Introduction to Basic Microeconomics

These vocabulary flashcards cover the fundamental concepts of economics, microeconomics, economic systems, and the mechanics of supply, demand, and equilibrium based on the lecture transcript.

Economics

Comes from the Greek word “oikonomos” meaning “One who manages a household” and is the study of how society manages its scarce resources.

Economists

Individuals who study how people make decisions, how they work, buy, save, and invest, while also analyzing data and trends to predict future outcomes.

Scarcity

The state of having limited resources to satisfy unlimited wants and needs, resulting in a “price to pay” in the economy.

Choice

The decision-making process required to grapple with the problem of scarcity to satisfy needs relative to specific constraints.

Marginalism

An economic theory stating that economic decisions are based on the value or the margin.

Margin

Refers to the next unit of consumption. It refers to the change or the “extra”

Utility

The satisfaction or value one receives from consuming goods or services.

Util

The specific unit used to measure utility.

Marginal Utility

The additional satisfaction gained from consuming another unit of a product.

Total Utility

The overall value or satisfaction derived from consumption.

Marginal Cost

The additional cost associated with consuming an extra of goods or services.

Law of Diminishing Utility

A principle stating that as you consume more of a good, the extra satisfaction gained from it decreases.

Opportunity Cost

The next best alternative foregone as a result of choosing a particular option.

Factors of Production

The different elements used in producing goods and services, consisting of land, capital, labor, and entrepreneurship.

Land

Does not only refer to the geographical location where production occurs but also the raw materials available from mining, fishing, agriculture, and other natural sources.

Capital

Assets used to aid in the production of other goods. This includes machinery, financial assets, skills, and others that can be used to aid on generating profit

Labor

The human workers involved in the production process.

Entrepreneur

An individual or business that takes the initiative to set up and combine the different factors of production.

Positive Economics

An approach that strives to describe what exists and how it operates in an economy without making judgments about whether outcomes are good or bad.

Normative Economics

An approach that evaluates the outcomes of economic behavior to determine if they are good or bad and how they can be improved.

Applied Economics

Referred to as the “arts of economics,” it is the application of economic theories and statistics combined with institutional knowledge to explain real-world phenomena.

Microeconomics

The study of the economic activities of individual decision-making units, including individuals, households, and firms.

Market

A mechanism within which economic units like households and firms interact.

Macroeconomics

The study of the behavior of economic aggregates or the economy as a whole.

Trade-Off

A situation where choosing one option requires sacrificing some aspects of another option due to limited resources.

Production Possibility Curve (PPC)

A graphical representation showing the various maximum possible output combinations of two goods given existing resources and technology.

Constant Opportunity Cost

A trade-off between two goods that remains fixed, represented by a downward slope when resources are equally suited to produce either good.

Increasing Opportunity Cost

The state where the opportunity cost of producing a product rises as you produce more of it.

Production Possibility Table

A chart that displays the points represented on a PPC, showing maximum possible output combinations of two goods.

Traditional Economic System

The most ancient economic system, typical in rural settings, which is highly sustainable but lacks the potential to generate a surplus.

Barter System

A system involving the trade of goods or services for other goods or services instead of using currency.

Command Economic System

A system where a dominant centralized authority controls a significant portion of the economic structure and resources.

Fascism

A system where economic power is centralized to one person.

Communism

A system with no private property, currency, or social class, where the government distributes all goods equally.

Market Economic System

A system based on free markets with very little government interference or control over resources.

Capitalism

An economic system where private individuals or entities own the means of production.

Mixed System

Also known as dual systems, these combine market and command characteristics and are the global norm.

Basic Economic Activities

The set of actions comprising production, consumption, employment, and income generation.

Production

The use of economic resources to create goods and services designed to satisfy human wants.

Consumption

The use of goods and services by consumers or those involved in producing other items.

Employment

The use of manpower in production or engagement in economic activity.

Income Generation

The production of the maximum amount an individual can spend in a period without being worse off.

Circular Flow Model

A model demonstrating how money and resources move continuously through society between consumers and producers.

Households

The owners of the factors of production and the consumers of finished goods and services.

Firms

The producers that transform resources into finished products and pay households for their labor.

Resource Market

The place where households sell resources such as labor, land, or capital to firms in exchange for wages, rent, or interest.

Product Market

The place where finished goods and services are sold by firms to households.

Inner Cycle

The part of the circular flow model representing the tangible flow of resources.

Outer Cycle

The part of the circular flow model representing the monetary flow of funds.

Independent Variable

The variable representing the cause, graphed on the horizontal $x$ axis.

Dependent Variable

The variable representing the effect, graphed on the vertical $y$ axis.

Direct relationship

Also called a positive relationship, where two variables change in the same direction, represented by an upsloping line.

Inverse relationship

A relationship where two variables change in opposite directions, always graphed as a downsloping line.

Cateris Paribus

A Latin phrase meaning “all other things being equal,” used to assume other factors are constant when modeling variables.

Supply

The behavior of firms representing how much of a good will be produced at a given price.

Slope Intercept Formula

An equation representing a line: $y = mx + b$ where $m$ is the slope ($rise/run$) and $b$ is the $y$-intercept.

Law of Supply

States there is a direct, positive relationship between the price of a good and the quantity supplied, ceteris paribus.

Supply Function

The numerical association expressed as $Sx = f (Px, P0, Pf, St, T, O)$, where $Sx$ is the supply of commodity $x$.

Demand

The behavior of households showing the willingness and ability of consumers to purchase a good at a given price.

Substitutes

Goods that offer the same purpose as a main good in consumption.

Complement in Consumption

Goods that are consumed together by the user.

Law of Demand

States there is an inverse relationship between the price of a good and the quantity demanded, ceteris paribus.

Equilibrium

The agreed-upon price where the quantity demanded equals the quantity supplied, found at the intersection of supply and demand curves.

Shortage

The area below the equilibrium point where consumers want more of a product than producers are willing to supply due to low prices.

Surplus

The area above the equilibrium point where there is too much supply relative to demand because the price is too high.

Price Ceiling

The legal maximum price that one can pay for goods or services, often enacted to keep prices low for those in need.

Price Floor

The lowest price that one can legally pay for a product, often called “price support” as the government prevents it from falling below a specific level.