IIT JAM Economics flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Marginal rate of substitution

The rate at which a consumer will trade one good for another while staying on the same indifference curve; equals MUx/MUy and, at the optimum, the price ratio Px/Py.

Giffen good

An inferior good whose income effect is so strong and negative that it outweighs the substitution effect, so quantity demanded rises when its price rises, giving an upward-sloping demand curve.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic if the absolute value exceeds one, inelastic if it is below one.

Shutdown point

The output level where price equals minimum average variable cost. Below this price a competitive firm loses less by producing nothing in the short run.

Long-run competitive equilibrium

A state in which price equals marginal cost and minimum average total cost, firms earn zero economic profit, and no firm has an incentive to enter or exit.

Deadweight loss

The loss of total surplus caused by a market distortion such as a tax, monopoly pricing, or a binding price control, equal to the area of the lost welfare triangle.

Lerner index

A measure of monopoly power equal to (P − MC)/P. Under perfect competition it is zero; under monopoly it equals the reciprocal of the absolute price elasticity.

Returns to scale

If doubling all inputs more than doubles output, returns are increasing; exactly doubles, constant; less than doubles, decreasing. Determined by the production function's homogeneity degree.

Gross domestic product

The market value of all final goods and services produced within a country's borders in a given period, regardless of the nationality of the producers.

GDP deflator

Nominal GDP divided by real GDP, multiplied by 100. It measures the price level of all domestically produced output, unlike the CPI which uses a fixed consumption basket.

Marginal propensity to consume

The change in consumption resulting from a one-unit change in disposable income. It lies between zero and one, and one minus it equals the marginal propensity to save.

Keynesian multiplier

The ratio of the change in equilibrium output to an autonomous change in spending; in the simplest model it equals 1/(1 − MPC).

IS-LM equilibrium

The interest rate and output level where goods-market equilibrium (IS) and money-market equilibrium (LM) hold simultaneously, determining aggregate demand.

Crowding out

The reduction in private investment caused when expansionary fiscal policy raises interest rates, weakening the effect of the initial increase in government spending.

Quantity theory of money

The identity MV = PY stating that money stock times velocity equals price level times real output; with constant velocity, money growth determines inflation.

Natural rate of unemployment

The unemployment rate consistent with stable inflation, comprising frictional and structural unemployment; the long-run Phillips curve is vertical at this rate.

Okun's law

An empirical relationship stating that a one-percentage-point rise in unemployment is associated with roughly a two-percent fall in output relative to potential.

Coefficient of variation

The standard deviation divided by the mean, often expressed as a percentage. It compares relative dispersion across data sets with different units or very different means.

Pearson correlation coefficient

Covariance of two variables divided by the product of their standard deviations; ranges from minus one to plus one and measures only linear association.

OLS slope formula

In simple regression the slope equals Cov(X,Y)/Var(X), equivalently r times the ratio of the standard deviation of Y to that of X.

Coefficient of determination

R-squared, the share of total variation in the dependent variable explained by the regression; it does not fall when regressors are added, so adjusted R-squared is used for comparison.

Homoskedasticity

The classical assumption that the variance of the regression error term is constant across all observations; its violation is heteroskedasticity and makes standard errors unreliable.

Bayes' theorem

P(A|B) = P(B|A)P(A)/P(B). It updates the prior probability of A using the likelihood of the observed event B.

Laspeyres price index

A price index using base-period quantities as weights. It tends to overstate the cost of living because it ignores substitution toward goods whose prices fell.

Solow steady state

The capital per worker at which saving equals the investment needed to equip new workers and replace depreciation, so capital per worker stops changing.

Golden-rule capital

The steady-state capital stock that maximizes consumption per worker, attained when the marginal product of capital equals population growth plus depreciation.

Harrod-Domar growth rate

The growth rate of output equals the saving rate divided by the incremental capital-output ratio; higher saving or lower capital intensity raises growth.

Gini coefficient

A measure of income inequality derived from the Lorenz curve, ranging from zero for perfect equality to one for complete inequality.

Human Development Index

A composite index averaging normalized indicators of health, education, and income using a geometric mean, published annually by the United Nations.

Repo rate

The policy rate at which the central bank lends short-term funds to commercial banks against securities; raising it reduces liquidity and helps control inflation.

Fiscal deficit

Total government expenditure minus total receipts other than borrowing. It measures the government's borrowing requirement in a financial year.

Purchasing power parity

The exchange rate at which a basket of goods costs the same in two countries; used to compare real incomes across countries at common price levels.