SACE Stage 2 Economics key terms

The condition where limited resources cannot satisfy all human wants. It forces individuals, firms and governments to choose between competing uses of resources, making it the foundation of all economic problems.

The value of the next best alternative forgone when a choice is made. It measures the true cost of any decision, including non-monetary sacrifices such as time or leisure, not just the money paid.

A situation where gaining more of one objective requires giving up some of another. It highlights that choices involve balancing competing goals rather than obtaining everything at once.

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed. Points inside the curve indicate inefficiency; outward shifts reflect economic growth.

The way a society distributes its scarce factors of production among competing uses. It determines what is produced, how it is produced and for whom, and can occur through markets or government decisions.

The process by which the interaction of demand and supply, guided by price signals, determines what is produced and in what quantities. Prices coordinate decisions of buyers and sellers without central direction.

The quantity of a good or service consumers are willing and able to buy at each price over a given period, other things equal. A change in price causes movement along the demand curve.

The principle that, all else equal, as the price of a good rises the quantity demanded falls, and as price falls quantity demanded rises. This inverse relationship produces a downward-sloping demand curve.

The quantity of a good or service producers are willing and able to offer for sale at each price over a given period, other things equal. A change in price causes movement along the supply curve.

The price at which quantity demanded equals quantity supplied, leaving no shortage or surplus. It is also called the market-clearing price and changes when demand or supply curves shift.

A market condition where quantity demanded does not equal quantity supplied. A price above equilibrium creates a surplus; a price below equilibrium creates a shortage, pressuring prices to adjust.

A measure of how responsive quantity demanded is to a change in price, calculated as percentage change in quantity divided by percentage change in price. Values above one indicate elastic demand.

A measure of how responsive quantity supplied is to a change in price, calculated as percentage change in quantity supplied divided by percentage change in price. Time period and spare capacity strongly influence it.

A measure of how responsive demand is to a change in consumer income, calculated as percentage change in quantity demanded divided by percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.

A good for which demand rises when consumer income rises, giving a positive income elasticity of demand. Most goods and services, such as restaurant meals, fall into this category.

A good for which demand falls when consumer income rises, giving a negative income elasticity of demand. Consumers switch to preferred substitutes as their incomes grow.

Goods that can replace one another in use, so that a rise in the price of one increases demand for the other. Their cross elasticity of demand is positive.

Goods consumed together, so that a rise in the price of one reduces demand for the other. Their cross elasticity of demand is negative; examples include printers and ink cartridges.

A legally imposed maximum price, set below equilibrium to make a good more affordable. It typically creates a shortage and may require rationing or lead to black markets.

A legally imposed minimum price, set above equilibrium to support producers or workers. It typically creates a surplus, such as unsold produce or unemployment when applied to wages.

A situation where a free market allocates resources inefficiently, producing too much or too little of a good relative to the social optimum. Causes include externalities, public goods and market power.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction. Negative externalities cause overproduction; positive externalities cause underproduction.

A good that is non-rival and non-excludable, meaning one person's use does not reduce availability to others and users cannot easily be prevented from consuming it. Markets tend to underprovide such goods.

The tendency of people to benefit from a good without paying for it when the good is non-excludable. This undermines voluntary provision and justifies government funding of public goods.

The loss of total economic welfare caused by an inefficient allocation of resources, such as when a tax or monopoly reduces output below the socially optimal level. It is shown as a triangle on a diagram.

The income a firm receives from selling its output, calculated as price multiplied by quantity sold. Its behaviour when price changes depends on the price elasticity of demand.

The total market value of all final goods and services produced within a country's borders in a given period. It is a key measure of economic activity and output.

An increase in the volume of goods and services an economy produces over time, usually measured as the percentage change in real gross domestic product. It raises living standards and employment.

The recurring pattern of expansion and contraction in economy-wide activity over time, marked by booms, downturns, recessions and recoveries. It reflects fluctuations around the long-run growth trend.

A sustained increase in the general price level of goods and services in an economy, reducing the purchasing power of money. It is commonly measured by changes in the consumer price index.

A measure of the average change over time in the prices paid by households for a representative basket of goods and services. It is the most common indicator used to calculate inflation.

The proportion of the labour force that is actively seeking work but cannot find it. It is measured as the number of unemployed people divided by the total labour force.

The use of government spending and taxation to influence the level of economic activity, income distribution and resource allocation. It may be expansionary or contractionary depending on objectives.

Actions by a central bank to influence interest rates, money supply and credit conditions in order to achieve objectives such as price stability and full employment. It is typically set by adjusting the cash rate.

The total planned expenditure on goods and services in an economy at a given price level, comprising consumption, investment, government spending and net exports. A fall shifts the curve leftwards.

The total volume of goods and services producers are willing to supply at each price level in an economy. Its responsiveness depends on spare capacity and the cost of inputs.

The ability of a country to produce a good at a lower opportunity cost than another country. It explains the gains from specialisation and trade, even when one country is more efficient at everything.

The reduction or removal of barriers to international trade such as tariffs, quotas and subsidies. It aims to lower prices, expand markets and improve efficiency through increased competition.

A tax imposed on imported goods, raising their domestic price and protecting local producers. It generates government revenue but reduces consumer welfare and can invite retaliation.

The growing integration of national economies through increased flows of goods, services, capital, labour and information across borders. It expands markets and competition while creating adjustment pressures.