Economics Principles & Concepts Review Guide

Comprehensive vocabulary flashcards covering fundamental concepts, definitions, and mathematical rules from Units 1 through 9 of the Economics Review Guide.

ceteris paribus

The assumption that all other relevant factors remain constant while examining the relationship between specific economic variables (all else equal)

economic growth

An increase in the total output of goods and services produced by an economy over a specific period.

economics

The social science that analyzes how individuals, institutions, and societies allocate limited resources to satisfy unlimited wants.

efficiency

A state where maximum output is produced from available resources without unnecessary waste.

efficient market

A market in which asset prices rapidly adjust to reflect all publicly available information, leaving no unexploited profit opportunities.

empirical economics

The application of data, quantitative measurement, and statistical methods to test economic hypotheses and models.

equity

Fairness or justice in the distribution of economic resources, opportunities, and wealth.

Industrial Revolution

The historic transition beginning in the 18th century from agrarian, handcrafted production systems to industrial, machine-driven manufacturing processes.

macroeconomics

The branch of economics that evaluates economy-wide phenomena, including aggregate output, national inflation, unemployment, and monetary policy.

marginalism

An analytical framework focusing on the additional (incremental) costs or benefits resulting from a small change in economic activity.

microeconomics

The branch of economics studying the behavior and decision-making of individual agents, such as individual households, firms, or specific markets.

model

A simplified theoretical representation or abstraction of economic reality designed to isolate key relationships.

normative economics

An approach to economics based on subjective values, ethics, or prescriptions about what economic outcomes ought to be.

Ockham's razor

The philosophical principle that extraneous assumptions should be eliminated, favorizing the simplest explanation that fits the facts.

opportunity cost (Foundations of Economics)

The value of the highest-ranked alternative given up when making a choice.

positive economics

An approach to economics that focuses on objective, testable statements describing economic reality as it is.

post hoc, ergo propter hoc

A logical fallacy assuming that because Event B happened after Event A, Event A must have caused Event B.

scarce

The fundamental economic condition of having limited resources relative to unlimited human desires.

stability

A condition where key macroeconomic indicators experience minimal volatility, characterized by steady growth and low inflation.

variable

A measurable factor or quantity that can assume different numeric values across time or individuals.

absolute advantage

The capability of a producer to create a greater quantity of a good or service using fewer total resource inputs than competitors.

capital

Manufactured goods used specifically to produce other goods and services over time.

command economy

An economic structure where a centralized government agency makes all production, investment, and resource allocation decisions.

comparative advantage

The ability of a party to produce a particular good or service at a lower opportunity cost than another producer.

consumer goods

Final goods purchased directly by households for immediate personal consumption.

consumer sovereignty

The principle that consumer market choices directly dictate what goods and services firms produce.

economic growth (PPF)

An increase in the productive capacity of an economy, represented visually by an outward shift of the Production Possibility Frontier (PPF).

factors of production (or factors)

The fundamental productive resources categorized into Land, Labor, Capital, and Entrepreneurship.

inputs or resources

All goods, services, and raw materials used directly in the production process to generate outputs.

investment

The creation or acquisition of new physical capital that enhances future productive potential.

laissez-faire economy

An economic system characterized by absolute private ownership and zero government intervention or market regulation.

marginal rate of transformation (MRT)

The absolute slope of the Production Possibility Frontier (PPF) indicating the quantity of one good that must be sacrificed to produce one additional unit of another good.

market

An arrangement or institution bringing buyers and sellers together to negotiate trades and prices.

opportunity cost (Trade-Off)

The trade-off value measured in terms of the next best alternative activity given up.

outputs

The finished products or completed services generated by combining productive inputs.

production

The operational process of transforming input resources into economic outputs.

production possibility frontier (ppf)

A graphical representation showing all maximum potential output combinations of two goods an economy can achieve when resources are fully and efficiently utilized.

theory of comparative advantage

Ricardo's economic principle demonstrating that mutual gain from trade exists if nations specialize in producing goods for which they have a lower opportunity cost, regardless of absolute advantage.

capital market

Financial markets where long-term debt and equity-backed securities are bought and sold to fund capital investments.

complements, complementary goods

Interrelated goods consumed together, where an increase in the price of one reduces demand for the other.

demand curve

A downward-sloping graph illustrating the relationship between product price and quantity demanded by buyers during a given period.

demand schedule

A tabular depiction detailing the specific quantities of a product consumers purchase at varying hypothetical prices.

entrepreneur

An individual who assumes financial risks to innovate, organize factor inputs, and launch economic ventures.

equilibrium

The market condition where quantity demanded equals quantity supplied at a stable market price.

excess demand or shortage

A market imbalance occurring when quantity demanded exceeds quantity supplied at the current market price ($Q_d > Q_s$).

excess supply or surplus

A market imbalance occurring when quantity supplied exceeds quantity demanded at the current market price ($Q_s > Q_d$).

firm

A commercial organization that purchases inputs, coordinates production, and sells finished goods or services.

households

Primary economic units that supply productive factor inputs to businesses and purchase consumer goods and services.

income

The cumulative earnings derived from wages, interest, rents, and profits over a specified period.

inferior goods

Goods for which economic demand decreases as consumer income levels rise.

input or factor markets

Markets where businesses buy factors of production from household owners of those factors.

labor market

The specific factor market where workers supply labor capacity to firms in exchange for hourly wages or salaries.

land market

The factor market covering the buying, selling, or leasing of natural land resources and real property.

law of demand

The economic rule stating that, ceteris paribus, as product price decreases, quantity demanded increases, and vice versa.

law of supply

The economic rule stating that, ceteris paribus, as product price increases, quantity supplied increases, and vice versa.

market demand

The aggregate sum of all individual consumer demand curves within a designated market space.

market supply

The aggregate sum of all individual supplier supply curves within a designated market space.

movement along a demand curve

A change in quantity demanded driven purely by a change in the product's own price, holding all other determinants constant.

movement along a supply curve

A change in quantity supplied driven purely by a change in the product's own price, holding all other determinants constant.

normal goods

Goods for which demand expands when consumer incomes rise, and contracts when incomes fall.

perfect substitutes

Identical products that deliver completely interchangeable utility to buyers, making buyers indifferent between them.

product or output markets

Markets where finished consumer goods and services are traded directly to households.

profit

The net financial return remaining after total costs are deducted from total revenue, calculated as $\text{TR}-\text{TC}$ .

quantity demanded

The specific numerical quantity of a good consumers are willing and able to purchase at a distinct price point.

quantity supplied

The specific numerical quantity of a good suppliers are willing and able to offer for sale at a distinct price point.

shift of a demand curve

A movement of the entire demand curve leftward or rightward caused by changes in non-price determinants (e.g., income, consumer preferences, related good prices).

shift of a supply curve

A movement of the entire supply curve leftward or rightward caused by changes in non-price determinants (e.g., technological advances, input costs, seller taxes).

substitutes

Alternative goods that satisfy similar consumer needs; an increase in the price of one increases demand for the other.

supply curve

An upward-sloping graph illustrating the relationship between market price and quantity supplied by producers.

supply schedule

A tabular listing showing various quantities supplied at different market price levels.

wealth or net worth

The cumulative monetary value of total assets owned minus total outstanding financial liabilities at a specific point in time, given by $\text{Total Assets}-\text{Total Liabilities}$ .

black market

An informal or illicit market where goods or services are traded illegally to circumvent official price controls, quotas, or bans.

consumer surplus

The economic gain realized by consumers, calculated as the difference between maximum willingness to pay and actual market price paid.

deadweight loss

The net reduction in total social welfare (combined consumer and producer surplus) caused by market distortions like price controls, taxes, or monopolies.

favored customers

Consumers who receive preferential access to scarce goods during market shortages based on personal status or non-price criteria.

minimum wage

A legally mandated minimum price floor on labor preventing employers from paying workers below a set hourly rate.

price ceiling

A maximum legal price set by government authorities above which market transactions cannot occur.

price floor

A minimum legal price set by government authorities below which market transactions cannot occur.

price rationing

The market process where price movements freely adjust to allocate scarce goods to buyers willing to pay the market price.

producer surplus

The economic gain realized by sellers, calculated as the difference between actual market price received and minimum price required to sell.

queuing

A non-price rationing mechanism where scarce products are distributed based on waiting time on a first-come, first-served basis.

ration coupons

Government-issued tickets or certificates granting holders the right to purchase specified quantities of constrained goods during national rationing programs.

cross-price elasticity of demand

Measures the percentage responsiveness of quantity demanded for Good A relative to a percentage price change in Good B, expressed as $\frac{\% \Delta Q_A}{\% \Delta P_B}$ .

elastic demand

Demand responsiveness where the percentage change in quantity demanded is proportionally larger than the percentage price change ($|E_d| > 1$).

elasticity

A general measure quantifying the sensitivity of one variable to changes in another variable.

elasticity of labor supply

Measures the percentage responsiveness of labor hours supplied by workers relative to percentage wage rate changes, calculated as $\frac{\% \Delta\text{Labor Supplied}}{\% \Delta\text{Wage Rate}}$ .

elasticity of supply

Measures the percentage responsiveness of quantity supplied by producers relative to percentage product price changes, calculated as $\frac{\% \Delta Q_s}{\% \Delta P}$ .

excise tax

A per-unit tax levied on specific commercial goods or services produced and sold.

income elasticity of demand

Measures the percentage responsiveness of quantity demanded relative to percentage consumer income changes, calculated as $\frac{\% \Delta Q_d}{\% \Delta Y}$ .

inelastic demand

Demand responsiveness where the percentage change in quantity demanded is proportionally smaller than the percentage price change ($|E_d| < 1$).

midpoint formula

An elasticity calculation formula using the averages of base and new values to ensure consistent percentage calculations regardless of direction: $\frac{\frac{Q_2 - Q_1}{(Q_1 + Q_2)/2}}{\frac{P_2 - P_1}{(P_1 + P_2)/2}}$ .

perfectly elastic demand

An extreme condition where quantity demanded is infinitely price sensitive; any price increase drops quantity demanded to zero ($E_d = \infty$), forming a horizontal demand line.

perfectly inelastic demand

An extreme condition where quantity demanded remains completely fixed regardless of price changes ($E_d = 0$), forming a vertical demand line.

point elasticity

Elasticity measured at a specific singular point on a continuous demand curve using differential calculus: $\left(\frac{dQ}{dP}\right)\times\left(\frac{P}{Q}\right)$ .

price elasticity of demand

Measures the percentage change in quantity demanded of a product resulting from a percentage change in its own price, calculated as $\frac{\% \Delta Q_d}{\% \Delta P}$ .

unitary elasticity

A condition where the percentage change in quantity demanded precisely matches the percentage price change ($|E_d| = 1$).

budget constraint

The financial frontier defining all combinations of goods affordable given consumer income and fixed market prices, represented as $I = P_X \times X + P_Y \times Y$.

choice set or opportunity set

The set of all possible consumption bundles affordable under a consumer's budget constraint.

diamond/water paradox

The economic paradox where essential items (water) have low market prices due to high abundance and low marginal utility, while non-essential items (diamonds) have high market prices due to scarcity and high marginal utility.

financial capital market

Institutions facilitating the flow of household savings into financial investments, loans, and corporate shares.