Economics Fundamentals Flashcards

Vocabulary flashcards covering fundamental economic principles, factors of production, and supply and demand analysis.

Economics

The study of how individuals, firms, and societies allocate scarce resources to satisfy unlimited wants.

Scarcity

The fundamental economic problem that resources are limited while wants are unlimited; forces every choice to involve a trade-off.

Economy

The system by which a society organizes the production, distribution, and consumption of goods and services, answering what, how, and for whom to produce.

Economic resource

Any input that is scarce and used in the production of goods and services; because these resources are limited, they command a price and must be allocated through choices.

Factors of production

The four categories into which economic resources are classified: land, labor, capital, and entrepreneurship.

Land

All natural resources used in production, such as physical land, water, minerals, and timber; exists without human creation and earns the factor payment of rent.

Labor

The physical and mental effort of people used in the production of goods and services; earns the factor payment of wages.

Physical capital

Human-made resources used to produce other goods and services, such as machinery, tools, factories, and equipment; earns the factor payment of interest. Not to be confused with money, which is not a productive resource.

Entrepreneurship

The ability to combine land, labor, and capital to produce goods and services; involves taking risks, innovating, and organizing production, and earns the factor payment of profit.

Efficiency

The condition in which an economy uses its scarce resources in a way that maximizes output and minimizes waste; efficient points lie on the production possibilities curve.

Inefficiency

The condition in which an economy is not fully or properly using its scarce resources, producing less output than possible; represented by points inside the production possibilities curve.

Opportunity cost

The value of the next best alternative given up when a choice is made; because scarcity forces every decision to involve a trade-off, all choices carry an opportunity cost.

Tradeoffs

The alternatives that must be given up when choosing one option over others; because resources are scarce, every decision requires sacrificing some of one good to obtain another.

Economic growth

An increase in an economy's ability to produce goods and services over time, caused by increases in resources, improvements in technology, or gains in productivity; shown as an outward shift of the production possibilities curve.

Economic model

A simplified representation of economic reality used to explain and predict economic behavior; relies on assumptions such as ceteris paribus to isolate relationships between variables.

Ceteris paribus

A Latin phrase meaning "all other things held constant"; the assumption used in economic models to isolate the effect of one variable on another.

Productivity

The amount of output produced per unit of input, most commonly output per worker per hour; increases in productivity allow an economy to produce more with the same resources and are a key source of economic growth.

Trade

The voluntary exchange of goods and services between individuals, firms, or nations; benefits both parties by allowing specialization and lower opportunity costs.

Capital stock

The total amount of physical capital available in an economy at a given time; increases through investment and contributes to economic growth.

Accumulation

The process of increasing an economy's stock of resources over time, most commonly capital accumulation through investment; a key driver of economic growth.

Specialization

The concentration of an individual, firm, or nation on producing a limited range of goods or services, ideally those in which it has a comparative advantage; increases total output and makes trade beneficial.

Gains from trade

The increase in total output and consumption that results when individuals, firms, or nations specialize according to comparative advantage and trade with one another; allows each party to consume beyond what it could produce on its own.

Terms of trade

The rate at which one good is exchanged for another between trading partners; for trade to be mutually beneficial, the terms must fall between each party's opportunity costs of producing the good.

Absolute advantage

The ability to produce more of a good than another producer using the same amount of resources, or the same amount using fewer resources.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer; the basis for specialization and mutually beneficial trade.

Competitive market

A market with many buyers and sellers trading identical products, so that no single participant can influence the price; all participants are price takers.

Law of demand

The principle that, ceteris paribus, as the price of a good rises, the quantity demanded falls, and vice versa; gives the demand curve its downward slope.

Price

The amount of money that must be paid to obtain a good, service, or resource; acts as a signal that communicates information and coordinates the decisions of buyers and sellers.

Quantity demanded

The amount of a good buyers are willing and able to purchase at a specific price; a change in price causes movement along the demand curve, not a shift.

Demand schedule

A table showing the quantity of a good that buyers are willing and able to purchase at each of various prices; the data used to plot the demand curve.

Demand curve

A graph showing the relationship between price and quantity demanded, with price on the vertical axis and quantity on the horizontal axis; slopes downward due to the law of demand.

Shift in demand

A change in the quantity demanded at every price, caused by a factor other than the good's own price; shown as movement of the entire demand curve rightward (increase) or leftward (decrease).

Determinants of demand

The non-price factors that shift the entire demand curve: tastes and preferences, income, prices of related goods, consumer expectations, and the number of buyers.

Complementary good/service

A good or service typically consumed together with another good, such as cars and gasoline; when the price of one rises, demand for its complement falls.

Substitute good/service

A good or service that can be used in place of another to satisfy the same want, such as coffee and tea; when the price of one rises, demand for its substitute rises.

Normal good

A good for which demand increases when consumer income rises and decreases when income falls; most goods are normal goods.

Inferior good

A good for which demand decreases when consumer income rises and increases when income falls; examples include ramen noodles and generic brands.

Law of supply

The principle that, ceteris paribus, as the price of a good rises, the quantity supplied rises, and vice versa; gives the supply curve its upward slope.

Quantity supplied

The amount of a good sellers are willing and able to offer for sale at a specific price; a change in price causes movement along the supply curve, not a shift.

Supply schedule

A table showing the quantity of a good that sellers are willing and able to offer for sale at each of various prices; the data used to plot the supply curve.

Supply curve

A graph showing the relationship between price and quantity supplied, with price on the vertical axis and quantity on the horizontal axis; slopes upward due to the law of supply.

Movement along the supply curve

A change in the quantity supplied caused by a change in the good's own price; the curve itself does not move, only the point on it.

Shift in supply

A change in the quantity supplied at every price, caused by a factor other than the good's own price; shown as movement of the entire supply curve rightward (increase) or leftward (decrease).

Determinants of supply

The non-price factors that shift the entire supply curve: input prices, technology, producer expectations, the number of sellers, and government policies such as taxes and subsidies.

Equilibrium

The point at which the supply and demand curves intersect, where quantity demanded equals quantity supplied; no shortage or surplus exists.

Equilibrium price

The price at which quantity demanded equals quantity supplied; also called the market-clearing price.

Equilibrium quantity

The quantity of a good bought and sold at the equilibrium price, where quantity demanded equals quantity supplied.

Surplus

A situation in which quantity supplied exceeds quantity demanded, occurring when the price is above equilibrium; sellers lower the price to return to equilibrium.

Shortage

A situation in which quantity demanded exceeds quantity supplied, occurring when the price is below equilibrium; buyers bid the price up toward equilibrium.

Indeterminate price

A situation in which the effect on equilibrium price cannot be determined because simultaneous shifts in supply and demand push price in opposite directions.

Indeterminate quantity

A situation in which the effect on equilibrium quantity cannot be determined because simultaneous shifts in supply and demand push quantity in opposite directions.