ECO113 Spring 2026 Study Guide for Exam 2

A set of vocabulary flashcards covering key concepts for ECO113 exam preparation.

Price Ceiling

A legally established maximum price for a good or service.

Price Floor

A legally established minimum price for a good or service.

Binding Price Ceiling

A price ceiling set below the market price.

Binding Price Floor

A price floor set above the market price.

Shortage

Occurs when the quantity demanded exceeds the quantity supplied.

Surplus

Occurs when the quantity supplied exceeds the quantity demanded.

Price Gouging Laws

Temporary price ceilings imposed during emergencies.

Black Market Price

Prices that are significantly higher than the legal price due to supply-demand imbalances.

Market Failure

Occurs when the market leads to an inefficient allocation of resources.

Externality

A cost or benefit imposed on a third party not involved in a market transaction.

Negative Externalities

Costs imposed on a third party, e.g., air pollution.

Positive Externalities

Benefits received by a third party, e.g., vaccinations.

Third-Party Problem

When those not involved in a market activity are positively or negatively affected.

Internal Cost

Costs of a market activity paid only by individual participants.

External Cost

Costs of a market activity imposed on people not participating in that market.

Private Goods

Goods that are excludable and rival in consumption.

Club Goods

Goods that are non-rival and excludable.

Common Resource Goods

Goods that are rival but not excludable.

Free-Rider Problem

Occurs when people benefit from a good without paying for it.

Diminishing Marginal Product

Adding additional inputs leads to a slower (diminishing) rise in output.

Fixed Cost

Costs that remain constant regardless of output level.

Variable Cost

Costs that vary with the level of output.

Short Run Production

Period where at least one input is fixed.

Long Run Production

Period where all inputs are variable.

Marginal Cost (MC)

Increase in cost from producing one more unit of output.

Average Total Cost (ATC)

Total cost divided by the number of units produced.

Average Variable Costs (AVC)

Variable costs divided by the number of units produced.

Average Fixed Cost (AFC)

Fixed cost divided by the number of units produced.

Perfect Competition

A market structure with many buyers and sellers of similar goods.

Profit Maximizing Rule

Firms maximize profit by producing where MR = MC.

Sunk Costs

Costs that cannot be recovered once incurred.

Zero Economic Profits

Indicates the market is in long-run equilibrium.

Tragedy of the Commons

Occurs when shared resources are overused and depleted.

Economies of Scale

Average total cost decreases as production increases.

Diseconomies of Scale

Average total cost increases as production increases.

Constant Returns to Scale

Average total cost remains constant as production increases.

Accounting Profit

Total revenue minus explicit costs.

Economic Profit

Total revenue minus both explicit and implicit costs.