Karnataka II PUC Economics (KSEAB) flashcards

32 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 instead of another. It arises because resources are scarce and have alternative uses.

Production possibility frontier

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

Marginal opportunity cost

The amount of one good sacrificed to produce one more unit of another good. Rising MOC along a PPF explains why the frontier is concave to the origin.

Central problems of an economy

The three allocation questions every economy faces: what to produce and in what quantities, how to produce, and for whom to produce. Distribution of output is the third.

Microeconomics

The branch of economics that studies the behaviour of individual economic units such as a single consumer, a single firm or one market, using price as the coordinating signal.

Positive versus normative economics

Positive economics describes and explains what is, and its statements can be tested against facts. Normative economics judges what ought to be and involves value judgements.

Total utility

The total satisfaction obtained from consuming a given quantity of a commodity. It is the sum of the marginal utilities of all units consumed and rises while marginal utility is positive.

Law of diminishing marginal utility

As a consumer takes more units of a commodity in a given period, the additional satisfaction from each successive unit falls, other consumption remaining unchanged.

Consumer's equilibrium: one commodity

A consumer buying one good is in equilibrium when marginal utility in money terms equals its price, that is MUx divided by Px equals marginal utility of money.

Law of equi-marginal utility

A consumer with limited income maximises total satisfaction by spending so that the marginal utility per rupee is equal for every good purchased, that is MUx/Px = MUy/Py.

Indifference curve

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

Marginal rate of substitution

The rate at which a consumer gives up units of one good to obtain one more unit of another while keeping satisfaction constant. It diminishes along a convex indifference curve.

Budget line

The locus of all combinations of two goods a consumer can buy by spending the whole income at given prices, written PxX + PyY = M, with slope minus Px/Py.

Law of demand

Other things remaining constant, quantity demanded of a commodity rises when its price falls and falls when its price rises, giving an inverse price-quantity relationship.

Movement along demand curve

A change in quantity demanded caused only by a change in the commodity's own price, shown as a slide along a given demand curve, not a shift of the curve.

Shift in demand curve

A change in demand at every price caused by factors other than own price, such as income, tastes, prices of related goods or population, moving the whole curve.

Law of variable proportions

In the short run, as more units of a variable factor are applied to fixed factors, marginal product first rises, then falls, and finally becomes negative.

Average product

Total product divided by the number of units of the variable input employed, that is AP = TP/L. It is maximum where marginal product equals average product.

Returns to scale

A long-run concept describing how output responds when all inputs are increased in the same proportion: increasing, constant or decreasing returns to scale.

Fixed and variable costs

Fixed costs do not vary with output, such as rent on a factory. Variable costs change with output, such as raw material and casual labour. TC = TFC + TVC.

Marginal cost

The addition to total cost from producing one more unit, MC = change in TC divided by change in output. MC cuts both AVC and AC at their minimum points.

Average fixed cost

Total fixed cost divided by output, AFC = TFC/Q. It falls continuously as output rises because a constant numerator is spread over more units.

Law of supply

Other things remaining constant, quantity supplied of a commodity rises when its price rises and falls when its price falls, giving an upward-sloping supply curve.

Elasticity of supply

The percentage change in quantity supplied divided by the percentage change in price. It is zero for perfectly inelastic supply and infinite for perfectly elastic supply.

Perfect competition

A market with very many buyers and sellers, a homogeneous product, free entry and exit, and perfect knowledge, so each firm is a price taker facing a horizontal demand curve.

Monopoly

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

Monopolistic competition

A market with many sellers of differentiated products, free entry and exit, and heavy selling costs such as advertising, giving each firm limited control over its price.

Oligopoly

A market dominated by a few large firms whose decisions are interdependent; a price change by one firm provokes reactions from rivals, often making prices rigid.

Profit-maximising condition

A firm maximises profit at the output where marginal revenue equals marginal cost, provided marginal cost is rising at that point. This holds in every market form.

Shut-down point

The output at which price equals minimum average variable cost. Below this price a competitive firm stops production in the short run, losing only its fixed costs.

Market equilibrium

The price at which quantity demanded equals quantity supplied. Excess demand at a lower price pushes price up; excess supply at a higher price pushes price down.

Price ceiling

A maximum price fixed by government below the equilibrium price. It creates excess demand, shortages, rationing and often black marketing in the market.