Introduction to Microeconomics: Foundations, Capitalism, Scarcity, and Game Theory

Practice vocabulary flashcards for ECON 113 covering key concepts across economic history, living standards, institutions of capitalism, economic models, Malthusian dynamics, constrained optimization, and game theory.

Economics

The study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how these relationships change over time.

Gross Domestic Product (GDP)

A measure of the market value of all final goods and services produced in a country in a given period, representing the total output and total income earned within an economy.

GDP per Capita

A metric of average living standards calculated as total Gross Domestic Product divided by the total population: $\text{GDP per capita} = \frac{\text{GDP}}{\text{population}}$.

Disposable Income

The amount of income available to spend without incurring debt, calculated as: $\text{Disposable income} = \text{wages} + \text{profit} + \text{rent} + \text{interest} + \text{transfers} - \text{taxes}$.

Ratio Scale

A graphing scale where equal vertical distances represent identical proportional changes or growth rates (such as a doubling of income), enabling clear comparison of growth rates across countries.

Recession

An economic condition defined by two consecutive quarters of decline in GDP growth.

Invisible Hand

Adam Smith's metaphor describing how free markets create incentives for self-interested individuals to coordinate and inadvertently promote the economic wellbeing of society, even when it is not part of their original intention.

Technology

A production process that combines a specific set of inputs, including raw materials, machinery, and labour, to produce an output.

Technological Progress

An improvement in technology that enables fewer inputs to produce the same quantity of output, or allows greater output to be produced from the same set of inputs.

Biosphere

The collection of all forms of life on Earth that provides the essentials for human survival, including clean air, water, and food, within which society and the economy are nested.

Capitalism

An economic system combining three core institutions: private property, markets, and firms.

Private Property

The legal right to enjoy, use, exclude others from, and transfer ownership of goods, equipment, buildings, land, and other production inputs, as well as the resulting outputs.

Market

A means through which people exchange goods and services via mutually beneficial, voluntary transfers characterized by competition among buyers and sellers.

Firm

A business organization that hires employees, purchases inputs, owns capital goods, and sells output in markets with the objective of generating profit for its owners.

Economies of Scale

A cost advantage in production where producing a larger number of units of a good results in lower per-unit production costs.

Absolute Advantage

The ability of an individual or entity to produce a larger quantity of a good or service using the same amount of time or resources compared to another producer.

Comparative Advantage

The ability of an individual or entity to produce a specific good at a lower opportunity cost relative to another producer.

Natural Experiment

An empirical study in which populations are exposed to differing experimental conditions—such as different institutions—that are not controlled by the researcher and are not confounded by other causes.

Dynamic Economy

A capitalist economic system that generates sustained long-run growth in living standards, requiring secure private property, competitive markets, and firm leadership selected by merit and competence rather than privilege.

Economic Model

A simplified description of reality—using equations, graphs, words, or physical representations—designed to illustrate essential economic relationships and generate testable predictions.

Equilibrium

A self-perpetuating outcome in an economic model in which variables of interest remain constant unless altered by an external force.

Ceteris Paribus

An economic assumption meaning 'all other things equal,' applied to simplify analysis and isolate the specific effect of changing one variable while holding all others constant.

Incentive

An economic reward or penalty that alters the relative benefits and costs of selecting one course of action over another.

Relative Price

The price of one good or option expressed in terms of the price of another (a ratio of prices), which guides decision-making among competing alternatives.

Economic Rent

A payment or benefit received by an individual above and beyond what they would have obtained in their fallback or next best alternative: $\text{Economic Rent} = \text{Benefit from Option Taken} - \text{Benefit from Reservation Option}$.

Reservation Option

A decision-maker's next best fallback alternative among all available choices in a transaction.

Isocost Line

A line joining all possible combinations of production inputs (such as workers and coal) that cost the firm the exact same total expenditure: $\text{Cost} = (w \times L) + (p \times R)$.

Creative Destruction

Joseph Schumpeter's term for the market process wherein innovative technologies and adaptable firms replace obsolete, unprofitable firms, releasing labour and capital goods for more productive combinations.

Entrepreneur

An economic actor and agent of change who introduces new products, develops new production techniques, or opens new markets.

Production Function

A mathematical or graphical representation showing the maximum amount of output that can be produced for any given combination of inputs.

Average Product of Labour

Total output produced divided by the total quantity of labour input employed: $\text{Average Product} = \frac{Y}{L}$.

Diminishing Average Product of Labour

A property of production where adding successive units of labour to a fixed quantity of land causes the average output per worker to decline.

Marginal Product

The additional output generated by increasing a particular input by one unit while holding all other inputs constant: $\text{MP} = \frac{\Delta \text{TP}}{\Delta H}$.

Subsistence Level

The level of living standards, measured by real income or consumption, at which the population remains constant, experiencing neither growth nor decline.

Malthusian Trap

A cycle where technological improvements temporarily increase living standards, triggering population growth that reduces land per farmer, which reduces average product of labour and returns living standards back down to subsistence level.

Utility

A numerical indicator reflecting the subjective value or satisfaction an individual places on an outcome or consumption bundle.

Indifference Curve

A curve linking all combinations of two goods or outcomes that yield the exact same level of utility or satisfaction to a consumer.

Marginal Rate of Substitution (MRS)

The trade-off an individual is willing to make between two goods while keeping their utility level constant, measured by the absolute slope of the indifference curve.

Opportunity Cost

The net benefit of the next best alternative action that is forgone when making a specific economic choice.

Economic Cost

The total cost of pursuing an action, equal to direct out-of-pocket accounting costs plus the opportunity cost of the forgone fallback option.

Feasible Set

The collection of all combinations of goods or outcomes that an individual can achieve given physical, technological, time, or financial constraints.

Feasible Frontier

A curve showing the maximum quantity of one good that can be produced or obtained for any given quantity of another good, representing the upper boundary of the feasible set.

Marginal Rate of Transformation (MRT)

The quantity of a good that must be physically sacrificed to obtain one additional unit of another good, measured by the absolute slope of the feasible frontier.

Constrained Choice Optimum

The utility-maximizing point within a feasible set where the marginal rate of substitution equals the marginal rate of transformation ($\text{MRS} = \text{MRT}$), representing the point of tangency between the highest attainable indifference curve and the feasible frontier.

Worker's Budget Constraint

The linear frontier relating consumption ($c$) to hours of free time ($t$) given an hourly wage ($w$) and a 24-hour daily time constraint: $c = w(24 - t)$.

Social Dilemma

A situation where individuals pursuing their own private objectives independently produce an outcome that is inferior to another feasible outcome that could have occurred had they coordinated their actions.

Tragedy of the Commons

A social dilemma in which a common-pool resource that lacks private ownership or access controls (such as ocean fisheries or the atmosphere) is degraded and overexploited by self-interested users.

Free Riding

Enjoying the benefits of a collective project or non-excludable public good without contributing a proportional share toward its cost or maintenance.

Strategic Interaction

A social interaction where each individual participant recognizes that their payoff depends on the decisions made by other players, and that their own choices affect the payoffs of others.

Strategy

An action or complete plan of action selected by a player in a game, taken with full awareness of mutual interdependence.

Payoff

The quantitative benefit, utility, or financial return received by a player resulting from the combined strategies selected by all participants in a game.

Best Response

The strategy in a game that produces the highest possible payoff for a player given the specific strategies played by other participants.

Dominant Strategy

An action that yields the highest payoff for a player regardless of what strategies other players choose.

Dominant Strategy Equilibrium

An outcome of a game in which every participating player plays their individual dominant strategy.

Prisoners' Dilemma

A game structure where each player has a dominant strategy to defect, resulting in a dominant strategy equilibrium that gives both players lower payoffs than if both had chosen to cooperate.

Nash Equilibrium

A set of strategies such that each player's strategy is a best response to the strategies chosen by all other players, meaning no player has an incentive to unilaterally deviate.

Pareto Efficient Allocation

An economic allocation where it is impossible to make any single individual better off without making at least one other individual worse off.

Social Preferences

Preferences that place value on the payoffs and wellbeing of other individuals, including motives such as altruism, reciprocity, and inequality aversion.

Altruism

The willingness of an economic actor to bear personal costs in order to confer a benefit upon another person.

Zero-Sum Game

A game in which the total payoff gains and losses across all players sum to zero for every feasible strategy combination.

Public Good

A good or service that is both non-rival (one person's consumption does not reduce its availability to others) and non-excludable (it is impossible or excessively costly to prevent non-payers from accessing it).

Peer Punishment

A mechanism in public goods games where individuals incur a private financial cost to impose penalties on free riders, transforming payoffs and sustaining high group cooperation over time.

Social Norm

A shared, informal understanding of acceptable or expected behavior within a community that constrains purely self-interested actions without reliance on formal legal contracts.

Ultimatum Game

A sequential two-player game where a Proposer suggests a split of a fixed sum of money and a Responder decides to either accept the split or reject it, leaving both players with nothing if rejected.