MATSEC IM Economics flashcards
MATSEC IM 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
- The value of the next-best alternative forgone when a choice is made. It arises because resources are scarce and can be used in competing ways.
- Production possibility frontier
- A curve showing the maximum combinations of two goods an economy can produce with given resources and technology. Points on it are efficient; points outside are unattainable.
- Law of demand
- Other things equal, as the price of a good rises, quantity demanded falls. This inverse relationship produces a downward-sloping demand curve.
- Movement along demand curve
- A change in quantity demanded caused solely by a change in the good's own price. It differs from a shift, which is caused by non-price factors.
- Shift in demand
- A change in demand at every price caused by non-price factors such as income, tastes, population, expectations, or prices of related goods.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied. At this price there is no tendency for price to change, and the market clears.
- Excess supply
- A situation where quantity supplied exceeds quantity demanded at a price above equilibrium. Unsold stock pushes the price downward toward equilibrium.
- Price elasticity of demand
- Percentage change in quantity demanded divided by percentage change in price. Values above 1 in absolute terms indicate elastic demand; below 1 indicates inelastic demand.
- Income elasticity of demand
- Percentage change in quantity demanded divided by percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.
- Price elasticity of supply
- Percentage change in quantity supplied divided by percentage change in price. Supply is more elastic when firms have spare capacity and time to adjust.
- Perfect competition
- A market with many small firms, a homogeneous product, free entry and exit, and perfect information. Firms are price takers earning only normal profit in the long run.
- Monopoly
- A market with a single seller protected by high barriers to entry. The firm faces downward-sloping demand and restricts output to raise price above marginal cost.
- Oligopoly
- A market dominated by a few interdependent firms. Each firm's decisions affect rivals, encouraging strategic behaviour such as price rigidity, collusion, or non-price competition.
- Profit maximisation rule
- A firm maximises profit at the output where marginal cost equals marginal revenue. If price falls below average variable cost, the firm minimises loss by shutting down.
- Negative externality
- A cost imposed on third parties not involved in a transaction, such as pollution. Marginal social cost exceeds marginal private cost, so the market overproduces.
- Public good
- A good that is non-rival and non-excludable, such as national defence. Markets underprovide it because of the free-rider problem.
- Merit good
- A good that is excludable but underconsumed because of information failure, such as education or vaccination. Governments subsidise or mandate it.
- Pigouvian tax
- A tax set equal to the marginal external cost of production. It internalises the externality, raising private cost to social cost and reducing output to the social optimum.
- Gross domestic product
- The total market value of final goods and services produced within a country's borders in a period. It excludes transfer payments and second-hand sales.
- Expenditure approach to GDP
- GDP calculated as consumption plus investment plus government spending plus exports minus imports. It sums final expenditure on domestically produced output.
- Real versus nominal GDP
- Nominal GDP uses current prices; real GDP is adjusted for price changes using a deflator. Real GDP measures changes in actual output.
- GDP deflator
- Nominal GDP divided by real GDP, multiplied by 100. It measures the price level of all domestically produced output, unlike the CPI basket.
- Consumer price index
- A weighted index of the cost of a representative basket of goods and services relative to a base year. Its percentage change measures inflation.
- Demand-pull inflation
- Inflation caused by aggregate demand growing faster than productive capacity. Excess demand allows firms to raise prices while output is constrained.
- Cost-push inflation
- Inflation caused by rising costs of production, such as wages, energy, or imported materials. Higher costs shift aggregate supply left, raising prices and reducing output.
- Structural unemployment
- Unemployment caused by a mismatch between workers' skills or locations and available jobs, often from technological change or deindustrialisation. It persists without retraining or relocation.
- Cyclical unemployment
- Unemployment caused by deficient aggregate demand during a recession. It falls when spending and output recover, unlike structural unemployment.
- Phillips curve
- A curve showing the short-run inverse relationship between inflation and unemployment. In the long run it is vertical at the natural rate of unemployment.
- Fiscal policy
- The use of government spending and taxation to influence aggregate demand, output, and employment. Expansionary policy raises spending or cuts taxes.
- Monetary policy
- Central bank control of interest rates or money supply to influence inflation and output. Higher rates reduce consumption, investment, and aggregate demand.
- Multiplier
- The ratio of the change in equilibrium income to the initial change in spending. In a simple model it equals 1 divided by one minus the marginal propensity to consume.
- Comparative advantage
- The ability to produce a good at lower opportunity cost than another country. Specialising according to comparative advantage raises total output and gains from trade.