Economics Midterms 1 & 2 Vocabulary Flashcards

A comprehensive collection of vocabulary terms and definitions covering economic principles, market dynamics, elasticity, efficiency, government interventions, trade, externalities, public goods, and redistribution.

Cost-benefit principle

Take an action when its benefit is greater than or equal to its cost.

Economic surplus

Total benefits minus total costs.

Sunk cost

A cost already incurred that cannot be reversed; ignore it in current decisions.

Marginal benefit

Additional benefit from one more unit.

Marginal cost

Additional cost from one more unit.

Rational rule for marginal decisions

Continue an activity until marginal benefit equals marginal cost, assuming a suitable interior optimum.

Opportunity cost

Value of the next-best alternative given up.

Production possibilities frontier (PPF)

Graph showing feasible production combinations and trade-offs/opportunity costs.

Interdependence principle

Best choice depends on your other choices, other people, other markets, and expectations about the future.

Positive statement

A factual, testable claim about what is.

Normative statement

A value judgment about what ought to be.

Fallacy of composition

Assuming what is best for one person must be best for everyone.

Unintended consequences

Secondary effects of an action that were not initially considered.

Traditional economy

Economic choices are determined primarily by custom and tradition.

Command economy

Central government determines production targets and prices.

Market economy

Individuals and firms make decisions pursuing their interests within markets.

Free enterprise

Freedom to start and operate businesses for profit.

Private property

Resources and assets can be privately owned.

Perfect competition

Many buyers and sellers; no individual participant can influence market price.

Price taker

A buyer or seller who accepts the market price.

Diminishing marginal utility

Each additional unit consumed provides less extra satisfaction or benefit.

Demand versus quantity demanded

Demand is the whole curve; quantity demanded is a point on the curve at a given price.

Normal good

Demand rises when income rises, all else equal.

Inferior good

Demand rises when income falls, all else equal.

Complements

Goods used together; a rise in one good's price tends to lower demand for the other.

Substitutes

Goods that replace each other; a rise in one good's price tends to increase demand for the other.

Network effect

A product becomes more useful as more people use it.

Congestion effect

A product becomes less useful as more people use it.

Market quantity demanded

Sum of quantities demanded by all consumers at a given price.

Law of supply

Higher price generally leads to higher quantity supplied, all else equal.

Total revenue

Price times quantity sold: $TR = P \times Q$.

Marginal revenue

Additional revenue from selling one more unit.

Marginal product

Additional output produced by one more unit of an input.

Diminishing marginal product

Additional units of an input eventually produce smaller increases in output, holding other inputs fixed.

Supply versus quantity supplied

Supply is the whole curve; quantity supplied is a point at a given price.

Substitutes in production

Alternative products competing for the same production capacity.

Complements in production

Products made together in the same production process.

Fixed cost

Cost that does not change with output in the relevant period.

Variable cost

Cost that changes with the quantity produced.

Increasing marginal costs

Producing additional units becomes more costly at the margin.

Market equilibrium

Price and quantity at which quantity supplied equals quantity demanded.

Shortage

Quantity demanded exceeds quantity supplied at the current price.

Surplus

Quantity supplied exceeds quantity demanded at the current price.

Price elasticity of demand

Responsiveness of quantity demanded to changes in the good's price.

Price elasticity of demand formula

$\%\text{ change in quantity demanded} \div \%\text{ change in price}$.

Midpoint percentage change formula

$\frac{\text{New} - \text{Old}}{(\text{New} + \text{Old}) / 2} \times 100\%$.

Midpoint price elasticity of demand formula

$\frac{(Q_2 - Q_1) / ((Q_2 + Q_1) / 2)}{(P_2 - P_1) / ((P_2 + P_1) / 2)}$.

Income elasticity of demand

$\%\text{ change in quantity demanded} \div \%\text{ change in income}$.

Cross-price elasticity of demand

$\%\text{ change in quantity demanded of good X} \div \%\text{ change in price of good Y}$.

Price elasticity of supply

$\%\text{ change in quantity supplied} \div \%\text{ change in price}$.

Elastic demand

Absolute price elasticity of demand greater than $1$; quantity responds proportionally more than price.

Inelastic demand

Absolute price elasticity of demand less than $1$; quantity responds proportionally less than price.

Unit elastic demand

Absolute price elasticity of demand equals $1$.

Statutory tax burden

Who is legally responsible for paying the tax on paper.

Economic tax burden

The burden created by changes in after-tax prices.

Tax incidence

How the economic burden of a tax is divided between buyers and sellers.

Quota

A quantity control limiting the maximum amount of a good that can be sold.

Consumer surplus

The economic surplus a buyer receives from purchasing a good; calculated as marginal benefit (willingness to pay) minus price.

Producer surplus

The economic surplus a seller receives from selling a good; calculated as price minus marginal cost.

Total surplus

Consumer surplus plus producer surplus.

Efficient quantity

The quantity that maximizes total economic surplus.

Rational rule for markets

Produce until marginal benefit (demand) equals marginal cost (supply).

Market failure

When market forces of supply and demand produce an inefficient outcome.

Deadweight loss

The reduction in total surplus relative to the efficient outcome; calculated as economic surplus at the efficient quantity minus actual economic surplus.

Comparative advantage

The ability to produce a good at a lower opportunity cost.

Absolute advantage

The ability to produce more output using the same inputs, or the same output using fewer inputs.

Rent seeking

Using resources to secure government protection instead of producing value.

Negative externality

A spillover cost imposed on others; marginal social cost exceeds marginal private cost ($MSC = MPC + MDC$).

Marginal damage cost (MDC)

The difference between marginal social cost and marginal private cost.

Coase theorem approach

Define property rights and allow parties to negotiate.

Cap and trade

A system that limits pollution through tradable permits, which may be allocated or auctioned.

Tragedy of the commons

Overuse of resources that are difficult to exclude people from using.

Positive externality

A spillover benefit to others; marginal social benefit exceeds marginal private benefit.

Nonrival

One person using the good does not reduce the amount available to others.

Nonexcludable

It is difficult to prevent nonpayers from benefiting.

Public good

A good characterized by both nonrivalry and nonexcludability.

Free-rider problem

Someone can receive the benefit without paying.

Drop-in-the-bucket problem

A person may feel their payment alone will not determine whether the good is provided.

Wealth

The value of accumulated assets minus liabilities.

Poverty threshold

Three times the USDA food budget.

Redistribution

Policies that shift income or resources among people.

Social insurance

A government program providing protection against certain economic risks; examples include Social Security and Medicare.

Means-tested income assistance

Assistance based on financial need; examples include TANF, Medicaid, and food stamps.

Progressive tax

A tax system where the tax rate rises as the taxable base increases.

Flat tax

A tax applying the same rate across the taxable base.

Regressive tax

A tax whose burden as a share of income falls as income rises.