Fundamental economics concepts
20 cards · practical
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| Front | Back |
|---|---|
| Scarcity | Finite resources cannot satisfy unlimited wants Because resources are limited, every choice involves giving something up. |
| Opportunity cost | Value of the next-best alternative forgone Choosing one option means losing the benefits of the next-best choice. |
| Marginal utility | Extra satisfaction from consuming one more unit The first slice of pizza pleases more than the fifth—utility tends to diminish. |
| Law of demand | Higher prices reduce quantity demanded As price rises, people buy less, all else equal. |
| Law of supply | Higher prices increase quantity supplied Rising prices encourage producers to offer more for sale. |
| Market equilibrium | Price where quantity demanded equals quantity supplied At equilibrium, there’s no pressure for price to move up or down. |
| Price elasticity of demand | Responsiveness of quantity demanded to price changes Elastic > 1: sensitive (luxuries). Inelastic < 1: less sensitive (gasoline). |
| Price ceiling | Legal maximum price; if binding, creates a shortage Rent control is a common example of a binding ceiling creating shortages. |
| Gross domestic product | Market value of final goods and services produced domestically Counts final goods only to avoid double-counting intermediates. |
| Real GDP | GDP adjusted for inflation (constant prices) Separates true output growth from price changes. |
| Inflation | Sustained rise in the general price level Inflation erodes purchasing power over time. |
| Consumer Price Index | Index of consumer prices used to track inflation Based on a fixed basket of goods and services purchased by households. |
| Monetary policy | Central bank actions on money and interest to stabilize the economy Tools include policy rates, open market operations, and quantitative easing. |
| Fiscal policy | Government spending and taxation to influence the economy Expansionary: higher spending or lower taxes; contractionary does the reverse. |
| Perfect competition | Many firms, identical products, price takers, free entry In the long run, firms earn zero economic profit in this market. |
| Monopoly | Single seller with market power and no close substitutes Monopolies set prices above competitive levels, creating deadweight loss. |
| Comparative advantage | Lower opportunity cost in producing a good Trade can benefit both sides even if one is absolutely better at everything. |
| Externality | Cost or benefit on bystanders not reflected in market prices Pollution is a negative externality; vaccinations create positive spillovers. |
| Sunk cost fallacy | Letting unrecoverable past costs sway current decisions Ignore sunk costs; decide based on future costs and benefits only. |
| Broken window fallacy | Mistaking destruction for net economic benefit Repairs shift spending; they don’t create new wealth overall. |