some degree of market power.

Barriers to Entry

Factors that make it difficult for new firms to enter a market (e.g., high startup costs, government regulations).

Price Maker

A firm that has the power to set its own price due to lack of competition (typically in monopolies or oligopolies).

Price Taker

A firm in perfect competition that must accept the market price as given.

Market Failure

A situation in which the market does not allocate resources efficiently, leading to a loss of economic welfare.

Externality

A side effect of an economic activity that affects third parties (positive or negative).

Public Goods

Goods that are non-rivalrous and non-excludable, meaning consumption by one person does not reduce availability to others, and no one can be excluded from using the good.

Private Goods

Goods that are both rivalrous and excludable.

Free Rider Problem

When people benefit from a good without paying for it, typically associated with public goods.

Government Intervention

Actions taken by the government to correct market failures, such as taxes, subsidies, regulations, or providing public goods.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between the price a producer receives and the minimum price at which they are willing to sell a good.

Deadweight Loss

A loss of total surplus that occurs when the market is not in equilibrium, often due to taxes, price controls, or monopolies.

Tax Incidence

The division of the burden of a tax between buyers and sellers, which depends on the price elasticity of demand and supply.

Price Ceiling

A government-imposed maximum price that can be charged for a good or service (e.g., rent controls).

Price Floor

A government-imposed minimum price for a good or service (e.g., minimum wage).

Labor Market

A market in which workers sell their labor to firms, and firms purchase labor for production.

Capital Market

A market for the buying and selling of financial instruments, such as bonds, stocks, and loans.

Marginal Revenue Product (MRP)

The additional revenue generated by employing one more unit of a factor of production, such as labor.

Human Capital

The skills, knowledge, and experience possessed by individuals that can be used for productive activities.

Short-Run

A period during which at least one factor of production is fixed.

Long-Run

A period in which all factors of production can be varied, and firms can enter or exit the market.

Economies of Scale

The cost advantages that firms experience as they increase the scale of production, leading to lower average costs.

Diseconomies of Scale

The disadvantages that firms experience when they become too large, leading to rising average costs.

Market Structure and Welfare

A monopoly can often charge higher prices than a perfectly competitive market, leading to a reduction in consumer surplus and a loss of total welfare.

Price Elasticity of Demand

The responsiveness of the quantity demanded of a good to a change in its price.

Externalities

Costs or benefits incurred by third parties who are not directly involved in a transaction.

Game Theory

A framework for understanding strategic interactions among rational decision-makers.

Income Distribution

The way in which total income is distributed among the population.

Income Inequality

The unequal distribution of income within a population.

Minimum Wage Laws

Regulations that set the lowest legal wage that can be paid to workers.

Education Subsidies

Financial assistance provided by the government to support education and reduce costs for students.