Principles of Microeconomics: Chapters 1 & 2 Key Vocabulary

Vocabulary flashcards based on Chapters 1 and 2 of Case, Fair & Oster's Principles of Microeconomics.

Economics

The study of how individuals and societies choose to use scarce resources.

Opportunity Cost

The value of the best alternative given up when making a choice.

Marginalism

The process of weighing a decision by counting only additional (marginal) costs and benefits, rather than total or sunk ones.

Efficient Markets

Markets in which real profit opportunities are spotted and eliminated rapidly because many people are searching for them ("no free lunch").

Microeconomics

The branch of economics that focuses on individual firms, households, and industries, examining the "trees" rather than the whole forest.

Macroeconomics

The branch of economics that examines the economy as a whole, focusing on aggregates like GDP, national inflation, and total unemployment.

Positive Economics

An approach to economics that describes what is without making value judgments.

Normative Economics

An approach to economics that asks what should be, involving opinions and policy judgments.

Model

A simplified, formal (often mathematical) version of a theory that strips away detail to show only what is relevant.

Ockham's Razor

The principle that irrelevant detail should be cut away when forming economic theories or models.

Ceteris Paribus

A Latin phrase meaning "all else equal," used by economists to isolate the effect of one variable at a time.

Post Hoc, Ergo Propter Hoc

The logical fallacy of assuming that because B happened after A, A caused B ("after this, therefore because of this").

Empirical Economics

The collection and use of data, as well as controlled experiments, to carefully test causal claims and economic theories.

Efficiency

An economic outcome criterion defined as producing what people actually want at the lowest possible cost with no wasted resources.

Equity

An economic outcome criterion concerning fairness, which is often contested because people disagree about what "fair" means.

Economic Growth

An increase in the total output of an economy over time.

Stability

An economic outcome criterion characterized by steady growth, low inflation, and full employment, as opposed to boom-bust cycles.

Slope

A measurement calculated as rise over run ($\Delta Y / \Delta X$) that indicates the direction (positive or negative) and strength of the relationship between two variables on a graph.

Absolute Advantage

The ability to produce more of a good using the same resources (higher raw productivity).

Comparative Advantage

The ability to produce a good at a lower opportunity cost than someone else.

Capital

Resources (such as equipment, buildings, or education/"human capital") used to produce other goods, rather than being consumed directly.

Investment

The process of using resources to build capital instead of consuming now, trading present benefits for expected future ones.

Consumer Goods

Goods produced for present consumption rather than for use in producing other goods.

Production Possibility Frontier (PPF)

A graph showing all combinations of two goods that an economy can produce if it uses its resources fully and efficiently.

Law of Increasing Opportunity Cost

The principle that as more resources are shifted into producing one good, resources less suited to it are pulled in, causing the PPF to be bowed outward (concave).

Command Economy

An economic system in which a central government or planner decides what gets produced, how it is produced, and who gets it.

Laissez-Faire Economy

A free market economy where individual buyers and sellers coordinate through prices to answer basic economic questions.

Consumer Sovereignty

The idea that in a free market economy, consumers "vote" with their purchases, and firms respond by producing those goods to make a profit.