Cambridge IAL Economics flashcards
Cambridge IAL Economics · Build recall with a focused review session.
33 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Price elasticity of demand
- Percentage change in quantity demanded divided by percentage change in price. Values above 1 in absolute terms indicate elastic demand; below 1 indicates inelastic demand.
- Income elasticity of demand
- Percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, above one for luxuries, and negative for inferior goods.
- Cross elasticity of demand
- Percentage change in quantity demanded of one good divided by percentage change in price of another. Positive values indicate substitutes; negative values indicate complements.
- Price ceiling
- A legally imposed maximum price set below equilibrium, causing excess demand, shortages, rationing, and black markets.
- Tax incidence and elasticity
- The burden of an indirect tax falls mainly on the side of the market that is more price inelastic, because that side cannot easily change quantity in response.
- Comparative advantage
- A country has comparative advantage in a good when it produces it at a lower opportunity cost than its trading partner, forming the basis for beneficial specialisation and trade.
- Terms of trade
- Index of export prices divided by index of import prices, multiplied by one hundred. A rise means each unit of exports buys more imports.
- Marshall-Lerner condition
- A currency depreciation improves the trade balance only if the sum of the price elasticities of export and import demand exceeds one.
- J-curve effect
- After depreciation, the trade balance initially worsens because quantities adjust slowly, then improves once elasticities rise over time.
- Tariff welfare effects
- A tariff raises domestic price, cuts imports, transfers surplus from consumers to producers and government, and creates deadweight loss from reduced consumption and inefficient production.
- Unemployment rate formula
- Number of unemployed people divided by the labour force, multiplied by one hundred, where the labour force equals employed plus unemployed.
- Natural rate of unemployment
- Unemployment that remains when the labour market is in equilibrium, comprising frictional and structural unemployment, excluding cyclical demand-deficient unemployment.
- Consumer price index
- A weighted index tracking the cost of a representative basket of goods and services over time, used to measure the rate of inflation.
- Real versus nominal GDP
- Nominal GDP values output at current prices; real GDP values it at constant base-year prices, removing the effect of price changes.
- Disinflation versus deflation
- Disinflation is a fall in the rate of inflation, meaning prices still rise but more slowly; deflation is a sustained fall in the general price level.
- Demand-pull inflation
- Inflation caused by aggregate demand growing faster than productive capacity, pushing the economy beyond potential output and raising the price level.
- Cost-push inflation
- Inflation caused by rising costs of production, such as wages or energy, shifting short-run aggregate supply left and raising prices while reducing output.
- Quantity theory of money
- The equation MV = PY implies that if velocity and real output are constant, growth in the money supply translates directly into inflation.
- Short-run Phillips curve
- A downward-sloping relationship showing that lower unemployment is associated with higher inflation in the short run, shifting with expectations and supply shocks.
- Menu costs of inflation
- The costs firms incur when changing prices, such as reprinting catalogues and updating systems, which rise with higher and more variable inflation.
- Profit maximisation rule
- A firm maximises profit at the output where marginal revenue equals marginal cost, provided marginal cost is rising through that point.
- Economies of scale
- Falls in long-run average cost as output expands, arising from specialisation, indivisible capital, bulk buying, and better access to finance.
- Natural monopoly
- A market where economies of scale persist across the whole range of demand, so one firm can supply at lower average cost than several competing firms.
- Negative externality of production
- A cost imposed on third parties not reflected in private costs, so marginal social cost exceeds marginal private cost and the free market overproduces.
- Public good characteristics
- Non-rivalry means one person's consumption does not reduce another's; non-excludability means non-payers cannot be prevented from consuming, causing free-riding.
- Aggregate demand components
- Total planned expenditure equals consumption plus investment plus government spending plus net exports, where net exports equal exports minus imports.
- Fiscal multiplier
- The ratio of change in equilibrium national income to the initial change in autonomous spending, equal to one divided by one minus the marginal propensity to consume.
- Crowding out
- Government borrowing raises interest rates and displaces private investment, reducing the expansionary effect of fiscal policy, especially near full capacity.
- Liquidity trap
- A situation where nominal interest rates are near zero and money demand is perfectly elastic, making further monetary expansion ineffective and fiscal policy more powerful.
- Human Development Index
- A composite index averaging health (life expectancy), education (years of schooling), and income (GNI per capita at purchasing power parity) indicators.
- Rule of 70
- Approximate number of years for real GDP to double equals seventy divided by the annual percentage growth rate.
- Sustainable development
- Development that meets present needs without compromising the ability of future generations to meet theirs, balancing growth with environmental and social limits.
- Foreign direct investment
- Investment by a firm in productive assets abroad, bringing capital, jobs, and technology transfer but risking profit repatriation and environmental damage.