Economics Lecture Notes

Flashcards for Economics Lecture Review

Economics

The discipline that examines how individuals, businesses, and governments allocate scarce resources to fulfill various needs and objectives.

Scarcity

The problem that requires efficient resource allocation to maximize societal well-being.

Political Economics

Branch of economics that examines the foundational principles governing economic systems, focusing on markets and competition.

Business Economics

Also known as managerial economics, it concerns itself withdecision-making processes within firms and organizations.

Applied Economics

The use of economic theories and principles to bridge the gap between theoretical economics and practical applications in everyday life.

Welfare Economics

A subfield of political economics that examines how economic policies and resource allocations impact societal well-being.

Efficiency

Allocation that maximizes total output and welfare by ensuring that resources are allocated in the most productive manner possible.

Equity

Relates to the just and ethical distribution of wealth, income, and opportunities.

Horizontal Equity

Individuals with similar circumstances should be treated equally.

Vertical Equity

Individuals with greater means should contribute more to society.

Pareto Efficiency

An economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off.

Pareto Improvement

An action in an economy that makes at least one person better off and nobody worse off.

Pareto Frontier

Represents the set of all possible distributions of resources where no further Pareto improvements can be made.

Pareto Principle

States that a small portion of inputs (20%) generates the majority of results (80%).

Pareto Chart

A fundamental tool used to represent the distribution of resources and visualize allocative efficiency or Pareto optimality.

Market

A system or environment where buyers and sellers interact to exchange goods, services, or resources.

Goods Markets

Products are bought and sold.

Services Market

Involve the exchange of intangible products such as consulting or healthcare.

Perfect Competition

Many buyers and sellers, example: agricultural markets.

Oligopoly

A few dominant firms control the market, example: The automobile.

Monopoly

A single seller dominates the market with no close substitutes, example: Utility companies.

Concentration

Refers to the market share distribution among firms.

Entry and Exit Barriers

Obstacles that make it difficult to enter or leave a market.

Product Differentiation

Refers to the distinctiveness of products in a market.

Information Availability

All market participants have full and immediate knowledge of all factors relevant to their market decision.

Cournot Duopoly

Firms compete on quantity, choosing output levels independently and simultaneously to maximize profit.

Bertrand Duopoly

Firms compete on price, with each firm choosing its price assuming the competitor’s price is fixed.

Stackelberg Duopoly

One firm is a leader and the other a follower; the leader firm makes a decision first, and the follower firm then decides its strategy.

Private Marginal Benefit (PMB)

The benefit that a consumer obtains from purchasing one additional unit of a good.

Private Marginal Cost (PMC)

The cost incurred by a producer to produce one additional unit of a good.

Externalities

Occur when the actions of individuals or firms affect third parties who are not directly involved in the economic transaction.

Negative Externality

Occurs when an economic activity imposes a cost on society that is not reflected in the price of goods or services.

Social Marginal Cost (SMC)

The true cost of producing an additional unit of a good, which includes the PMC and external cost.

Positive Externality

Occurs when an economic activity generates benefits for third parties who did not participate in the original transaction.

Social Marginal Benefit (SMB)

The true benefit of consumption, includes both the private benefit and the extra benefit to others.

Behavioral Economics

A field of study that combines elements of economics and psychology to examine human behavior in economic decisions.

Anchoring Bias

The common human tendency to rely heavily on the first piece of information offered when making a decision.

Status-Quo

A type of cognitive bias that involves the preference that things stay as they are or that the current state of things remains the same.

Nudging

The intervention designed to influence people’s behavior without imposing constraints or direct economic incentives.

Endowment Effect

Phenomenon where people ascribe more value to things merely because they own them