IAI CB2 flashcards
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34 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Law of Demand
- As the price of a good rises, quantity demanded falls, other things equal. The demand curve slopes downward because of substitution and income effects.
- 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.
- Demand Curve Shift
- A change in income, tastes, related-good prices, expectations or number of buyers shifts the whole demand curve. A price change only moves along it.
- Price Elasticity of Demand
- Percentage change in quantity demanded divided by percentage change in price. Values above one are elastic, below one inelastic, equal to one unit elastic.
- Income Elasticity of Demand
- Percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, negative for inferior goods, 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, negative for complements.
- Tax Incidence Rule
- The tax burden falls more heavily on the side of the market with the lower price elasticity, because that side cannot easily change quantity.
- Total Revenue Test
- If a price rise increases total revenue, demand is inelastic. If it decreases total revenue, demand is elastic. Unchanged revenue means unit elastic.
- Law of Diminishing Marginal Utility
- As a consumer takes successive units of a good in a period, each extra unit adds less satisfaction than the previous one.
- Utility Maximisation Rule
- A consumer maximises satisfaction when marginal utility per unit of money is equal across all goods: MUx/Px equals MUy/Py, with the budget fully spent.
- Marginal Rate of Substitution
- The amount of one good a consumer will give up for one more unit of another while staying on the same indifference curve. It equals MUx/MUy.
- Budget Line
- Shows all combinations of two goods a consumer can buy with given income and prices. Its slope equals the negative ratio of the prices.
- Law of Diminishing Returns
- In the short run, adding more of a variable input to a fixed input eventually reduces the marginal product of the variable input.
- Marginal Cost
- The change in total cost from producing one more unit. The marginal cost curve cuts average cost at the minimum point of average cost.
- Shutdown Rule
- A firm shuts down in the short run if price falls below minimum average variable cost, because it cannot even cover variable costs.
- Profit Maximisation Condition
- A firm maximises profit where marginal revenue equals marginal cost and marginal cost is rising. In perfect competition price equals marginal revenue.
- Economies of Scale
- Falling long-run average cost as output rises, caused by specialisation, bulk buying and spreading fixed costs over more units.
- Perfect Competition
- Many firms sell an identical product with free entry and exit. Each firm is a price taker and earns only normal profit in long-run equilibrium.
- Monopoly Pricing
- A single seller with barriers to entry faces downward-sloping demand. It sets output where marginal revenue equals marginal cost and prices above marginal cost.
- Monopolistic Competition
- Many firms sell differentiated products with free entry. Each faces downward-sloping demand, and long-run entry drives economic profit to zero.
- Price Discrimination
- Charging different prices to different buyers for the same product. It requires market separation and different elasticities, and raises profit.
- Gross Domestic Product
- The market value of all final goods and services produced within a country's borders in a period, measured by expenditure, income or output methods.
- GDP Deflator
- A price index calculated as nominal GDP divided by real GDP, multiplied by one hundred. It covers all goods in GDP, unlike the CPI.
- Marginal Propensity to Consume
- The fraction of each extra unit of disposable income spent on consumption. It lies between zero and one, and MPC plus MPS equals one.
- Spending Multiplier
- The ratio of the change in equilibrium output to the initial change in spending, equal to one divided by one minus the marginal propensity to consume.
- Money Multiplier
- The maximum expansion of bank deposits from an initial deposit equals one divided by the reserve ratio, assuming no cash leakage.
- Functions of Money
- Money serves as a medium of exchange, a unit of account, a store of value and a standard for deferred payment.
- Fisher Equation
- The real interest rate approximately equals the nominal interest rate minus expected inflation. It links nominal rates, real rates and price expectations.
- 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.
- Phillips Curve
- A short-run inverse relationship between inflation and unemployment. The long-run curve is vertical at the natural rate of unemployment.
- Unemployment Rate
- The number of unemployed people divided by the labour force, multiplied by one hundred. The labour force includes employed plus actively seeking unemployed.
- Crowding Out
- Government borrowing to finance a fiscal deficit raises interest rates and can reduce private investment, weakening the effect of expansionary fiscal policy.
- Open Market Operations
- Central bank buying or selling of government securities to change bank reserves and the money supply, and thereby influence short-term interest rates.
- Automatic Stabilisers
- Features such as progressive taxes and unemployment benefits that dampen fluctuations in aggregate demand without new legislation, reducing the need for discretionary action.