BSEB Intermediate Economics 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; it is a real cost measured in goods or satisfaction, not in the money actually paid.

Production Possibility Frontier

A curve showing the maximum combinations of two goods an economy can produce with given resources and technology; points on it are efficient and points inside it show unemployment or inefficiency.

Marginal Opportunity Cost

The amount of one good sacrificed to produce one additional unit of another good; it rises along a concave PPF because resources are not equally suited to both uses.

Normative Economics

The branch of economics dealing with what ought to be; it involves value judgements and cannot be tested against facts, unlike positive economics which describes what is.

Law of Demand

Other things remaining constant, quantity demanded of a good falls when its price rises and rises when its price falls, giving an inverse price-quantity relationship.

Price Elasticity of Demand

The ratio of the percentage change in quantity demanded to the percentage change in price; demand is elastic when the absolute value exceeds one and inelastic when it is below one.

Cross Price Elasticity

The percentage change in quantity demanded of one good divided by the percentage change in the price of a related good; positive for substitutes and negative for complements.

Income Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in consumer income; negative for inferior goods and positive for normal goods.

Law of Diminishing Marginal Utility

As a consumer takes successive units of a good in a given period, the additional satisfaction from each extra unit declines, eventually reaching zero and then becoming negative.

Indifference Curve

A curve showing all combinations of two goods that give a consumer equal total satisfaction; it is convex to the origin because the marginal rate of substitution diminishes.

Budget Line

A line showing all combinations of two goods a consumer can buy by spending the entire given income at given prices; its slope equals the price ratio.

Law of Variable Proportions

With one input variable and others fixed, marginal product first rises, then falls, and finally turns negative, defining the three stages of short-run production.

Returns to Scale

The proportionate change in output when all inputs are increased in the same proportion; returns may be increasing, constant, or decreasing and are a long-run concept.

Marginal Cost

The addition to total cost from producing one more unit of output; it cuts both average variable cost and average total cost at their minimum points.

Break-Even Point

The output level at which total revenue equals total cost so that the firm earns only normal profit; price equals minimum average total cost in the long run.

Price Elasticity of Supply

The percentage change in quantity supplied divided by the percentage change in price; supply is more elastic in the long run and when inputs can move easily between uses.

Perfect Competition

A market with many sellers of 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 of a product with no close substitutes and strong entry barriers; the firm equates marginal revenue with marginal cost and charges a price above marginal cost.

Monopolistic Competition

A market with many sellers of differentiated products and free entry; each firm faces a downward-sloping demand curve and earns only normal profit in long-run equilibrium.

Kinked Demand Curve

An oligopoly model in which the demand curve is more elastic above the current price than below it, because rivals ignore price rises but match price cuts, making prices rigid.

Market Equilibrium

The price at which quantity demanded equals quantity supplied; above it excess supply pushes price down, below it excess demand pushes price up.

Gross Domestic Product

The money value of all final goods and services produced within a country's domestic territory during a year, measured at market prices and excluding intermediate goods.

National Income

Net national product at factor cost: gross national product at market price minus depreciation, minus net indirect taxes, where GNP equals GDP plus net factor income from abroad.

Value Added Method

A method of estimating national income by summing gross value added across sectors, where value added equals the value of output minus intermediate consumption.

GDP Deflator

The ratio of nominal GDP at current prices to real GDP at constant prices, multiplied by one hundred; it measures the general price level of domestically produced goods.

Money Multiplier

The ratio of total money supply to high-powered money; it rises when the cash reserve ratio falls, because banks can lend a larger fraction of each deposit.

Cash Reserve Ratio

The proportion of a bank's net demand and time liabilities that must be held as cash reserves with the central bank; raising it reduces credit creation.

Repo Rate

The rate at which the central bank lends short-term funds to commercial banks against government securities; raising it is a contractionary monetary measure.

Investment Multiplier

The ratio of a change in equilibrium income to the change in autonomous investment that causes it; it equals one divided by one minus the marginal propensity to consume.

Marginal Propensity to Consume

The fraction of an additional unit of income spent on consumption; it lies between zero and one, and one minus it gives the marginal propensity to save.

Deflationary Gap

The shortfall of aggregate demand below the full-employment level of aggregate supply; it causes unemployment and falling prices and is corrected by expansionary fiscal policy.

Fiscal Deficit

Total government expenditure minus total receipts excluding borrowings; it measures the government's borrowing requirement in a financial year and equals borrowing plus drawdown of cash balances.

Revenue Deficit

Revenue expenditure minus revenue receipts; it shows the excess of government's recurring spending over its recurring income and signals dissaving by the government.

Balance of Payments

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

Depreciation of Currency

A fall in the external value of a currency under a flexible exchange rate system; it makes exports cheaper and imports costlier, tending to improve the trade balance over time.