Economics Principles Final Review

Comprehensive vocabulary flashcards covering basic economic definitions, market structures, elasticity, and market failures based on lecture modules 1 through 13.

Economics

The study of how society best allocates resources and makes choices given scarcity.

Scarcity

The concept that there is less of a good freely available than what individuals would like, acting as a constraint on decision making and leading to rationing.

Opportunity Cost

The next best alternative foregone when a choice is made.

Resources

Inputs used to produce economic goods, categorized into human (labor), capital (human-made resources), and natural (land, water, etc.).

Division of Labor

The separation of tasks in production to different people to improve efficiency; a form of specialization popularized by the Industrial Revolution.

Division of Knowledge

The separation of knowledge across different individuals, allowing for focus and specialization such as medical specialties.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer, implying it is relatively cheaper for that person to produce it.

Law of Supply

The direct relationship where quantity supplied ($QS$) increases as price increases, as producers want to sell more at a higher price.

Price Elasticity of Demand ($E_D$)

A measure of how sensitive consumers are to changes in a product's price, calculated as the percentage change in quantity demanded from a $1\%$ change in price.

Elastic Demand

A condition where the absolute value of the price elasticity of demand is greater than 1 (|E_D| > 1).

Unit Elastic Demand

A condition where the absolute value of the price elasticity of demand is equal to 1 ($|E_D| = 1$).

Inelastic Demand

A condition where the absolute value of the price elasticity of demand is less than 1 (|E_D| < 1).

Total Revenue ($TR$)

The total money earned from selling goods, calculated as price multiplied by quantity ($P \times Q$).

Cross Price Elasticity ($E_{x/y}$)

Measures how a change in the price of one good relates to the consumption of another good; positive values indicate substitutes and negative values indicate complements.

Income Elasticity ($E_I$)

Measures how a change in income relates to changes in consumption, calculated as $\frac{\%\Delta Q_D}{\%\Delta I}$.

Price Ceilings

A legally established maximum price sellers can charge for a good, which can lead to a shortage if the ceiling is binding (P_c < P).

Commodity Taxes

Taxes levied on specific goods, creating a tax wedge that shifts the supply curve up by the amount of the tax.

Subsidies

Payments the government makes to either a buyer or seller when a good or service is purchased or sold, used to incentivize consumption or production.

Perfectly Competitive Market

A market with many buyers and sellers of homogeneous products, no barriers to entry, and where firms act as price takers.

Arbitrage

The practice of buying a good in one market and selling it in another to profit from price differences.

Sunk Costs

Costs that have already been incurred and cannot be recovered, which should be ignored when making current decisions.

Explicit Costs

Costs that involve directly spending money, such as expenses for supplies, equipment, and labor.

Implicit Costs

Costs that do not involve a direct payment of money, such as the opportunity cost of time.

Accounting Profit

Total revenue minus explicit costs ($TR - \text{Explicit Costs}$).

Economic Profit

Total revenue minus the sum of explicit and implicit costs ($TR - (\text{Explicit} + \text{Implicit Costs})$).

Marginal Revenue ($MR$)

The change in total revenue resulting from selling an additional unit of output ($\frac{\Delta TR}{\Delta Q}$).

Marginal Cost ($MC$)

The change in total costs resulting from producing an additional unit of output ($\frac{\Delta TC}{\Delta Q}$).

Market Power

The ability of a firm to raise price ($P$) above marginal cost ($MC$) without other firms entering the market.

Monopoly

A market structure with a single seller of a product with no good substitutes; the firm possesses significant market power.

Economies of Scale

Advantages of large-scale production that reduce average cost ($AC$) as quantity ($Q$) increases.

Natural Monopoly

A monopoly that arises because a single firm can take advantage of economies of scale more effectively than multiple competitive firms.

Patents

Legal property rights granted to inventors for 20 years, providing exclusive rights to an invention to incentivize innovation despite raising prices.

Antitrust Laws

Regulations that give the federal government authority to prosecute monopolies, prohibit mergers that reduce competition, and prevent collusion.

Collusion

When firms work together to gain an unfair advantage or manipulate pricing within a market.

Market Failure

Occurs when market incentives lead individuals and firms to undertake activity that results in an inefficient level of output.

Externalities

Benefits or costs that affect individuals not directly involved in the production or consumption of a good.

Pigouvian Tax

A tax placed on a good with a negative externality at a rate equal to the external cost to correct market failure.

Coase Theorem

The proposition that if transaction costs are low and property rights are clearly defined, private trade will lead to an efficient market equilibrium regardless of externalities.

Public Good

A good that is both non-rival (consumption by one person doesn't prevent others) and non-excludable (no mechanism to limit who can use it).

Asymmetric Information

A situation where one side of a transaction possesses more information than the other side.