SACE Stage 2 Economics flashcards
SACE Stage 2 Economics · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- The value of the next best alternative forgone when a choice is made. It excludes all other alternatives and applies to individuals, firms and governments alike.
- Law of demand
- Ceteris paribus, as the price of a good rises, quantity demanded falls, producing a downward-sloping demand curve. Price changes cause movements along the curve.
- Demand curve shifters
- Non-price factors that move the whole demand curve: income, tastes and preferences, prices of substitutes and complements, expectations, and the number of buyers.
- Supply curve shifters
- Non-price factors that move the whole supply curve: input costs, technology, taxes and subsidies, prices of related goods, expectations, and the number of sellers.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. Above it a surplus pushes price down; below it a shortage pushes price up.
- Factors of production
- Land (natural resources), labour (human effort), capital (produced means of production) and enterprise (risk-taking and organisation). Their scarcity underpins the economic problem.
- Real versus nominal GDP
- Nominal GDP uses current prices; real GDP uses constant base-year prices, so it isolates changes in output from changes caused by inflation.
- Positive versus normative statements
- Positive statements are factual and testable against evidence. Normative statements contain value judgements about what should be and cannot be proved or disproved by data alone.
- Price elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in price. Absolute values above one are elastic, below one inelastic, equal to one unit elastic.
- Midpoint elasticity formula
- Elasticity equals the change in quantity divided by average quantity, all divided by the change in price divided by average price. It gives the same result in both directions.
- Total revenue test
- If price and total revenue move in opposite directions, demand is elastic. If they move in the same direction, demand is inelastic.
- Tax incidence
- The division of a per-unit tax burden between buyers and sellers. The less elastic side of the market bears the larger share of the tax.
- Price ceiling effect
- A legally imposed maximum price. If set below equilibrium it binds, creating a shortage, rationing problems and possible black markets.
- Price floor effect
- A legally imposed minimum price. If set above equilibrium it binds, creating a surplus, such as unemployment when applied to wages.
- Negative externality
- A cost imposed on third parties not reflected in market prices, so marginal social cost exceeds marginal private cost and the market overproduces relative to the social optimum.
- Positive externality
- A benefit enjoyed by third parties not reflected in market prices, so marginal social benefit exceeds marginal private benefit and the market underproduces relative to the social optimum.
- Output gap
- Actual GDP minus potential GDP, expressed as a percentage of potential. A negative gap is contractionary; a positive gap is inflationary.
- Multiplier formula
- The multiplier equals one divided by one minus the marginal propensity to consume, equivalently one divided by the marginal propensity to save.
- Aggregate demand components
- AD equals consumption plus investment plus government spending plus net exports. A change in any component shifts the aggregate demand curve.
- Fiscal policy evaluation
- Government spending and taxation can inject demand directly, but recognition and implementation lags, political constraints and crowding out limit effectiveness.
- Monetary policy evaluation
- Central bank cash-rate changes act relatively quickly and independently, but transmission lags and weak effect on supply-side inflation limit their reach.
- Supply-side policy evaluation
- Policies raising productive capacity may reduce inflation pressure without demand contraction, but they are slow, costly and may widen inequality.
- Tradable permits versus tax
- Permits fix the quantity of pollution and let the price emerge; a tax fixes the price and lets quantity adjust. Permits suit uncertain abatement costs.
- Cost-benefit analysis
- A decision tool comparing present values of social benefits and costs. Results are sensitive to the discount rate and to valuing non-market goods.
- Policy mix rationale
- Combining fiscal, monetary and supply-side instruments can address demand and capacity simultaneously, reducing trade-offs a single instrument would create.
- Equity-efficiency trade-off
- Redistribution through taxes and transfers may reduce incentives to work and invest, so a gain in equity can cost some allocative efficiency.
- Evaluation criteria
- Judge policies against explicit criteria: allocative efficiency, equity, sustainability, feasibility and time frame. Ranking options against these makes judgement transparent.
- Ceteris paribus
- A Latin phrase meaning all other things held constant. It isolates the effect of one variable and must be stated when analysing a single cause.
- Reasoning chain
- A structured argument: state the assumption, explain the mechanism, derive the prediction, then evaluate. Each link should be explicit rather than implied.
- Diagram labelling
- Every economic diagram needs labelled axes, labelled curves, marked equilibrium price and quantity, and arrows showing the direction of any shift.
- Quantifying an argument
- Use elasticity and multiplier values to attach numbers to claims, for example a 10% price rise with elasticity 0.4 implies about a 4% quantity fall.
- Defensible conclusion
- Answer the question directly, restate the judgement, and acknowledge the strongest counterargument. Hedged language such as may or tends to is more defensible than absolutes.