Principles of Economics Flashcards

Vocabulary flashcards for Economics review.

Economics

The study of how society manages its scarce resources.

Microeconomics

The study of how households and firms make decisions and how they interact in markets.

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth; how entire nations deal with scarcity.

Production Possibilities Frontier

A graph that shows the combinations of output that the economy can produce given the available factors of production and the available production technology.

Market

Any 'place' that brings together buyers and sellers.

Circular Flow Diagram

A visual model of the economy that shows how dollars flow through markets among households and firms.

Equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Elasticity

The measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

Utility Maximization

The assumption in economics that people attempt to make themselves as happy as possible limited only by budget constraints.

Diminishing Marginal Utility

The reduction in 'happy points' for each additional unit you consume.

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer.

Competitive Market

A market for which there are many buyers and sellers so that each has a negligible impact on the market price.

Exports

Goods produced domestically and sold abroad.

Imports

Goods produced abroad and sold domestically.

Trade

The exchange of goods and services between one individual or group with another.

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Normative Statement

Claims that attempt to prescribe how the world should be.

Positive Statement

Claims that attempt to describe the world as it is.

Opportunity Cost

Whatever must be given up to obtain something else.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which quantity demanded is greater than the quantity supplied.

Business Cycle

Fluctuations in economic activity, such as employment and production.

Efficiency

The property of society getting the most it can from its scarce resources.

Productivity

The quantity of goods and services produced from each hour of a worker's time.

Scarcity

The limited nature of society's resources.

Property Rights

The ability of an individual to own and exercise control over scarce resources.

Inflation

An increase in the overall level of prices in the economy.

Incentive

Something that induces a person to act.

Perverse Incentives

Government action or other market interventions that motivate a party to act in an undesirable way.

Long Run

The period of time in which firms can vary all of the inputs of production.

Price Floor

A legal minimum price for a good, service or resource.

Price Ceiling

A legal maximum price for a good, service or resource.

Tax Incidence

The manner in which the burden of tax is shared among participants in a market.

Subsidy

A sum of money given by the government to a household, industry, or business in order to support it.

Rationing

A mechanism used to allocate resources, when the free market cannot bring supply and demand into equilibrium through price.

Taxation

The power to coerce payment

Monopoly

A market structure in which there is a sole seller of a product without close substitutes.

Perfectly Competitive Market

A market structure with many buyers and sellers trading identical products so that each buyer and seller is a price taker.

Duopoly

A market structure in which there are only two major sellers offering similar products.

Monopolistically Competitive Market

A market structure in which many firms sell products that are similar but not identical, often using marketing and branding to set themselves apart from their competition.

Oligopoly

A market structure in which only a few sellers offer similar or identical products.

Collusion

An agreement among firms in a market, often cartels, about prices or production quantities.

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

Diminishing Marginal Product

The property whereby the marginal product (push-ups) of an input declines as the quantity of an input (classmates) increases.

Exit

A firm's decision to permanently leave a market, usually because economic profits have fallen below zero.

Sunk Costs

Costs that have already been committed and cannot be recovered.

Economic Profit

Total revenue minus explicit and implicit costs.

Marginal Revenue

The change in total revenue from an additional unit sold.

Implicit Costs

Input costs that do not require a direct outlay of money by a firm.

Explicit Costs

Input costs that require an outlay (payment) of money by a firm.

Market Equilibrium

Occurs after economic profits have incentivized firms to enter and compete in a market, driving prices down and reducing economic profits in the long run, such that inefficient firms leave that market, which brings supply and demand into balance, removing the incentive for new firms to enter or existing firms to exit.

Hyperinflation

when the gov't creates too much money resulting in an associated rapid rise in prices

Menu Costs

The cost to firms (and ultimately society) of changing prices due to inflation.

Bureau of Labor Statistics

The government agency responsible for measuring unemployment.

Unemployment Rate

The percentage of the labor force that is unemployed.

Discouraged Workers

Individuals who would like to work but have given up looking for a job.

Marginally Attached Workers

Those who have looked for work in the last twelve months, but not the last four weeks.

Labor Force

The total number of workers, including both employed and unemployed.

Cyclical Unemployment

The deviation of unemployment from its natural rate.

Full Employment

The absence of cyclical unemployment.

Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates; includes structural and frictional unemployment.

Structural Unemployment

Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

Frictional Unemployment

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills.

Efficiency Wages

Above-equilibrium wages paid by firms to increase worker productivity.

Collective Bargaining

The process by which unions and firms agree on the terms of employment.

LOWER the natural rate of unemployment

Technology that reduces job search time

RAISE the natural rate of unemployment

An increase in unemployment benefits

Hyperinflation

Inflation above 50% annually.

Double Coincidence of Wants

The unlikely occurrence that two people both have something the other wants and of the same value.

Quantity Theory of Money

MXV =PX4

Quantity Theory of Money

Asserts that the money supply will always determine prices and that the growth rate of the money supply will determine the rate of inflation.

Velocity

How often a unit of money is traded within a period of time.

Inflation Tax

The revenue the government raises by printing new money to finance debt and spending.

Real GDP

The value of all of the goods and services (output) in an economy.

Nominal GDP

The monetary value of an economy.

FOMC

The elite group at the FED responsible for setting monetary policy for the United States.

Reserve Requirement

Regulations on the minimum amount of reserves that banks must hold against deposits.

Currency

The paper bills and coins in the hands of the public.

Central Bank

An institution designed to oversee the banking system and regulate the quantity of money in the economy.

Unit of Account

The yardstick people use to post prices and record debts.

Monetary Policy

The setting of the money supply by policy makers at the central bank.

Reserve Ratio

The fraction of deposits that banks hold as reserves, established by legal requirements and bank policy.

Money Supply

The quantity of money available in the economy.

Liquidity

The ease with which an asset can be converted into the economy's medium of exchange.

Federal Reserve (FED)

The central bank of the United States.

Cryptocurrency

A digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.

Money Multiplier

The amount of money the banking system generates with each dollar of reserves; the reciprocal of the reserve ratio.

Medium of Exchange

An item that buyers give to sellers when they want to purchase goods and services.

Demand Deposits

Balances in bank accounts that depositors can access on demand by writing a check.

Reserves

Deposits that banks have received but have not loaned out.

Fiat Money

Money without intrinsic value that is used as money because of government decree.

Commodity Money

Money with intrinsic value.

Store of Value

An item that people can use to transfer purchasing power from the present to the future.

Open Market Operations

The purchase and sale of US government bonds by the FED.

Discount Rate

The interest rate on the loans that the FED makes to banks.