Pancyprian Economics flashcards
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34 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 includes non-monetary costs and is the core implication of scarcity.
- 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; outside points are unattainable.
- Normative statement
- A statement containing a value judgement about what ought to be. It cannot be tested or refuted by evidence, unlike a positive statement.
- Ceteris paribus
- A Latin phrase meaning all other things held constant. Economists use it to isolate the effect of one variable while ignoring other influences.
- Shift in demand
- A movement of the whole demand curve caused by a non-price factor such as income, tastes, or the price of a substitute or complement, not by the good's own price.
- Equilibrium price
- The price at which quantity demanded equals quantity supplied, so there is no shortage or surplus and the market clears.
- Price ceiling
- A maximum legal price set below equilibrium. It creates a shortage, since quantity demanded exceeds quantity supplied, and may cause queues or black markets.
- Price elasticity of demand
- The percentage change in quantity demanded divided by the percentage change in price. Values above 1 in absolute terms mean elastic demand.
- Income elasticity of demand
- Percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, negative for inferior goods, above 1 for luxuries.
- Cross elasticity of demand
- Percentage change in quantity demanded of one good divided by the percentage change in price of another. Positive for substitutes, negative for complements.
- Consumer surplus
- The difference between what consumers are willing to pay and what they actually pay. On a diagram it is the area below demand and above price.
- Diminishing marginal utility
- As more units of a good are consumed, each extra unit adds less satisfaction. This explains why demand curves slope downward.
- Marginal cost
- The change in total cost from producing one more unit. It cuts average total cost at its minimum point.
- Economies of scale
- Falls in long-run average cost as a firm grows larger, arising from technical, managerial, financial or marketing advantages of size.
- Profit maximisation rule
- A firm maximises profit where marginal revenue equals marginal cost. Output should expand while marginal revenue exceeds marginal cost.
- Perfect competition
- A market with many firms, a homogeneous product, free entry and exit, and perfect information. Firms are price takers and earn only normal profit in the long run.
- Monopoly
- A market with a single seller, high barriers to entry and no close substitutes. The firm is a price maker and output is set where marginal revenue equals marginal cost.
- Negative externality
- A cost imposed on third parties not involved in a transaction, such as pollution. Marginal social cost exceeds marginal private cost, so output is excessive.
- Public good
- A good that is non-rival and non-excludable, such as national defence. The free-rider problem means markets underprovide it, so government provision is typical.
- Merit good
- A good under-consumed because of imperfect information about its benefits, such as education or vaccination. It is often subsidised or provided by government.
- Government failure
- When government intervention worsens resource allocation rather than correcting it, through poor information, high administration costs or unintended side effects.
- Multiplier
- The ratio of the change in equilibrium national income to the initial change in injections. In the simple model it equals 1 divided by the marginal propensity to withdraw.
- Real GDP
- Gross domestic product adjusted for price changes, measured at constant prices. It shows changes in output rather than changes caused by inflation.
- Circular flow of income
- A model showing income moving between households and firms. Injections (investment, government spending, exports) equal withdrawals (saving, taxation, imports) in equilibrium.
- Demand-pull inflation
- Inflation caused by aggregate demand growing faster than productive capacity. It is often described as too much money chasing too few goods.
- Open market operations
- Central bank buying or selling of government securities to change bank reserves and the money supply. Buying expands the money supply and lowers interest rates.
- Lender of last resort
- A central bank function of lending to solvent banks facing a temporary liquidity shortage, to prevent panic and systemic collapse.
- Progressive tax
- A tax taking a larger proportion of income as income rises, such as a graduated income tax. It tends to reduce income inequality.
- Budget deficit
- Government spending exceeding tax revenue in a given year. It must be financed by borrowing, which adds to the national debt.
- Automatic stabilisers
- Features such as progressive taxation and unemployment benefits that dampen the economic cycle without deliberate government action.
- Comparative advantage
- A country has it when it produces a good at a lower opportunity cost than another country. Specialising according to it raises total world output.
- Marshall-Lerner condition
- A depreciation improves the trade balance only if the sum of the price elasticities of export and import demand exceeds one.
- Human Development Index
- A composite measure of development combining life expectancy, years of schooling and GNI per capita at purchasing power parity. It ranges from 0 to 1.
- Gini coefficient
- A measure of income inequality derived from the Lorenz curve, ranging from 0 for perfect equality to 1 for perfect inequality.