Economics Study Review: Microeconomics, Macroeconomics, and Economic History

Comprehensive vocabulary flashcards covering microeconomic market failures, externalities, price setting, historical economic transitions, and core macroeconomic indicators including GDP, inflation, unemployment, inequality, and growth.

Perfect Competition

A foundational assumption of supply and demand where no single producer or consumer controls the price or quality of a good.

Perfect Information

A market assumption stating that every participant knows exactly what they are buying and selling without deceptive advertising.

Perfect Rights

The market assumption that if you buy a good, you receive it, and if you do not buy it, it does not affect you (costs and benefits do not spill over).

Negative Externality

A market failure occurring when an action imposes uncompensated costs on a third party, causing the good to be overproduced ($Q_e > Q_o$) and generating an efficiency loss.

Positive Externality

A market failure occurring when an action generates spillover benefits for a third party, causing the good to be underproduced ($Q_e < Q_o$) and creating an efficiency loss.

Pigovian Tax

A specific corrective tax levied on polluters that shifts the supply curve to the left from $S$ to $S_t$, reducing equilibrium output from $Q_e$ to the socially efficient output $Q_o$.

Public Good

A good that is both non-rival (one person's consumption does not limit another's) and non-excludable (people cannot be prevented from consuming it), leading to free-riding and requiring state provision.

Market Demand for a Public Good

The vertical summation of all individual consumers' willingness to pay at each given quantity.

Cost-Benefit Analysis

A decision-making evaluation rule stating that public projects should be expanded until marginal benefit falls below marginal cost, maximizing net benefit ($\text{Net benefit} = \text{Total benefit} - \text{Total cost}$).

Paradox of Voting

A situation where collective preferences cycle across multiple choices (e.g., defense beats road, road beats weather warning, weather warning beats defense), causing the outcome to depend entirely on the order of voting.

Mark-Up Pricing

An alternative pricing theory where firms choose output before price based on anticipated demand, setting the price equal to unit costs plus an intended profit margin ($\text{Price} = \text{Costs (wages + inputs)} + \text{Profit mark-up}$).

Law of Demand

The economic principle stating that price and quantity demanded are inversely related, driven by the income effect, substitution effect, and diminishing marginal utility.

Income Effect

The mechanism explaining the downward-sloping demand curve where limited income causes consumers to purchase less of a good when its price increases.

Substitution Effect

The consumer tendency to replace a good with a similar, cheaper alternative when the original good becomes more expensive.

Diminishing Marginal Utility

The principle that each additional unit of a good consumed yields less additional satisfaction or happiness than the preceding unit.

Superior (Normal) Good

A good for which consumer demand increases as consumer income rises.

Inferior Good

A good that consumers buy primarily because they cannot afford better options, meaning demand decreases as income rises.

Substitute Good

An alternative good where an increase in the price of one leads to an increase in the demand for the other.

Complement Good

Goods typically consumed together; an increase in the price of one good decreases the demand for the other.

Law of Supply

The economic principle stating that price and quantity supplied are directly related, all else held equal.

Price Ceiling

A legally established maximum price that sellers are allowed to charge for a good or service.

Price Floor

A legally established minimum price that buyers must pay for a good or service.

Laissez-Faire Capitalism

An economic system where the government's role is strictly limited to defending property rights and enforcing contracts, justified by the ethical belief that strong private rights prevent tyranny.

Mixed Markets

An economic system combining private individual incentives with government coordination, where the state sets development goals and incentivizes strategic markets.

Command Economy

An economic structure where the government directly controls production and distribution under the belief that private business promotes selfish, harmful behavior.

Circular Flows

The concept that every transaction has two sides where one party's outflow is another's inflow ($\text{Expenses} = \text{Income}$, and $\text{Liabilities} \leftrightarrow \text{Assets}$).

Money as Debt

The historical and functional perspective that money acts as a ledger tracking who owes whom when exchange lacks a double coincidence of wants, supported by ancient tally sticks, tokens, and tablets.

Money as Barter

The theoretical view that money acts primarily as a veil to make direct commodity exchange easier, implying money must possess intrinsic value.

Enclosure Movement

The historical process in England where common lands were privatized, driving displaced peasants into urban areas as wage laborers and establishing agricultural economies of scale.

The Calling

Martin Luther's Reformation concept rejecting monastic retreat by asserting that God assigns a purpose to each individual life, making everyday worldly work an act of religious devotion.

Protestant Work Ethic

The cultural norm where business success is pursued to serve God rather than flaunt wealth, transforming economic diligence into evidence of divine favor.

Feudal Manor (Fiefdom)

The basic, relatively self-sufficient economic unit of European feudalism, consisting of peasant holdings, common lands, and the lord's estate.

Christian Paternalism

The medieval Church doctrine viewing society through the metaphor of a shepherd's obligation to the flock, creating ideological tension between biblical texts and concentrated wealth.

Three Estates

Stephen of Fougères' c. 1170s feudal hierarchy describing a divine harmony between the cleric who prays, the knight who defends, and the peasant who feeds both.

Guild Hierarchy

The craft production structure consisting of the apprentice (learning under a master), journeyman (authorized to produce and hire out labor), and master (authorized to train apprentices and run a shop).

Neoclassical Economics

An orthodox economic framework defining economics as the allocation of scarce resources among unlimited wants, focused on choice, efficiency, and rational maximizing behavior.

Pluralist (Heterodox) Economics

An economic framework defining the discipline as the study of how societies create, distribute, and use resources, focusing on institutions, meaning, distribution, and power.

Invisible Hand

Adam Smith's 1776 metaphor describing how individuals pursuing their private self-interest in competitive markets inadvertently promote broader social organization and efficiency.

Fallacy of Composition

The logical error of assuming that what holds true for an individual must automatically hold true for the group or the aggregate macroeconomy.

Malthusian Trap

The historical condition where rising living standards lead to population growth that consumes gains, returning society to baseline subsistence levels.

Recession

A period of punctuated under-utilization characterized by the rule of thumb of $2$ consecutive quarters of falling GDP, or defined by the NBER as a significant decline in economic activity lasting more than a few months across real GDP, real income, employment, industrial production, and wholesale-retail sales.

Sticky Prices

The short-run phenomenon where firms cannot or choose not to change prices due to fixed costs, menu costs, and customer resistance, causing demand shifts to impact quantity rather than price.

Gross Domestic Product (GDP)

The total monetary value of all final goods and services produced within the geographic borders of a country in a single year ($\text{GDP} = C + I + G + X - M$).

Gross National Product (GNP)

A territorial-independent economic measure of the total output produced by a country's citizens, regardless of where in the world production takes place.

Human Development Index (HDI)

An alternative summary metric evaluating average national achievement across three key dimensions: a long and healthy life, knowledge, and a decent standard of living.

Nominal GDP

The market value of final goods and services calculated using current-year prices ($\text{Nominal GDP} = \text{Quantity} \times \text{Price}$).

Real GDP

A measure of physical production holding prices constant to evaluate actual output growth ($\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index}} \times 100$).

Inflation

A sustained increase in the overall price level, causing the purchasing power of money to decline.

Deflation

A sustained decrease in the overall price level, causing the purchasing power of money to rise.

Disinflation

A reduction in the rate of inflation, where price levels are still increasing but at a slower pace.

Consumer Price Index (CPI)

A weighted price index tracking what the average consumer buys by comparing base-year quantities at new-year prices against base-year quantities at base-year prices.

Demand-Pull Inflation

Inflation that occurs when aggregate demand grows faster than firms can expand production capacity, allowing sellers to bid up prices.

Cost-Push Inflation

Inflation driven by rising per-unit production costs (e.g., raw material scarcity, oil price shocks, tariffs, or wages) that forces firms to raise prices to protect profits.

Wage-Price Spiral

A self-reinforcing inflationary dynamic where rising wages (which account for $52.8\%$ of output) force firms to raise prices, provoking demands for higher nominal wages to restore real income.

Quantity Equation of Money

The macroeconomic relationship $MV = PQ$, expressing that the money supply multiplied by velocity equals the price level multiplied by goods purchased.

Labor Force

The total pool of non-institutionalized individuals aged $16$ and older who are either currently employed or actively seeking employment.

Unemployment

The under-utilization of labor defined strictly as individuals who are not working and are actively seeking work.

Frictional Unemployment

Temporary unemployment occurring because jobs are continuously created and destroyed, requiring time for workers to search for and match with employers.

Structural Unemployment

Unemployment resulting from shifts in the skills demanded by businesses that require displaced workers to undergo training and structural adjustment.

Seasonal Unemployment

Unemployment caused by predictable, cyclical fluctuations in labor demand throughout the calendar year.

Cyclical Unemployment

Unemployment caused by recessions and economic downturns as deficient aggregate demand leads firms to lay off workers.

Natural Rate of Unemployment

An imputed, neutral benchmark estimate (approximately $4.2\%$ to $4.5\%$) representing the unemployment rate achievable without cyclical unemployment that maintains steady inflation.

GINI Coefficient

A mathematical measure of income inequality ranging from $0$ (perfect equality) to $1$ (perfect inequality), where higher numbers signify greater disparity.

OECD Poverty Line

A relative poverty threshold defined as half ($50\%$) of the median household income of the total population.

Cumulative Causation

The socioeconomic principle that an initial economic advantage or disadvantage reinforces itself over time, explaining persistent geographic and racial income disparities.

Dutch Disease

An economic challenge where a surge in natural resource extraction distorts the economy, causing currency appreciation and hindering development in other productive sectors.