MATSEC SEC 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. Because resources are scarce, every decision to produce or consume one thing means giving up something else.

Factors of production

The four resource categories used to produce goods and services: land (natural resources), labour (human effort), capital (man-made aids to production such as machinery) and enterprise (risk-taking and organising).

Production possibility frontier

A curve showing the maximum combinations of two goods an economy can produce with all resources fully and efficiently employed, given constant technology. Points outside the curve are unattainable.

Positive statement

A statement about what is or will be, which can be tested against evidence and shown true or false. Example: 'unemployment rose in 2023.' It contains no value judgement.

Normative statement

A statement about what ought to be, based on opinion or value judgement. It cannot be proved or disproved by data, for example 'the government should tax sugary drinks.'

Law of demand

The principle that, other things equal, quantity demanded falls as price rises and rises as price falls, producing a downward-sloping demand curve caused by income and substitution effects.

Shift in demand

A movement of the whole demand curve caused by a change in a non-price determinant such as income, tastes, population, advertising or the price of related goods, not by a change in the good's own price.

Substitute goods

Goods that can replace each other in use, such as tea and coffee. A rise in the price of one increases demand for the other, giving positive cross elasticity of demand.

Complementary goods

Goods consumed together, such as printers and ink cartridges. A rise in the price of one reduces demand for the other, giving negative cross elasticity of demand.

Market equilibrium

The price at which quantity demanded equals quantity supplied, so there is no tendency for price to change. Above it there is excess supply; below it there is excess demand.

Excess demand

A situation where quantity demanded exceeds quantity supplied at a price below equilibrium. The resulting shortage usually pushes the market price upwards toward equilibrium.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic if the value exceeds one, inelastic if below one, and unit elastic if equal to one.

Income elasticity of demand

Percentage change in quantity demanded divided by percentage change in income. Positive values indicate normal goods, negative values inferior goods, and values above one indicate luxuries.

Price elasticity of supply

Percentage change in quantity supplied divided by percentage change in price. Supply tends to be more elastic in the long run and when firms hold spare capacity or stock.

Price ceiling

A legal maximum price set below equilibrium, intended to protect consumers. It creates excess demand, shortages, queues and possible black markets unless accompanied by rationing.

Price floor

A legal minimum price set above equilibrium, such as an agricultural support price. It creates excess supply, so government may need to buy and store the surplus.

Indirect tax incidence

The division of a tax burden between buyers and sellers. The more inelastic demand is relative to supply, the larger the share of the tax passed on to consumers as higher prices.

Consumer surplus

The difference between what a consumer is willing to pay for a good and the price actually paid. On a demand and supply diagram it is the area below demand and above price.

Public good

A good that is non-rival and non-excludable, such as street lighting. Markets underprovide it because of the free-rider problem, so government usually finances it through taxation.

Merit good

A good with positive externalities or information failure, such as education or vaccination, which is underconsumed in a free market and may be subsidised or provided by government.

Demerit good

A good with negative externalities or information failure, such as tobacco, which is overconsumed in a free market and may be taxed, regulated or banned to reduce consumption.

Negative externality

A cost of production or consumption borne by third parties not involved in the transaction, such as pollution. It causes social cost to exceed private cost and leads to overproduction.

Gross domestic product

The total market value of final goods and services produced within a country in a period, usually a year. It measures output but excludes unpaid work and the informal economy.

Real versus nominal GDP

Nominal GDP is measured at current prices; real GDP is adjusted for inflation using a base year, so only real GDP shows changes in actual output over time.

Inflation

A sustained rise in the general price level, measured by the annual percentage change in a consumer price index. It reduces the purchasing power of money, especially for fixed-income earners.

Demand-pull inflation

Inflation caused by aggregate demand rising faster than productive capacity, often through higher consumer spending, investment, government spending or exports, pulling prices upwards.

Cost-push inflation

Inflation caused by rising costs of production, such as wage increases or higher imported raw material and energy prices, shifting aggregate supply left and raising the price level.

Unemployment rate

The number of unemployed persons expressed as a percentage of the labour force, where the labour force comprises the employed plus those actively seeking work.

Fiscal policy

Government use of taxation and public expenditure to influence aggregate demand, output and employment. Expansionary policy raises spending or cuts taxes; contractionary policy does the reverse.

Monetary policy

Central bank control of interest rates, money supply and credit conditions to influence aggregate demand and inflation. Higher interest rates usually reduce borrowing, spending and investment.

Balance of payments

A record of all economic transactions between a country and the rest of the world, comprising the current account, capital account and financial account, which must in principle balance overall.

Comparative advantage

The ability of a country to produce a good at a lower opportunity cost than another country, which is the basis for mutually beneficial specialisation and international trade.