AP Intermediate Economics (BIEAP) flashcards

35 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. Because resources are scarce, every decision to produce or consume one good carries this hidden cost.

Production Possibility Frontier

A curve showing maximum combinations of two goods an economy can produce with given resources and technology. Points on it are efficient, inside it inefficient, and outside it unattainable.

Law of Demand

Other things remaining constant, quantity demanded of a good rises when its price falls and falls when its price rises, producing a downward-sloping demand curve.

Marginal Utility

The addition to total satisfaction from consuming one more unit of a good, calculated as change in total utility divided by change in quantity consumed. It generally diminishes.

Law of Equi-Marginal Utility

A consumer maximises satisfaction by allocating income so that marginal utility per rupee is equal across all goods, that is MUx divided by Px equals MUy divided by Py.

Indifference Curve

A curve showing all combinations of two goods giving the consumer equal satisfaction. It slopes downward, is convex to the origin and never intersects another indifference curve.

Marginal Rate of Substitution

The rate at which a consumer willingly gives up one good to obtain one more unit of another while keeping satisfaction constant. It equals the slope of the indifference curve and diminishes.

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the value exceeds one and inelastic when it is below one.

Law of Variable Proportions

In the short run, as more units of a variable factor are added to fixed factors, marginal product eventually declines, so total product rises at a diminishing rate.

Marginal Cost

The addition to total cost from producing one more unit of output, equal to change in total cost divided by change in quantity. It cuts average cost at its minimum point.

Returns to Scale

The change in output when all inputs are increased proportionally in the long run. Increasing returns mean output rises more than proportionally, constant means equally, decreasing means less.

Break-Even Point

The output level at which total revenue equals total cost, so the firm earns only normal profit. It occurs where price equals average total cost.

Perfect Competition

A market with many buyers and sellers, a homogeneous product, free entry and exit and perfect information. Each firm is a price taker facing a horizontal demand curve.

Monopoly

A market with a single seller, no close substitutes and strong entry barriers. The firm is a price maker and sets output where marginal revenue equals marginal cost.

Monopolistic Competition

A market with many sellers offering differentiated products and free entry. Each firm faces a downward-sloping but highly elastic demand and earns only normal profit in the long run.

Price Discrimination

Charging different prices to different buyers for the same product. It requires separable markets with different demand elasticities and is profitable when resale is prevented.

Marginal Revenue Product

The addition to total revenue from employing one more unit of a factor, equal to marginal product multiplied by marginal revenue. Profit-maximising firms hire until it equals the factor price.

Economic Rent

The payment to a factor above its transfer earnings, that is the minimum amount needed to keep it in its current use. It arises from the scarcity of the factor.

Quasi-Rent

A short-run surplus earned by a factor whose supply is temporarily fixed, such as machinery already installed. It disappears in the long run when supply becomes elastic.

Backward-Bending Labour Supply

A labour supply curve that bends back at high wages because the income effect of a wage rise outweighs the substitution effect, so workers choose more leisure and fewer hours.

Gross Domestic Product

The market value of all final goods and services produced within a country's domestic territory during a year, regardless of the producers' nationality.

Net National Product

Gross national product minus depreciation on capital. At factor cost it equals national income, the sum of all factor incomes earned by residents.

Value Added Method

A national income method that sums the value added by each producing unit, where value added equals value of output minus intermediate consumption, avoiding double counting.

GDP Deflator

A price index equal to nominal GDP divided by real GDP, multiplied by one hundred. It measures the change in the general price level of all domestically produced goods.

Money Multiplier

The ratio of total money supply to the monetary base, equal to one divided by the reserve ratio in a simple banking model. It shows how deposits expand credit.

Cash Reserve Ratio

The proportion of net demand and time liabilities that commercial banks must hold as cash reserves with the central bank. Raising it reduces banks' lending capacity.

Demand-Pull Inflation

Inflation caused by aggregate demand growing faster than aggregate supply, often due to rising government spending, credit expansion or export demand, pulling the general price level upward.

Fiscal Deficit

Total government expenditure minus total receipts excluding borrowings. It measures the government's borrowing requirement and indicates the extent of deficit financing.

Progressive Tax

A tax whose average rate rises as taxable income rises, so higher-income earners pay a larger share of income. Income tax is the standard example.

Public Good

A good that is non-rival in consumption and non-excludable, such as national defence. Markets underprovide it because of free riding, so government provision is needed.

Comparative Advantage

The ability of a country to produce a good at a lower opportunity cost than another country. It explains why trade benefits both partners even if one is absolutely more efficient.

Balance of Payments

A systematic record of all economic transactions between a country's residents and the rest of the world in a year, comprising the current and capital accounts.

Human Development Index

A composite index combining life expectancy, education indicators and gross national income per capita at purchasing power parity, published to measure development beyond income.

Disguised Unemployment

A situation where more workers are engaged in a job than needed, so removing some does not reduce output. It is common in Indian family farming.

Goods and Services Tax

A destination-based value-added tax on supply of goods and services in India, introduced in 2017, replacing many indirect taxes and administered by a GST Council.