WACE Economics ATAR flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Law of demand

Ceteris paribus, as the price of a good rises, the quantity demanded falls, and as price falls, quantity demanded rises. This produces a downward-sloping demand curve.

Demand versus quantity demanded

A change in price changes quantity demanded and moves along the curve. A change in income, tastes, population or related prices shifts the entire demand curve.

Supply curve shift

A movement of the whole supply curve caused by non-price factors such as input costs, technology, taxes, subsidies, weather or number of sellers, changing equilibrium price and quantity.

Market equilibrium

The price at which quantity supplied equals quantity demanded. Above it a surplus pushes price down; below it a shortage pushes price up toward equilibrium.

Price elasticity of demand

The responsiveness of quantity demanded to a price change, calculated as percentage change in quantity divided by percentage change in price. Values above one in absolute terms are elastic.

Elastic versus inelastic demand

Elastic demand means quantity responds proportionately more than price, so total revenue falls when price rises. Inelastic demand means quantity responds less, so revenue rises with price.

Income elasticity of demand

Percentage change in quantity demanded divided by percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.

Price elasticity of supply

Percentage change in quantity supplied divided by percentage change in price. Supply is more elastic over longer time periods when firms can adjust all inputs.

Consumer and producer surplus

Consumer surplus is the area below the demand curve and above price; producer surplus is the area above the supply curve and below price. Together they measure total economic welfare.

Allocative efficiency

Occurs where marginal social benefit equals marginal social cost, maximising total surplus. Any deviation creates deadweight loss, indicating resources are misallocated.

Negative externality

A cost imposed on third parties not reflected in market price, such as pollution. Marginal social cost exceeds marginal private cost, so the free market overproduces relative to the efficient level.

Public goods

Goods that are non-rival and non-excludable, such as national defence. Markets underprovide them because of the free-rider problem, justifying government provision.

GDP expenditure approach

Gross domestic product equals consumption plus investment plus government spending plus exports minus imports, measuring the market value of final goods produced domestically in a period.

Real versus nominal GDP

Nominal GDP uses current prices; real GDP is adjusted to base-year prices, removing inflation effects. Real GDP per capita is the preferred living-standards indicator.

Consumer price index

A weighted index of a representative basket of goods and services, calculated as current basket cost divided by base-year cost times one hundred. Its percentage change measures inflation.

Demand-pull inflation

Inflation caused by aggregate demand growing faster than productive capacity, often during booms or after expansionary policy, pulling prices upward across the economy.

Cost-push inflation

Inflation caused by rising production costs, such as wages or imported inputs, shifting aggregate supply left and raising prices while reducing output, potentially causing stagflation.

Unemployment rate

The number of unemployed persons divided by the labour force, multiplied by one hundred. The labour force includes only employed and actively seeking unemployed persons.

Structural unemployment

Unemployment from a mismatch between workers' skills or location and available jobs, often caused by technological change or industry restructuring. It persists without retraining.

Money multiplier

The maximum expansion of bank deposits from an initial deposit, equal to one divided by the reserve ratio. A lower reserve ratio increases the multiplier and credit creation.

Cash rate transmission

A rise in the cash rate raises borrowing costs, reducing consumption and investment, appreciating the currency and lowering aggregate demand, which eases inflationary pressure.

Comparative advantage

A nation has comparative advantage when it produces a good at lower opportunity cost than another nation. Specialisation and trade raise total output even if one nation is absolutely more productive.

Opportunity cost

The value of the next best alternative forgone when a choice is made. It underlies the production possibility frontier and explains the shape of supply decisions.

Terms of trade

The ratio of export prices to import prices, usually expressed as an index. A rise means each unit of exports buys more imports, improving national purchasing power.

Index number construction

Convert a raw series to an index by dividing each value by the base-year value and multiplying by one hundred, allowing comparison of growth across variables with different units.

Tax incidence rule

The burden of a tax falls more heavily on the side of the market that is less elastic. With perfectly inelastic demand, consumers bear the entire tax in higher prices.

Correlation versus causation

Two variables moving together does not prove one causes the other. Check for omitted variables, reverse causation and selection bias before drawing a causal conclusion.

Marginal decision rule

An activity should be expanded while marginal benefit exceeds marginal cost. The efficient quantity occurs where marginal benefit equals marginal cost.

Policy evaluation criteria

Assess a policy on effectiveness, efficiency and deadweight loss, equity, time lags and unintended consequences such as crowding out, inflation or reduced incentives.

Real versus per-capita data

Real values remove price effects; per-capita values divide by population. Aggregate growth can coexist with falling living standards if population grows faster than output.

Chain of economic reasoning

Link an event to a curve shift, then to equilibrium price and quantity, then to stakeholder effects, then evaluate magnitude and time lags for a complete analytical answer.

Pigouvian tax

A tax set equal to the marginal external cost of a negative externality, shifting marginal private cost toward marginal social cost and reducing output to the efficient level.

Crowding out

When government borrowing to fund deficits raises interest rates and reduces private investment, weakening the expansionary effect of fiscal policy, especially near full employment.