Cameroon GCE A-Level Economics flashcards

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 arises because resources are scarce and cannot satisfy all wants simultaneously.

Production possibility frontier

A curve showing the maximum combinations of two goods an economy can produce with given resources and technology. Points inside are inefficient; points beyond are unattainable.

Ceteris paribus

A Latin phrase meaning 'all other things equal'. Economists hold other variables constant to isolate the effect of a single variable in a model.

Factors of production

The inputs used to produce goods and services: land, labour, capital and entrepreneurship. Each earns a reward: rent, wages, interest and profit respectively.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic if the absolute value exceeds one and inelastic if below one.

Income elasticity of demand

Percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, negative for inferior goods, and above one for luxuries.

Cross elasticity of demand

Percentage change in quantity demanded of one good divided by percentage change in price of another. Positive for substitutes and negative for complements.

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.

Law of diminishing marginal utility

As a consumer takes successive units of a good, the extra satisfaction from each additional unit falls. Total utility rises while marginal utility remains positive.

Indifference curve

A curve showing combinations of two goods that give a consumer equal satisfaction. It is convex to the origin because the marginal rate of substitution diminishes.

Budget line

A line showing all combinations of two goods a consumer can afford at given prices and income. Its slope equals the negative ratio of the two prices.

Marginal rate of substitution

The rate at which a consumer will trade one good for another while remaining equally satisfied. It equals the slope of the indifference curve.

Law of variable proportions

As more of a variable input is added to fixed inputs, marginal returns eventually diminish. This explains the U-shape of short-run marginal and average cost curves.

Profit maximisation condition

A firm maximises profit where marginal revenue equals marginal cost. In the short run it shuts down if price falls below minimum average variable cost.

Perfect competition

A market with many buyers and sellers, a homogeneous product, free entry and exit, and perfect information. Each firm is a price taker with a horizontal demand curve.

Monopolistic competition

A market with many firms selling differentiated products and easy entry. Firms have some price-setting power but earn only normal profit in the long run.

Marginal revenue product

The extra revenue a firm earns by employing one more unit of a factor, equal to marginal physical product times marginal revenue. Firms hire until MRP equals the factor price.

Economic rent

The payment to a factor above its transfer earnings, that is, above the minimum needed to keep it in its current use. Land is the classic example.

Monopsony

A market with a single buyer of a factor or good. A monopsonistic employer sets wages below the competitive level by restricting employment, so MRP exceeds the wage.

Public good

A good that is non-rival in consumption and non-excludable. The free-rider problem means markets under-provide it, so government provision is usually required.

Negative externality

A cost imposed on third parties not reflected in market prices, such as pollution. It makes social cost exceed private cost and causes overproduction relative to the social optimum.

Pigouvian tax

A tax set equal to the marginal external cost of a harmful activity. It internalises the externality so that producers face the true social cost of their output.

Government failure

Inefficiency created by government intervention through poor information, administrative costs, rent-seeking or unintended incentives. Intervention may worsen the original market failure.

Circular flow of income

A model showing money moving between households and firms. Injections (investment, government spending, exports) equal leakages (saving, taxes, imports) in equilibrium.

Multiplier

The ratio of the change in equilibrium national income to the initial change in injections. It equals one divided by one minus the marginal propensity to consume.

Real versus nominal GDP

Nominal GDP values output at current prices; real GDP adjusts for inflation using a base year. Real GDP is the correct measure of output growth.

Quantity theory of money

The equation MV = PY, where money supply times velocity equals price level times real output. Sustained inflation occurs when money supply grows faster than output.

Demand-pull inflation

Inflation caused by aggregate demand rising faster than aggregate supply, usually near full employment. It is often called 'too much money chasing too few goods'.

Cost-push inflation

Inflation caused by rising costs of production, such as wages, fuel or imported inputs. It shifts aggregate supply left and raises the price level while reducing output.

Structural unemployment

Unemployment caused by a mismatch between workers' skills or location and available jobs, often due to technological change or industrial decline. It persists even when demand is high.

Comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country. It is the basis for mutually beneficial specialisation and trade.

Human Development Index

A composite measure of development combining life expectancy, education (mean and expected years of schooling) and gross national income per capita adjusted for purchasing power.