BSEH SS Economics flashcards

36 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 resource is used for one purpose rather than another; it is the true economic cost of a choice.

Production possibility frontier

A curve showing all maximum combinations of two goods an economy can produce with given resources and technology, assuming full and efficient use.

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 value judgements about what ought to be, such as whether a policy is fair or desirable; statements cannot be tested purely by data.

Law of diminishing marginal utility

As a consumer consumes more units of a good continuously, the additional satisfaction from each extra unit declines, eventually becoming zero and then negative.

Indifference curve

A curve showing combinations of two goods that give a consumer equal total satisfaction, so the consumer is indifferent among all points on it.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in the good's own price; it measures responsiveness of demand to price.

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, negative for complements.

Consumer equilibrium two goods

A consumer is in equilibrium when marginal utility per rupee spent is equal across all goods and total expenditure equals income, maximising satisfaction.

Law of variable proportions

In the short run, as more units of a variable input are added to fixed inputs, marginal product first rises, then falls, and can become negative.

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.

Average fixed cost

Total fixed cost divided by output; it falls continuously as output rises because a constant fixed cost is spread over more units, creating a rectangular hyperbola.

Elasticity of supply

The percentage change in quantity supplied divided by the percentage change in price; supply through the origin has unitary elasticity regardless of slope.

Perfect competition

A market with many sellers and buyers, a homogeneous product, free entry and exit, and perfect information, so each firm is a price taker.

Monopoly equilibrium

A monopolist maximises profit where marginal revenue equals marginal cost with MC rising; price is set on the demand curve above marginal cost.

Shut-down point

The output level where price equals minimum average variable cost; below this price a competitive firm minimises loss by producing nothing in the short run.

Price ceiling

A legally imposed maximum price below the equilibrium price, which creates excess demand, shortages and the need for rationing or black markets.

Gross domestic product

The market value of all final goods and services produced within a country's domestic territory during a year, excluding intermediate goods to avoid double counting.

Net national product at factor cost

Gross national product at market price minus depreciation minus net indirect taxes; it equals national income, the sum of factor incomes earned.

GDP deflator

Nominal GDP divided by real GDP, multiplied by 100; it measures the change in the general price level of all goods and services included in GDP.

Value added method

A method of estimating national income by summing the value added by all producing units, where value added equals value of output minus intermediate consumption.

Money multiplier

The ratio of total money supply to the monetary base; equal to one divided by the reserve ratio, it shows how deposits expand from reserves.

M1 measure of money

Currency held by the public plus demand deposits of commercial banks plus other deposits with the Reserve Bank of India; it is the most liquid measure.

Repo rate

The rate at which the central bank lends short-term funds to commercial banks against government securities; raising it tightens liquidity and credit.

Cash reserve ratio

The proportion of net demand and time liabilities that banks must keep as cash reserves with the central bank; raising it reduces credit creation.

Investment multiplier

The ratio of change in national income to change in investment; equal to one divided by one minus marginal propensity to consume.

Marginal propensity to consume

The change in consumption expenditure divided by the change in income; it lies between zero and one, and its complement is the marginal propensity to save.

Deflationary gap

The shortfall of aggregate demand below the level needed for full employment output, causing unemployment and downward pressure on prices.

Fiscal deficit

Total government expenditure minus total receipts excluding borrowings; it measures the government's total borrowing requirement in a year.

Revenue deficit

Revenue expenditure minus revenue receipts; it shows the extent to which government's current spending exceeds its current non-debt income.

Balance of trade

The difference between a country's exports of goods and imports of goods; a component of the current account, not the whole balance of payments.

Currency depreciation

A fall in the value of a currency under a floating exchange rate regime, making exports cheaper and imports more expensive in domestic currency.

1991 economic reforms

India's liberalisation programme triggered by a balance of payments crisis, involving industrial delicensing, tariff reduction, rupee devaluation and greater foreign investment.

Human Development Index

A composite measure of development combining life expectancy, education years and per capita income in purchasing power parity terms.

CPI inflation

The percentage change in the consumer price index, measuring retail price changes in a representative basket; the RBI's target is 4% with a two-point band.

Median

The middle value of a data set arranged in ascending order; unlike the mean, it is not distorted by extreme values or outliers.