Honors Economics Exam Vocabulary – Flashcards
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Scarcity
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The situation in which unlimited wants exceed the limited resources available to fulfill those wants
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Economics
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The study of the choices people make to attain their goals, given their scarce resources.
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Economic model
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A simplified version of reality used to analyze real-world economic situations.
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Market
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A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
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Marginal analysis
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Analysis that involves comparing marginal benefits and marginal costs.
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Trade-off
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The idea that because of scarcity, producing more of one good or service means producing less of another good or service.
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Opportunity cost
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The highest-valued alternative that must be given up to engage in an activity.
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Centrally planned economy
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An economy in which the government decides how economic resources will be allocated.
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Market economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources
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Mixed economy
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An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
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Productive efficiency
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The situation in which a good or service is produced at the lowest possible cost.
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Allocative efficiency
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A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
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Voluntary exchange
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The situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
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Equity
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The fair distribution of economic benefits.
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Economic Variable
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Something measurable that can have different values, such as the wages of software programmers
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Positive analysis
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Analysis concerned with what is
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Normative analysis
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Analysis concerned with what ought to be
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Microeconomics
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The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
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Macroeconomics
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The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
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Production possibilities frontier
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A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
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Opportunity cost
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The highest-valued alternative that must be given up to engage in an activity.
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Economic growth
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The ability of the economy to produce increasing quantities of goods and services.
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Trade
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The act of buying or selling.
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Absolute advantage
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The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
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Comparative advantage
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The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
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Product markets
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Markets for goods - such as computers - and services - such as medical treatment.
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Factor markets
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Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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Factors of production
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The inputs used to make goods and services.
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Circular-flow diagram
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A model that illustrates how participants in markets are linked.
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Free market
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A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
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Entrepreneur
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Someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services.
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Property rights
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The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
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Perfectly competitive market
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A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
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Demand schedule
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A table showing the relationship between the price of a product and the quantity of the product demanded.
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Quantity Demanded
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The amount of a good or service that a consumer is willing and able to purchase at a given price.
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Demand curve
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A curve that shows the relationship between the price of a product and the quantity of the product demanded.
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Market demand
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The demand by all the consumers of a given good or service.
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Law of demand
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The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
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Substitution effect
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The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.
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Income effect
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The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power
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Ceteris paribus ("all else equal")
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The requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant.
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Normal good
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A good for which the demand increases as income rises and decreases as income falls.
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Inferior good
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A good for which the demand increases as income falls and decreases as income rises.
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Substitutes
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Goods and services that can be used for the same purpose.
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complements
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Goods and services that are used together.
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Demographics
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The characteristics of a population with respect to age, race, and gender.
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Quantity supplied
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The amount of a good or service that a firm is willing and able to supply at a given price.
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Supply schedule
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A table that shows the relationship between the price of a product and the quantity of a product supplied
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Supply curve
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A curve that shows the relationship between the price of a product and the quantity of the product supplied
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Law of supply
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The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
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Technological change
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A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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Market equilibrium
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A situation in which quantity demanded equals quantity supplied
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Competitive market equilibrium
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A market equilibrium with many buyers and many sellers
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Surplus
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A situation in which teh quantity supplied is greater than the quantity demanded
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Shortage
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A situation in which the quantity demanded is greater than the quantity supplied
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Sole proprietorship
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A firm owned by a single individual and not organized as a corporation
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Partnership
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A firm owned jointly by two or more persons and not organized as a corporation.
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Corporation
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A legal form of business that provides owners with protection from losing more than their investment should the business fail.
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Asset
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Anything of value owned by a person or firm
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Limited liability
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The legal provision that shields owners of a corporation from losing more than they have invested in the firm.
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Separation of ownership from control
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A situation in a corporation in which the top management, rather than the shareholders, control day-to-day operations.
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Principal-agent problem
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A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him.
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Corporate governance
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The way in which a corporation is structured and the effect a corporation's structure has on the firm's behavior.
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Indirect finance
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A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).
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Direct finance
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A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange
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Bond
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A financial security that represents a promise to repay a fixed amount of funds.
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Coupon payment
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An interest payment on a bond
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Interest rate
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The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.
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Stock
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A financial security that represents partial ownership of a firm.
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Dividends
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Payments by a corporation to its shareholders.
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Liability
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Anything owed by a person or a firm.
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Income statement
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A financial statement that sums up a firm's revenues, costs, and profit over a period of time.
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Accounting profit
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A firm's net income measured b revenue minus operating expenses and taxes paid.
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Explicit cost
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A cost that involves spending money
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Implicit cost
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A nonmonetary opportunity cost
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Economic profit
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A firm's revenues minus all of its implicit and explicit costs
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Balance sheet
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A financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year.
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Elasticity
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A measure of how much one economic variable responds to changes in another economic variable.
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Utility
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The enjoyment or satisfaction people receive from consuming goods and services.
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Marginal utility
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The change in total utility a person receives from consuming one additional unit of a good or service
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Law of diminishing marginal utility
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The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.
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Budget constraint
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The limited amount of income available to consumers to spend on goods and services.
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Income effect
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The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.
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Substitution effect
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The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
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Network externality
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The situation where the usefulness of a product increases with the number of consumers who use it
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Behavioral economics
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The study of situations in which people make choices that do not appear to be economically rational
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Opportunity cost
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The highest-valued alternative that must be given up to engage in an activity.
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Endowment effect
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The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.
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Sunk cost
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A cost that has already been paid and cannot be recovered.
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Price taker
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A buyer or seller that is unable to affect the market price
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Patent
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The exclusive right to a product for a period of 20 years from the date the product is invented.
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Copyright
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A government-granted exclusive right to produce and sell a creation
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Public franchise
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A designation by the government that a firm is the only legal provider of a good or service.
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Natural monopoly
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A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.
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Barrier to entry
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Anything that keeps new firms from entering an industry in which firms are earning economic profits
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Economies of scale
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The situation when a firm's long-run average costs fall as it increases output.
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Game theory
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The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.
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Business strategy
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Actions taken by a firm to achieve a goal, such as maximizing profits.
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Payoff matrix
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A table that shows the payoffs that each firm earns from every combination of strategies by the firms
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collusion
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An agreement among firms to charge the same price or otherwise not to compete
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Dominant strategy
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A strategy that is the best for a firm, no matter what strategies other firms use
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Nash equilibrium
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A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.
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Cooperative equilibrium
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An equilibrium in a game in which players cooperate to increase their mutual payoff
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Noncooperative equilibrium
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An equilibrium in a game in which players do not cooperate but pursue their own self-interest
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Prisoners' dilemma
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A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.
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Price leadership
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A form of implicit collusion where one firm in an oligopoly announces a price change, which is matched by the other firms in the industry.
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Cartel
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A group of firms that collude by agreeing to restrict output to increase prices and profits.
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Business cycle
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Alternating periods of economic expansion and economic recession
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Expansion
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The period of a business cycle during which total production and total employment are increasing.
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Recession
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The period of a business cycle during which total production and total employment are decreasing.
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Economic growth
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The ability of an economy to produce increasing quantities of goods and services.
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Inflation rate
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The percentage increase in the price level from one year to the next
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Gross domestic product (GDP)
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The market value of all final goods and services produced in a country during a period of time, typically one year.
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Final good or service
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A good or service purchased by a final user
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Intermediate good or service
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A good or service that is an input into another good or service, such as a tire on a truck.
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Transfer payments
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Payments by the government to individuals for which the government does not receive a new good or service in return.
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Consumption
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Spending by households on goods and services, not including spending on new houses.
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Investment
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Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.
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Government purchases
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Spending by federal, state, and local governments on goods and services.
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Net exports
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Exports minus imports
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Value added
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The market value a firm adds to a product.
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Underground economy
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Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.
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Price level
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A measure of the average prices of goods and services in the economy
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GDP deflator
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A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.
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Labor force
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The sum of employed and unemployed workers in the economy
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Unemployment rate
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The percentage of the labor force that is unemployed.
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Discouraged workers
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People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
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Labor force participation rate
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The percentage of the working-age population in the labor force.
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Structural unemployment
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Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs
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Cyclical unemployment
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Unemployment caused by a business cycle recession.
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Natural rate of unemployment
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The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.
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Efficiency wage
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A higher-than-market wage that a firm pays to increase worker productivity.
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Producer Price index
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An average of the prices received by producers of goods and services at all stages of the production process.
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Potential GDP
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The level of GDP attained when all firms are producing at capacity.
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Money
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Assets that people are generally willing to accept in exchange for goods and services or for payment of debts
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Asset
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Anything of value owned by a person or a firm
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commodity money
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A good used as money that also has value independent of its use as money
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Federal Reserve System
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The central bank of the United States
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Fiat money
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Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.
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M1
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The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
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M2
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A broader definition of the money supply: M1 plus savings account balances, small-denomination time deposits, balances in money market deposit accounts in banks, and noninstitutional money market fund shares.
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Reserves
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Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
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Required reserves
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Reserves that a bank is legally required to hold, based on its checking account depostits
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Required reserve ratio
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The minimum fraction of deposits banks are required by law to keep as reserves
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Excess reserves
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Reserves that banks hold over and above the legal requirement.
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Fractional reserve banking system
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A banking system in which banks keep less than 100 percent of deposits as reserves.
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Bank Run
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A situation in which many depositors simultaneously decide to withdraw money from a bank
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Bank panic
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A situation in which the banks experience runs at the same time
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Monetary policy
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The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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Federal Open Market Committee
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The federal reserve committee responsible for open market operations and managing the money supply in the US
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Open market operations
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The buying and selling of treasury securities by the Federal Reserve in order to control the money supply
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Discount loans
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Loans the Federal Reserve makes to banks.
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Discount rate
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The interest rate the Fed charges on discount loans.
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Monetary policy
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The actions the Fed takes to manage the money supply and intereset rates to pursue its macroeconomic policy objectives
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Taylor Rule
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A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables.
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Inflation targeting
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Conducting monetary policy so as to commit the central bank to achieving a publicly announced level of inflation
