PSEB SS Economics flashcards

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

Law of Diminishing Marginal Utility

As a consumer takes more units of a good in a given period, the extra satisfaction from each additional unit falls, while total utility keeps rising until marginal utility becomes zero.

Consumer Equilibrium (Two Goods)

A consumer is in equilibrium when MUx/Px = MUy/Py and the entire budget is spent, so satisfaction cannot be raised by reallocating expenditure between the two goods.

Indifference Curve

A curve showing all combinations of two goods that give a consumer the same level of satisfaction. It slopes downward, is convex to the origin, and curves never intersect.

Budget Line

The set of all combinations of two goods a consumer can buy by spending the entire income at given prices, written as Px·X + Py·Y = M with slope −Px/Py.

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price, computed as (ΔQ/ΔP)×(P/Q). It is greater than one for elastic demand.

Cross Price Elasticity

The percentage change in demand for one good divided by the percentage change in the price of another good. It is positive for substitutes and negative for complements.

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 eventually becomes negative.

Total, Average, Marginal Product

Total product is output from all units of a variable input; average product is TP divided by input; marginal product is the change in TP from one extra unit.

Returns to Scale

The response of output when all inputs are increased in the same proportion. Increasing, constant, or decreasing returns occur as output rises more than, equally, or less than proportionately.

Isoquant

A curve showing all combinations of two inputs that produce the same level of output. Its slope, the marginal rate of technical substitution, equals MPL divided by MPK.

Producer Equilibrium (Isocost)

A producer minimises cost for a given output where the isoquant is tangent to the isocost line, that is, where MPL/w equals MPK/r.

Marginal Cost

The addition to total cost from producing one more unit, equal to ΔTC/ΔQ. It cuts both average variable cost and average total cost at their minimum points.

Average Fixed Cost

Total fixed cost divided by output. It falls continuously as output rises because a constant numerator is spread over more units, and it never reaches zero.

Profit Maximisation Condition

A firm maximises profit where marginal revenue equals marginal cost and marginal cost is rising. At that output, the gap between total revenue and total cost is largest.

Shutdown Point

The output where price equals minimum average variable cost. Below this price a competitive firm loses less by stopping production than by continuing to pay variable costs.

Elasticity of Supply

The percentage change in quantity supplied divided by the percentage change in price, calculated as (ΔQ/ΔP)×(P/Q). It is always positive because supply rises with price.

Perfect Competition

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

Monopoly Equilibrium

A monopolist produces where marginal revenue equals marginal cost, then charges the price read from the demand curve, so price exceeds marginal cost and output is restricted.

Monopolistic Competition

A market with many sellers offering differentiated products and free entry. Short-run supernormal profits attract new firms until long-run profits fall to normal.

Price Ceiling

A maximum price fixed below the equilibrium price. It creates excess demand, shortage, and often queues or black markets because quantity supplied falls.

Price Floor

A minimum price fixed above the equilibrium price. It creates excess supply and surplus output, which the government may have to buy to support producers.

Gross Domestic Product

The market value of all final goods and services produced within a country's domestic territory during a year, counted without intermediate goods to avoid double counting.

National Income

Net national product at factor cost: GDP at market prices minus depreciation, minus indirect taxes, plus subsidies, plus net factor income from abroad.

Value Added Method

A method of measuring GDP that sums gross value added by all producing units, where value added equals value of output minus intermediate consumption.

Expenditure Method

A method that adds private consumption, investment, government spending, and net exports to obtain GDP at market prices, counting only final expenditures.

GDP Deflator

A price index equal to nominal GDP divided by real GDP, multiplied by one hundred. It measures inflation across all domestically produced goods and services.

Money Multiplier

The total credit created from a given reserve, equal to one divided by the reserve ratio. A lower cash reserve ratio raises the multiplier and expands deposits.

Fiscal Deficit

Total government expenditure minus total receipts excluding borrowings. It shows how much the government must borrow and is financed by borrowing or money creation.

Revenue Deficit

Revenue expenditure minus revenue receipts. It measures the shortfall in meeting routine spending from taxes and other non-debt receipts, signalling dissaving by government.

Repo Rate

The rate at which the central bank lends short-term funds to commercial banks against securities. Raising it tightens credit and lowers inflation.

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 the current and capital accounts.

Currency Depreciation

A fall in the value of a currency under a market-determined exchange rate, making exports cheaper and imports dearer, which can improve the trade balance.

Managed Floating

An exchange rate system where the market determines the rate but the central bank intervenes to smooth excessive volatility without fixing a target rate.