CAPE Economics Unit 1 flashcards
CAPE Economics Unit 1 · 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.
- Law of demand
- Ceteris paribus, quantity demanded of a good falls as its price rises and rises as its price falls, producing a downward-sloping demand curve.
- Demand curve shift
- A change in a non-price determinant such as income, tastes, substitute prices, or population moves the whole demand curve left or right rather than moving along it.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. Above it, surplus pushes price down; below it, shortage pushes price up toward equilibrium.
- Price elasticity of demand
- Percentage change in quantity demanded divided by percentage change in price. Values above one in absolute terms are elastic; below one, inelastic.
- Income elasticity of demand
- Percentage change in quantity demanded divided by percentage change in income. Positive indicates a normal good; negative indicates an inferior good.
- Cross elasticity of demand
- Percentage change in quantity demanded of one good divided by percentage change in price of another. Positive means substitutes; negative means complements.
- Price elasticity of supply
- Percentage change in quantity supplied divided by percentage change in price. Supply is more elastic when firms have spare capacity and longer time to adjust.
- Composite demand
- A good demanded for several distinct uses, such as milk for drinking and cheese. A rise in demand for one use raises price and reduces supply for others.
- Perfect competition assumptions
- Many buyers and sellers, homogeneous product, free entry and exit, perfect information, and no single firm able to influence price; firms are price takers.
- Profit maximisation rule
- All firms maximise profit where marginal revenue equals marginal cost, provided price covers average variable cost; otherwise the firm shuts down in the short run.
- Monopoly equilibrium
- A monopolist sets output where marginal revenue equals marginal cost, then charges the price on the demand curve, giving price above marginal cost.
- Natural monopoly
- An industry where declining long-run average cost over the relevant output range means one firm can supply the market more cheaply than several competing firms.
- Price discrimination conditions
- Requires market separation with different elasticities and no resale between markets. Charge higher prices where demand is inelastic and lower where elastic.
- Monopolistic competition
- Many firms sell differentiated products with low entry barriers. Short-run profit attracts entry until long-run normal profit where price equals average total cost.
- Kinked demand curve
- An oligopoly model where rivals match price cuts but ignore price rises, making demand elastic above the current price and inelastic below it, so prices stay rigid.
- Allocative efficiency
- Achieved when price equals marginal cost, so the marginal benefit to consumers equals the marginal cost of production and no deadweight loss exists.
- Productive efficiency
- Achieved when a firm produces at minimum average total cost, using the least-cost combination of inputs for the output produced.
- Herfindahl-Hirschman Index
- Sum of the squares of firms' percentage market shares. Higher values indicate greater concentration and more market power in the industry.
- 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 market overproduces.
- Positive externality
- A benefit enjoyed by third parties not reflected in market price, such as vaccination. Marginal social benefit exceeds marginal private benefit, so the market underproduces.
- Public good
- A good that is non-rival and non-excludable, such as national defence. Free riders mean private markets fail to supply it, so government provision is typical.
- Merit good
- A good with positive externalities or information failure, such as education, that is underconsumed in a free market and often subsidised or mandated by government.
- Demerit good
- A good with negative externalities or information failure, such as cigarettes, that is overconsumed in a free market and often taxed or regulated.
- Pigouvian tax
- A tax set equal to the marginal external cost of production, shifting supply up to the social cost curve and moving output toward the social optimum.
- Tradable pollution permits
- Government-issued licences allowing a fixed quantity of emissions. Firms trade permits so abatement occurs where it is cheapest, capping total pollution.
- Government failure
- A situation where government intervention worsens allocative efficiency through poor information, administrative costs, unintended side effects, or regulatory capture.
- Derived demand
- Demand for a factor of production that exists only because of demand for the final good it helps produce; higher product demand raises factor demand.
- Marginal revenue product
- The extra revenue earned from employing one more unit of a factor, equal to marginal physical product multiplied by marginal revenue.
- Backward-bending labour supply
- Above a certain wage the income effect of a wage rise outweighs the substitution effect, so workers choose more leisure and supply fewer hours.
- Monopsony
- A labour market with a single buyer of labour. Marginal factor cost exceeds the wage, so employment and wages fall below competitive levels.
- Transfer earnings
- The minimum payment needed to keep a factor of production in its current use; the next best alternative return.
- Economic rent
- The payment a factor receives above its transfer earnings. For a perfectly inelastic factor, the entire payment is economic rent.