FY13CE Economics flashcards

30 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 given up when a choice is made. Because resources are scarce, every decision to produce or consume one thing means sacrificing something else.

Scarcity

The condition in which available resources are insufficient to satisfy all human wants. It forces individuals, firms and governments to choose between competing uses of limited resources.

Production possibility frontier

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed. Points inside the curve indicate inefficiency; points beyond it are unattainable with current resources.

Factors of production

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

Capital

Producer goods such as machinery, tools, buildings and equipment used to make other goods and services. It is created by investment and differs from land and labour as a factor of production.

Price elasticity of demand

The proportional quantity-demand response divided by the proportional price change under a stated point or finite-change convention. The absolute magnitude, not the negative sign, determines the ordinary elastic/inelastic classification.

Price elasticity of supply

A measure of how responsive quantity supplied is to a change in price, calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply is more elastic when firms can adjust output quickly.

Income elasticity of demand

The responsiveness of quantity demanded to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income. Positive values indicate normal goods, negative values inferior goods.

Normal good

A good whose demand increases when consumers' income rises. Its income elasticity of demand is positive, and goods such as restaurant meals or branded clothing are typical examples.

Inferior good

A good whose demand falls when consumers' income rises, because buyers switch to preferred substitutes. Its income elasticity of demand is negative; examples include cheaper staple foods or second-hand clothing.

Demand

The quantity of a good or service consumers are willing and able to buy at each price over a given period. A movement along the curve follows a price change; a shift occurs when other conditions change.

Supply

The quantity of a good or service producers are willing and able to offer for sale at each price over a given period. Supply curves normally slope upward because higher prices make extra output profitable.

Market equilibrium

The price and quantity at which quantity demanded equals quantity supplied, so there is no tendency for price to change. Above it a surplus pushes price down; below it a shortage pushes price up.

Excess demand

A situation where quantity demanded exceeds quantity supplied at the prevailing price, usually because the price is held below equilibrium. It creates shortages and pressure for the price to rise.

Consumer surplus

The difference between what consumers are willing to pay for a good and what they actually pay. On a demand and supply diagram it is the area below the demand curve and above the price line.

Producer surplus

The difference between the price producers actually receive and the minimum price they would accept for each unit. It is shown as the area above the supply curve and below the price line.

Fixed cost

A cost that does not vary with the level of output in the short run, such as rent or insurance. Average fixed cost falls continuously as output expands because the same total is spread over more units.

Variable cost

A cost that changes directly with the quantity produced, such as raw materials and hourly labour. Total variable cost rises as output increases, though not necessarily at a constant rate.

Marginal cost

The addition to total cost from producing one extra unit of output. It typically falls at first, then rises as diminishing returns set in, and it cuts average total cost at its minimum point.

Average total cost

Total cost divided by the number of units produced, combining average fixed and average variable cost. Its curve is usually U-shaped, and firms must cover it to earn normal profit in the long run.

Diminishing returns

The principle that adding more of a variable input to fixed inputs eventually yields smaller increases in output. In the short run it explains why marginal cost rises as output expands.

Economies of scale

Reductions in average cost per unit that arise as a firm grows larger, from specialisation, bulk buying or better technology. They explain why average cost curves fall over a range of output.

Perfect competition

A market structure with many small firms, identical products, free entry and exit, and perfect information. Each firm is a price taker facing a horizontal demand curve and earns only normal profit in the long run.

Monopoly

A market with a single seller and high barriers to entry, giving the firm price-setting power. Output is usually lower and price higher than under competition, producing a deadweight welfare loss.

Barriers to entry

Obstacles that prevent new firms from entering a market, such as large capital requirements, patents, exclusive licences or strong brand loyalty. They protect existing firms' profits and reduce competition.

Normal profit

The minimum return needed to keep a firm in an industry, treated as part of total cost. It is earned when total revenue just equals total cost, including the opportunity cost of the owner's resources.

Contribution

Selling price less the defined unit variable cost, used toward fixed costs in the supplied single-product model.

Working capital

Current assets minus current liabilities under the stated balance-sheet definitions, distinct from a ratio or an entire cash forecast.

Receivable

An amount owed to the business by a customer, which can arise before the associated cash payment is collected.

Economic profit

Revenue less explicit and relevant implicit opportunity costs, which may differ from the stated accounting profit measure.