Kerala Plus Two Economics (DHSE) key terms

The value of the next best alternative given up when a choice is made. Because resources are scarce, every decision to produce or consume one thing means sacrificing something else.

The situation in which available resources are limited relative to the unlimited wants of people. Scarcity forces individuals and economies to choose among alternatives.

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

The additional satisfaction obtained from consuming one more unit of a good. It generally falls as consumption of the good increases over a short period.

As a consumer takes more units of a good in a given period, the extra satisfaction from each additional unit becomes smaller. This explains the downward-sloping demand curve.

A curve showing all combinations of two goods that give a consumer the same level of satisfaction. The consumer is indifferent among points on the same curve.

The rate at which a consumer is willing to give up one good to obtain one more unit of another while keeping satisfaction unchanged. It equals the slope of an indifference curve.

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 ratio of the two prices.

The combination of goods at which a consumer maximises satisfaction subject to income and prices. With indifference curves it occurs where the budget line is tangent to the highest attainable curve.

Other things remaining constant, quantity demanded of a good falls when its price rises and rises when its price falls. This inverse relation gives a downward-sloping demand curve.

The percentage change in quantity demanded divided by the percentage change in price. It measures how responsive demand is to price changes along a demand curve.

A good whose demand increases when consumer income rises. Most goods are normal, in contrast with inferior goods, whose demand falls as income rises.

The technological relationship showing the maximum output obtainable from given quantities of inputs. It may be described in the short run with one variable input or in the long run with all inputs variable.

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

The behaviour of output when all inputs are increased in the same proportion in the long run. Output may rise more than proportionately, proportionately, or less than proportionately.

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 is not affected by fixed costs.

Total cost divided by the number of units produced. It is the sum of average fixed cost and average variable cost and is U-shaped in the short run.

A market structure with many buyers and sellers, a homogeneous product, free entry and exit, and perfect information. Each firm is a price taker facing a horizontal demand curve.

The addition to total revenue from selling one more unit of output. Under perfect competition price equals marginal revenue, while a monopolist's marginal revenue is below price.

The output level at which the difference between total revenue and total cost is greatest. This occurs where marginal revenue equals marginal cost and marginal cost is rising.

The output level at which price equals minimum average variable cost. Below this price a competitive firm stops production in the short run because it cannot cover variable costs.

The rising part of the marginal cost curve above minimum average variable cost. It shows the quantity a competitive firm offers at each price in the short run.

A market with a single seller of a product having no close substitutes and with strong barriers to entry. The firm is a price maker facing the market demand curve.

Charging different prices to different buyers for the same good when resale is not possible. A monopolist uses it to capture more consumer surplus and raise profit.

A market with many sellers offering differentiated products and free entry and exit. Each firm has some price-setting power because its product is slightly different from rivals'.

A legally fixed maximum price, set below the equilibrium price to protect consumers. It creates excess demand, shortages, and often black-market sales.

A legally fixed minimum price, set above the equilibrium price to support producers. It creates excess supply, so the government may have to buy the surplus.

The market value of all final goods and services produced within a country's domestic territory during a year. It counts only final output to avoid double counting.

The sum of factor incomes earned by normal residents of a country in a year. It is also called net national product at factor cost.

A way of measuring national income by summing the value added at each stage of production. Value added equals the value of output minus intermediate consumption.

The ratio of total money supply to the monetary base, showing how much deposits the banking system creates from each unit of reserves. It depends on the reserve ratio and currency held by the public.

The process by which commercial banks expand deposits by lending out a fraction of the deposits they receive. The size of expansion depends on the reserve ratio.

The proportion of net demand and time liabilities that banks must keep as cash reserves with the central bank. Raising it reduces the funds available for lending.

The rate at which the central bank lends short-term funds to commercial banks against securities. Changing it is a key tool of monetary policy.

The number by which an initial change in autonomous spending is multiplied to give the final change in income. It equals one divided by one minus the marginal propensity to consume.

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

The excess of total government expenditure over total receipts excluding borrowings. It measures how much the government must borrow to finance its spending.

The excess of revenue expenditure over revenue receipts of the government. It indicates that current spending is not covered by current income, such as taxes and fees.

A systematic record of all economic transactions between residents of a country and the rest of the world in a year. It has a current account and a capital account.

The price of one currency expressed in terms of another. It is determined by demand for and supply of foreign exchange in a floating system or fixed by the central bank.

A fall in the value of a country's currency in terms of foreign currencies under a floating exchange rate. It makes exports cheaper and imports dearer.

A composite measure of development combining life expectancy, education, and per capita income. It is used to compare welfare across countries beyond income alone.

A pattern of high social development, shown by literacy, health, and low fertility, achieved at relatively low per capita income. It reflects strong public action in education and health.

The policy changes that liberalised, privatised, and globalised the Indian economy after a balance of payments crisis. Licensing was reduced and trade and investment opened up.