GCE A/L Economics 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 choice is made; it exists because resources are scarce and have alternative uses.

Production possibility frontier

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed, given existing technology.

Positive statement

A statement about what is or will be, based on evidence and capable of being tested against facts; it contains no value judgement.

Division of labour

Breaking production into separate tasks performed by different workers, raising output per worker through specialisation but risking boredom, low morale and mutual dependence.

Price elasticity of demand

The responsiveness of quantity demanded to a change in price, measured as the percentage change in quantity demanded divided by the percentage change in price.

Income elasticity of demand

The responsiveness of demand to a change in income; positive for normal goods, negative for inferior goods and greater than one for luxuries.

Cross elasticity of demand

The responsiveness of demand for one good to a change in the price of another good; positive for substitutes and negative for complements.

Price ceiling

A maximum price set below the equilibrium level, causing excess demand, queues, rationing and black markets, and reducing the quantity supplied.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay, shown as the area below the demand curve and above the price line.

Law of diminishing returns

In the short run, as more of a variable factor is added to fixed factors, marginal product eventually falls, which raises marginal cost.

Economies of scale

Falls in long-run average cost as output rises, arising from specialisation, bulk buying, cheaper finance and the indivisibility of capital equipment.

Profit maximisation rule

A firm maximises profit where marginal cost equals marginal revenue; if price falls below average variable cost, shutting down minimises losses.

Allocative efficiency

Achieved where price equals marginal cost, so the value consumers place on the last unit equals its cost of production and there is no deadweight loss.

Monopolistic competition

Many firms selling differentiated products with low entry barriers; each faces a downward-sloping demand curve and earns only normal profit in long-run equilibrium.

Negative externality

A cost of production or consumption borne by third parties and not reflected in the market price, so marginal social cost exceeds marginal private cost.

Public good

A good that is non-rival and non-excludable, so markets underprovide it because of free-riding; national defence is the standard example.

Merit good

A good whose consumption is judged socially beneficial and which is under-consumed because of information failure, justifying subsidy, regulation or direct provision.

Pigouvian tax

A tax equal to the marginal external cost of production, designed to internalise a negative externality and move output toward the social optimum.

Government failure

A situation where government intervention worsens resource allocation through information gaps, administrative costs, unintended consequences or distortion of incentives.

Real GDP

The value of output produced in an economy over a period, adjusted for inflation using a price index, so changes reflect changes in quantity.

Demand-pull inflation

Inflation caused by aggregate demand growing faster than the economy's productive capacity, pulling up prices especially when output is near full employment.

Structural unemployment

Unemployment caused by a mismatch between the skills or location of workers and the jobs available, often following technological change or industrial decline.

Money multiplier

The ratio of the change in bank deposits to the change in reserves, equal to one divided by the reserve ratio in a simple banking model.

Fiscal policy

The use of government taxation and spending to influence aggregate demand, output and employment, and to redistribute income.

Monetary policy

Central bank control of interest rates, the money supply or credit conditions to influence aggregate demand and meet an inflation target.

Supply-side policy

Measures that raise the productive capacity of the economy, such as education, deregulation, privatisation and labour market reform, shifting long-run aggregate supply.

Automatic stabiliser

A feature of the budget that dampens the economic cycle without new decisions: tax revenue falls and welfare spending rises during a downturn.

Crowding out

A fall in private investment caused by government borrowing, either by raising interest rates or by using resources that the private sector would have employed.

Comparative advantage

A country has it in a good when it produces that good at a lower opportunity cost than a trading partner, so specialisation raises total output.

Terms of trade

The ratio of a country's export prices to its import prices, usually expressed as an index; a rise means a unit of exports buys more imports.

Marshall-Lerner condition

A devaluation improves the current account only if the sum of the price elasticities of export demand and import demand exceeds one.

J-curve

The tendency of the current account to worsen immediately after a depreciation before improving, because quantities adjust more slowly than prices.