Kerala Plus Two Economics (DHSE) flashcards

33 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 underlies the downward slope of the production possibility frontier and all scarcity-based decisions.

Production possibility frontier

A curve showing maximum combinations of two goods an economy can produce with given resources and technology. It is concave to the origin when marginal opportunity cost rises.

Marginal rate of substitution

The rate at which a consumer gives up one good to obtain an extra unit of another while staying on the same indifference curve. It equals the slope of the indifference curve.

Law of diminishing marginal utility

As a consumer takes more units of a good in a given period, the marginal utility of each additional unit falls. Total utility rises at a decreasing rate and peaks when marginal utility is zero.

Consumer equilibrium (indifference analysis)

The consumer reaches equilibrium where the budget line is tangent to the highest attainable indifference curve, so marginal rate of substitution equals the price ratio Px/Py.

Inferior good

A good whose demand falls when consumer income rises, other things equal. Its income elasticity of demand is negative, unlike a normal good.

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 may 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 and cuts average cost at its minimum.

Average fixed cost

Total fixed cost divided by output. It falls continuously as output rises because a constant numerator is spread over a larger quantity, and it equals the gap between AC and AVC.

Shut-down 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.

Break-even point

The output level where price equals minimum average cost, so total revenue equals total cost and the firm earns only normal profit, with zero economic profit.

Marginal revenue

The addition to total revenue from selling one more unit. Under perfect competition it equals price; under monopoly it lies below average revenue.

Price taker

A firm that must accept the market price because its own output cannot influence it. This is the position of every firm under perfect competition.

Monopoly equilibrium

The monopolist produces where marginal revenue equals marginal cost with MC rising. Price is then read off the demand curve and exceeds marginal cost.

Price ceiling

A legally imposed maximum price, usually below equilibrium. It creates excess demand, shortages, queues and black markets unless accompanied by rationing.

Price discrimination

Charging different prices to different buyers for the same good. It requires separable markets and prevention of resale between them.

Gross domestic product

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

GDP deflator

Nominal GDP divided by real GDP, multiplied by 100. It measures the change in the general price level of all domestically produced goods and services.

Value added

The value of output of a firm minus the value of intermediate goods used. Summing value added across all firms avoids double counting in national income.

Money multiplier

The ratio of total money supply to high-powered money. With a reserve ratio r, its simple value is 1/r, so deposits equal initial deposit times 1/r.

Cash reserve ratio

The share of net demand and time liabilities that banks must hold as cash with the Reserve Bank of India. A rise in it reduces credit creation.

Repo rate

The rate at which the central bank lends short-term funds to commercial banks against securities. Raising it makes credit costlier and contracts money supply.

Investment multiplier

The number by which a change in autonomous investment is multiplied to give the change in equilibrium income. It equals 1/(1 − MPC) or 1/MPS.

Marginal propensity to consume

The fraction of an extra rupee of income spent on consumption, equal to the change in consumption divided by the change in income. It lies between zero and one.

Deflationary gap

The shortfall of aggregate demand below the level needed for full employment. It causes unemployment and falling prices and calls for expansionary fiscal policy.

Fiscal deficit

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

Primary deficit

Fiscal deficit minus interest payments. It shows current borrowing needs excluding the burden of past debt and equals zero when borrowing only pays interest.

Revenue expenditure

Government spending that neither creates assets nor reduces liabilities, such as salaries, subsidies and interest payments. It is recurring in nature.

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 current and capital accounts.

Currency depreciation

A fall in the market value of a domestic currency in terms of foreign currency under a flexible rate. It makes exports cheaper and imports dearer.

Current account deficit

The excess of payments over receipts on trade in goods and services, income and transfers. It must be financed by capital inflows or by drawing down reserves.

Human development in Kerala

Kerala achieved high literacy, low infant mortality and low fertility at relatively low per capita income, showing that social policy can precede income growth.

1991 economic reforms

India's shift to liberalisation, privatisation and globalisation in 1991, including rupee devaluation, industrial delicensing and reduced trade restrictions after a balance of payments crisis.