LC Economics flashcards
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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 includes non-monetary costs such as time and is the basis of the production possibility frontier.
- Production possibility frontier
- A curve showing the maximum combinations of two goods an economy can produce with all resources fully and efficiently employed, given constant technology.
- Factors of production
- The four resource categories used to produce goods and services: land (natural resources), labour (human effort), capital (man-made aids to production) and enterprise (risk-taking organisation).
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. At this price there is no tendency for price to change, and the market clears.
- Extension of demand
- A movement along the demand curve to a higher quantity caused by a fall in the good's own price, with all other determinants held constant.
- Consumer surplus
- The difference between what consumers are willing to pay and what they actually pay. It is the area below the demand curve and above the market price.
- Price elasticity of demand
- The responsiveness of quantity demanded to a change in price, measured as percentage change in quantity divided by percentage change in price.
- Tax incidence
- The division of the burden of an indirect tax between buyers and sellers. The side of the market with more inelastic behaviour bears the larger share.
- Deadweight loss
- The loss of total economic welfare caused by a market distortion such as a tax, monopoly or price control, arising from mutually beneficial trades that no longer occur.
- Diminishing marginal utility
- The principle that each additional unit of a good consumed yields less extra satisfaction than the previous unit, other things equal.
- Marginal cost
- The addition to total cost from producing one more unit of output. It equals the change in total cost divided by the change in quantity.
- Economies of scale
- Falls in long-run average cost as a firm expands output, arising from technical, managerial, financial and marketing advantages of larger scale.
- Price taker
- A firm that must accept the market price because its output is a negligible share of total supply, as in perfect competition where P = MR = AR.
- GDP expenditure formula
- Gross domestic product measured by spending: consumption plus investment plus government expenditure plus exports minus imports, all within a given period.
- GDP deflator
- A broad price index equal to nominal GDP divided by real GDP, multiplied by 100. It covers all domestically produced output, unlike the consumer price index.
- Multiplier
- The ratio of the change in equilibrium national income to the initial change in injections, equal to 1 divided by the marginal propensity to withdraw.
- Circular flow of income
- A model of the economy showing income and spending between households and firms, with leakages of saving, tax and imports offset by injections of investment, spending and exports.
- Lender of last resort
- A central bank function of providing emergency liquidity to solvent banks facing temporary funding shortages, in order to prevent contagion and systemic collapse.
- Credit creation
- The process by which commercial banks expand deposits by lending out a fraction of reserves, limited by the reserve ratio and cash withdrawal demand.
- Consumer price index
- A weighted measure of the average price of a representative basket of goods and services, used to calculate the inflation rate relative to a base year.
- Real interest rate
- The nominal interest rate adjusted for inflation, approximately nominal rate minus inflation rate. It measures the true return to saving and cost of borrowing.
- Progressive tax
- A tax for which the average tax rate rises as income rises, so higher earners pay a larger proportion of their income, as with graduated income tax.
- Structural budget balance
- The government's budget position adjusted to remove the effects of the economic cycle, showing whether fiscal policy is expansionary at full employment.
- Automatic stabilisers
- Features of the tax and benefit system, such as progressive income tax and unemployment benefits, that dampen the cycle without discretionary policy changes.
- Unemployment rate
- The number of unemployed people actively seeking work divided by the labour force, expressed as a percentage. Discouraged workers are excluded.
- Gini coefficient
- A measure of income inequality derived from the Lorenz curve, ranging from 0 for perfect equality to 1 for complete inequality.
- Dependency ratio
- The number of dependants, typically those under 16 and over 65, expressed as a proportion of the working-age population, indicating demographic pressure on public finances.
- Comparative advantage
- A country's ability to produce a good at a lower opportunity cost than a trading partner, forming the basis for mutually beneficial specialisation and trade.
- Current account
- The balance of payments record of trade in goods and services, plus primary income such as investment earnings and secondary income transfers.
- Marshall-Lerner condition
- The condition that a currency depreciation improves the trade balance only if the sum of the price elasticities of export and import demand exceeds one.
- Laspeyres price index
- A weighted price index using base-period quantities as weights, so it overstates inflation when consumers substitute away from goods whose prices rise fastest.
- Percentage point change
- The arithmetic difference between two percentage figures. A move from 4% to 6% is a two percentage point rise but a fifty per cent relative increase.