MATSEC AM Economics flashcards
MATSEC AM Economics · Build recall with a focused review session.
32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Opportunity cost
- Opportunity cost is the value of the next-best alternative forgone when a choice is made; it includes explicit money costs and implicit costs such as time or forgone income.
- Production possibility frontier
- A production possibility frontier shows the maximum combinations of two goods an economy can produce with given resources and technology; points on the curve are efficient and outside points are unattainable.
- Law of demand
- The law of demand states that, ceteris paribus, quantity demanded falls as price rises and rises as price falls; income, tastes, related prices, and expectations shift the demand curve.
- Price elasticity of demand
- Price elasticity of demand measures responsiveness of quantity demanded to price: percentage change in quantity demanded divided by percentage change in price; absolute values above one are elastic.
- Income elasticity of demand
- Income elasticity of demand is percentage change in quantity demanded divided by percentage change in income; it is positive for normal goods and negative for inferior goods.
- Price ceiling
- A price ceiling is a legal maximum price; if set below equilibrium it binds, creating excess demand, shortages, queues, and deadweight loss, while a ceiling above equilibrium has no effect.
- Negative externality
- A negative externality is an uncompensated cost imposed on third parties, such as pollution; the private market overproduces the good because marginal social cost exceeds marginal private cost.
- Marginal rate of substitution
- The marginal rate of substitution is the amount of one good a consumer will give up for one more unit of another while keeping utility constant; it equals the slope of an indifference curve.
- Budget constraint
- A budget constraint shows combinations of goods a consumer can afford given income and prices; its equation is PxX plus PyY equals I, with slope minus Px divided by Py.
- Consumer surplus
- Consumer surplus is the difference between what consumers are willing to pay and what they actually pay; graphically it is the area below demand and above market price.
- Law of diminishing returns
- The law of diminishing returns states that adding more of a variable input to fixed inputs eventually lowers marginal product, because each extra worker adds less output than the previous one.
- Marginal cost
- Marginal cost is the change in total cost from producing one more unit, calculated as change in total cost divided by change in output; it crosses average total cost at its minimum.
- Economies of scale
- Economies of scale occur when long-run average cost falls as output rises, due to specialisation, bulk buying, or spreading fixed costs; they end at minimum efficient scale.
- Perfect competition
- Perfect competition is a market with many price-taking firms, homogeneous products, free entry and exit, and perfect information; in long-run equilibrium price equals minimum average total cost.
- Monopoly
- A monopoly is a market with one seller protected by barriers to entry; it faces downward-sloping demand, sets output where marginal cost equals marginal revenue, and charges price above marginal cost.
- Monopolistic competition
- Monopolistic competition has many firms selling differentiated products with free entry; short-run profits attract entry, and long-run equilibrium has price equal to average total cost and zero economic profit.
- Oligopoly
- An oligopoly is a market dominated by a few interdependent firms; each firm's best strategy depends on rivals' actions, so game theory, collusion, and strategic behaviour are central.
- Price discrimination
- Price discrimination sells the same product to different buyers at different prices; it requires market power, separable markets with different elasticities, and no resale between markets.
- Allocative efficiency
- Allocative efficiency occurs when resources are allocated so that marginal benefit equals marginal cost; in a market this means price equals marginal cost, maximising total consumer plus producer surplus.
- GDP expenditure identity
- The GDP expenditure identity is GDP equals consumption plus investment plus government spending plus exports minus imports; it measures final output produced within a country during a period.
- Real versus nominal GDP
- Nominal GDP values output at current prices, while real GDP values it at constant base-period prices; real GDP changes only when quantities change, so it is used to measure growth.
- CPI inflation rate
- The CPI inflation rate is the percentage change in the consumer price index, which tracks the cost of a weighted basket of goods and services bought by a typical household.
- Unemployment rate
- The unemployment rate is the number of unemployed people divided by the labour force, multiplied by one hundred; the labour force includes employed plus unemployed people actively seeking work.
- Fiscal multiplier
- The fiscal multiplier is the change in equilibrium national income caused by a change in government spending or taxes; in a simple closed economy it equals one divided by one minus the marginal propensity to consume.
- Expansionary monetary policy
- Expansionary monetary policy raises the money supply or lowers policy interest rates; it aims to increase investment and consumption, shifting aggregate demand right, but may worsen inflation.
- Phillips curve
- The Phillips curve shows the short-run inverse relationship between inflation and unemployment; it shifts with expectations and supply shocks, and in the long run is vertical at the natural rate.
- Balance of payments
- The balance of payments records all transactions between residents and non-residents; the current account plus capital account plus financial account plus errors and omissions sums to zero.
- Comparative advantage
- Comparative advantage exists when a country can produce a good at a lower opportunity cost than another country; specialisation according to comparative advantage raises total output and allows gains from trade.
- Exchange rate appreciation
- Exchange rate appreciation is a rise in a currency's value against another currency; it makes exports dearer abroad and imports cheaper at home, reducing net exports if other things are equal.
- Marshall-Lerner condition
- The Marshall-Lerner condition states that currency depreciation improves the trade balance only if the sum of absolute price elasticities of export demand and import demand exceeds one.
- Euro area membership
- Euro area membership means a country uses the euro and its monetary policy is set by the European Central Bank; Malta adopted the euro in 2008 and therefore has no independent interest-rate policy.
- Small open economy
- A small open economy trades a large share of its output and takes world prices as given; it is highly exposed to external demand, import prices, and global financial conditions.