IIT JAM Economics key terms

The value of the next best alternative given up when a choice is made. It measures true cost in terms of forgone options, not just money paid, and underlies the shape of the production possibility frontier.

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

The absolute slope of the production possibility frontier, showing how much of one good must be sacrificed to produce one more unit of another. It equals the ratio of marginal costs of the two goods.

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one, inelastic when below one, and unit elastic at exactly one.

The percentage change in quantity demanded divided by the percentage change in consumer income. Positive values indicate normal goods, negative values inferior goods, and values above one indicate luxuries.

The percentage change in quantity demanded of one good divided by the percentage change in the price of another. Positive values suggest substitutes, negative values suggest complements, and zero suggests unrelated goods.

A curve relating a consumer's quantity demanded of a good to income, holding prices constant. Its slope reflects the income elasticity, and its shape distinguishes necessities from luxuries.

An inferior good for which the negative income effect dominates the substitution effect, so quantity demanded rises when price rises. It requires a large income share and few close substitutes.

A locus of consumption bundles giving a consumer equal utility. Curves are downward sloping, convex to the origin under diminishing marginal rate of substitution, and never intersect.

The rate at which a consumer will give up one good for one more unit of another while keeping utility constant. It equals the absolute slope of an indifference curve and the ratio of marginal utilities.

The set of consumption bundles a consumer can exactly afford given income and prices. Its slope equals the negative ratio of prices, and it shifts outward with income or rotates when a price changes.

The change in quantity demanded caused solely by a relative price change, holding utility constant. It is always negative for a price rise when preferences are convex and well behaved.

The change in quantity demanded caused by the change in purchasing power following a price change, holding relative prices constant. For normal goods it reinforces the substitution effect.

The additional satisfaction obtained from consuming one more unit of a good, holding other consumption constant. Diminishing marginal utility is typically assumed and drives the convexity of indifference curves.

As more of a variable input is added to fixed inputs, the marginal product of the variable input eventually falls. This short-run law underlies rising marginal cost.

How output responds when all inputs are scaled up proportionally. Increasing, constant, or decreasing returns occur as output rises more than, exactly, or less than proportionally in the long run.

A market structure with many price-taking firms selling a homogeneous product under free entry and exit. Firms earn zero economic profit in long-run equilibrium and price equals marginal cost.

A market with a single seller protected by barriers to entry, facing the downward-sloping market demand curve. The firm sets marginal revenue equal to marginal cost and charges a price above marginal cost.

The change in total revenue from selling one additional unit. For a price-taking firm it equals price; for a firm facing downward-sloping demand it is below price.

The increase in total cost from producing one additional unit, equal to the slope of the total cost curve. Profit is maximised where marginal cost equals marginal revenue.

The loss of total surplus arising when quantity traded differs from the efficient level, such as under monopoly or a tax. It equals the area between the demand and supply curves over the lost units.

The difference between what consumers are willing to pay and what they actually pay, summed over units bought. Graphically it is the area below demand and above price up to the quantity traded.

Charging different prices to different buyers for the same good for reasons unrelated to cost differences. It requires market power, separable markets, and limited resale, and can raise firm profit and output.

Goods that can replace each other in consumption, so a rise in the price of one raises demand for the other. Their cross-price elasticity of demand is positive.

Goods consumed together, so a rise in the price of one reduces demand for the other. Their cross-price elasticity of demand is negative, and they are often analysed as a joint demand.

The market value of all final goods and services produced within a country's borders in a given period. It excludes intermediate goods and transfer payments and can be measured by expenditure or income.

Nominal GDP is measured at current prices; real GDP is measured at constant base-year prices, removing the effect of inflation. The GDP deflator is nominal GDP divided by real GDP, times one hundred.

The accounting relation that total output equals the sum of consumption, investment, government spending, and net exports in an open economy. It underlies the circular flow of income.

The ratio of the change in equilibrium output to an initial change in autonomous spending. With a marginal propensity to consume c, the simple multiplier is 1/(1-c) in a closed economy.

The fraction of an extra unit of disposable income that households spend on consumption. It lies between zero and one and determines the size of the Keynesian multiplier.

The relationship between consumption expenditure and disposable income, often written as autonomous consumption plus the marginal propensity to consume times income. It underpins short-run Keynesian analysis.

A short-run framework where the IS curve shows goods-market equilibrium in income and interest rate, and the LM curve shows money-market equilibrium. Their intersection gives equilibrium output and interest rate.

The Keynesian theory that the interest rate is determined by money demand and supply. Money demand depends on income for transactions and on the interest rate for speculation.

The reduction in private investment caused by higher interest rates when government spending is financed by borrowing. It weakens the expansionary effect of fiscal policy.

A measure of the average price of a fixed basket of consumer goods relative to a base period. It is used to compute inflation and to adjust nominal values for changes in purchasing power.

A curve showing the short-run trade-off between inflation and unemployment. The long-run curve is vertical at the natural rate, so the trade-off disappears once expectations adjust.

The unemployment rate consistent with stable inflation, comprising frictional and structural unemployment. It is unaffected by demand policy in the long run.

An empirical relationship stating that each percentage point by which unemployment exceeds its natural rate is associated with roughly a two percent fall in output relative to potential GDP.

The ability to produce a good at a lower opportunity cost than a trading partner. It explains gains from specialisation and trade even when one country is absolutely more productive in everything.

The ratio at which exports exchange for imports, usually export prices divided by import prices. An improvement means a country gets more imports per unit of exports.

A systematic record of a country's transactions with the rest of the world, comprising the current account, capital and financial account, and reserve changes. Accounts must balance overall.