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Mastering
Economics
Essential Concepts
and Key Terms for

Students
140 Important Terms of 16 Economics Fields

A
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Scarcity: Limited resources to meet unlimited wants
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Opportunity Cost: The value of the next best alternative foregone when
making a choice
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Utility: Satisfaction or pleasure derived from consuming a good or service
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Marginal Utility: Additional satisfaction gained from consuming one more
unit of a good or service
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Diminishing Marginal Utility: The decrease in satisfaction from
consuming additional units of a good
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Factors of Production: Resources used in the production process: land,
labor, capital, and entrepreneurship
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Production Possibility Frontier (PPF): A curve showing the maximum
feasible output combinations of two products
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Comparative Advantage: Ability to produce a good at a lower opportunity
cost than others
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Absolute Advantage: Ability to produce more of a good with the same
resources than others
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Trade-offs: Compromises made when choosing one option over another
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Microeconomics Terms
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C
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Gross Domestic Product (GDP): The total value of all final goods and
services produced within a country
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Real GDP: GDP adjusted for inflation, reflecting the real value of goods
and services
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Nominal GDP: GDP measured in current prices, not adjusted for inflation
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Inflation: The rate at which the general level of prices for goods and
services rises
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Deflation: A decrease in the general price level of goods and services
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Stagflation: A situation of stagnant economic growth, high
unemployment, and high inflation
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Unemployment Rate: The percentage of the labor force that is jobless and
actively seeking employment
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Fiscal Policy: Government decisions on taxation and spending to influence
the economy
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Monetary Policy: Central bank actions to control the money supply and
interest rates
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Interest Rates: The cost of borrowing money, typically expressed as a
percentage
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Recession: A period of declining economic activity, typically defined by
two consecutive quarters of negative GDP growth
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Expansion: A phase of the business cycle where economic activity
increases
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Aggregate Demand: The total demand for goods and services within an
economy
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Aggregate Supply: The total supply of goods and services that firms in an
economy are willing to sell
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Balance of Trade: The difference between the value of a country's exports
and imports
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International Economics Terms
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E
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Labor Force: The total number of people who are either employed or
actively seeking employment
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Human Capital: The skills, knowledge, and experience possessed by
individuals, viewed in terms of their value to an organization or economy
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Wage Rate: The amount of money paid to a worker per unit of time (e
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,
per hour or per year)
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Productivity: The measure of output per unit of input, such as labor or
capital
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Minimum Wage: The lowest legal wage that can be paid to workers
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Collective Bargaining: The process of negotiation between employers and
a group of employees aimed at reaching agreements that regulate working
conditions
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Market Failures and Government Intervention
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Can be positive (e
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, education) or negative (e
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, pollution)
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Public Goods: Goods that are non-excludable and non-rivalrous, meaning
they can be consumed by many without reducing their availability (e
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,
national defense)
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Free Rider Problem: Occurs when individuals can benefit from a good or
service without paying for it
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Market Failure: When the free market does not allocate resources
efficiently
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Subsidy: Government financial support to encourage the production or
consumption of a particular good
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Tax Incidence: The study of who bears the economic burden of a tax
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Development Economics Terms

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H
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Rational Choice Theory: The assumption that individuals make decisions
that maximize their utility
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Bounded Rationality: The idea that in decision-making, individuals are
limited by the information they have, the cognitive limitations of their
minds, and the finite amount of time they have to make decisions
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Prospect Theory: A behavioral economics theory that describes how
people choose between probabilistic alternatives and the way they perceive
gains and losses
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Environmental Economics Terms
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J
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Arbitrage: The simultaneous purchase and sale of an asset to profit from a
difference in price
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Risk-Return Tradeoff: The principle that potential return rises with an
increase in risk
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Capital Asset Pricing Model (CAPM): A model that describes the
relationship between risk and expected return
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Efficient Market Hypothesis (EMH): The idea that all available
information is already reflected in stock prices, and it's impossible to
consistently outperform the market
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Portfolio Diversification: The practice of spreading investments among
different financial assets to reduce risk
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Bond Yield: The return an investor gets on a bond
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Derivatives: Financial contracts whose value is derived from the value of
an underlying asset (e
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, options, futures)
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Hedge Funds: Investment funds that employ high-risk strategies to
generate high returns
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Leverage: The use of borrowed funds to increase the potential return of
an investment
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Initial Public Offering (IPO): The first sale of stock by a company to the
public
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Liquidity: The ease with which an asset can be converted into cash without
affecting its price
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Market Capitalization: The total market value of a company's
outstanding shares
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Short Selling: The practice of selling borrowed securities with the
intention of buying them back later at a lower price
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Beta: A measure of a stock's volatility in relation to the overall market
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Yield Curve: A graph that shows the relationship between bond yields and
maturities
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Discount Rate: The interest rate used to determine the present value of
future cash flows
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Time Value of Money (TVM): The concept that a sum of money is worth
more now than the same sum in the future due to its earning potential
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Net Present Value (NPV): The value of a series of cash flows, discounted
to the present
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Internal Rate of Return (IRR): The discount rate that makes the net
present value of an investment zero
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Foreign Exchange (Forex): The market where currencies are traded
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Credit Default Swap (CDS): A financial derivative that functions as a form
of insurance against default by a borrower
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Sovereign Debt: Debt issued by a national government
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Equity: Ownership interest in a corporation, represented by stock
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Risk Premium: The extra return expected for taking on risk, over and
above the risk-free rate
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Interest Rate Parity: The theory that the difference in interest rates
between two countries is equal to the difference between the forward and
spot exchange rates
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Health Economics Terms
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L
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Market Structure: The organizational and other characteristics of a
market, such as the level of competition (e
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, monopoly, oligopoly,
monopolistic competition, perfect competition)
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Monopoly Power: The ability of a firm to set prices above competitive
levels due to the lack of competition
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Oligopoly: A market structure with a few large firms dominating the
market, often leading to collusive behavior
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Barriers to Entry: Factors that prevent or hinder new firms from entering
a market
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Natural Monopoly: A market situation where a single firm can supply the
entire market at a lower cost than multiple firms could
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Price Discrimination: The practice of charging different prices to
different customers for the same product, based on their willingness to pay
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Cartel: A group of firms that collude to control prices and limit
competition, often in violation of antitrust laws
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Antitrust Laws: Regulations designed to promote competition and prevent
monopolies
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Horizontal Integration: The acquisition of a business operating at the
same level of the value chain in similar or different industries
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Vertical Integration: The combination of companies that operate at
different stages of the production process
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Contestable Market: A market where entry and exit are easy, making it
competitive despite the small number of firms
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Merger: The combination of two or more firms to form a single entity
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Acquisition: The purchase of one company by another
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Economies of Scale: Cost advantages that firms obtain due to size, output,
or scale of operation
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Economies of Scope: Cost advantages that a firm experiences by
producing a variety of products rather than specializing in a single
product
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Game Theory: A mathematical approach used to model strategic
interactions between firms in competitive environments
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Nash Equilibrium: A situation in game theory where no player can benefit
from changing their strategy if the other players keep theirs unchanged
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Price Leadership: A strategy where one leading firm sets the price, and
other firms in the market follow suit
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X-Inefficiency: The inefficiency that arises because a firm lacks the
competitive pressure to minimize costs
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Regulation: The use of laws by the government to control or influence the
behavior of firms
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Other Important Economics Terms
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