NSSCAS Economics (8246) flashcards

33 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 applies to individuals, firms and governments and underpins the shape of the production possibility curve.

Production possibility curve

A curve showing maximum combinations of two goods an economy can produce with given resources and technology. Points inside indicate inefficiency; outward shifts indicate growth.

Positive statement

A statement about what is, which can be tested against evidence. It is distinct from a normative statement, which expresses a value judgement about what ought to be.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Values above one in absolute terms indicate elastic demand; below one, 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; values above one indicate luxuries.

Cross elasticity of demand

Percentage change in quantity demanded of one good divided by percentage change in price of another. Positive values indicate substitutes; negative values indicate complements.

Market equilibrium

The price at which quantity demanded equals quantity supplied. At this price there is no shortage or surplus, and there is no tendency for price to change.

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 when all factors are variable.

Negative externality of production

A cost imposed on third parties by production, so marginal social cost exceeds marginal private cost. The free market overproduces relative to the social optimum.

Public good

A good that is non-rival and non-excludable, such as national defence. Because of the free-rider problem, markets tend to underprovide such goods.

Merit good

A good that is excludable but underconsumed because consumers underestimate its private benefit or lack information. Examples include education and healthcare.

Government failure

A situation where government intervention worsens allocative efficiency, through information gaps, administrative costs, unintended incentives or regulatory capture.

Marginal cost

The change in total cost resulting from producing one additional unit. Marginal cost intersects average cost at the minimum point of average cost.

Economies of scale

Falls in long-run average cost as output rises, arising from technical, managerial, financial, marketing and purchasing advantages. They shift the long-run average cost curve downward.

Perfect competition

A market with many firms, homogeneous products, free entry and exit, and perfect information. Firms are price takers, and long-run equilibrium occurs at minimum average cost.

Profit maximisation

The output level where marginal revenue equals marginal cost. At this point the difference between total revenue and total cost is greatest.

Allocative efficiency

The condition where price equals marginal cost, so the value consumers place on the last unit equals the cost of producing it. It maximises total welfare.

Gross domestic product

The total value of goods and services produced within a country's borders in a period. It can be measured by output, expenditure or income approaches.

Multiplier

The ratio of a change in equilibrium national income to the initial change in injections. It equals one divided by one minus the marginal propensity to consume.

Cyclical unemployment

Unemployment caused by a deficiency of aggregate demand during a downturn. It responds to expansionary monetary or fiscal policy, unlike structural unemployment.

Output gap

The difference between actual and potential GDP, expressed as a percentage of potential GDP. A negative gap indicates spare capacity and downward pressure on inflation.

Demand-pull inflation

Inflation caused by aggregate demand rising faster than productive capacity. It is associated with a positive output gap and tightening labour markets.

Money multiplier

The ratio of total bank deposits to the initial deposit, equal to one divided by the reserve ratio. It shows how banks create credit through lending.

Quantitative easing

Central bank purchases of financial assets with newly created money to lower long-term interest rates and raise aggregate demand when policy rates are near zero.

Lender of last resort

A central bank function of lending to solvent banks facing temporary liquidity shortages, preventing bank runs and systemic contagion in the financial system.

Fiscal deficit

The excess of government spending over tax revenue in a period. It must be financed by borrowing, which adds to national debt.

Automatic stabilisers

Features such as progressive taxes and welfare benefits that dampen the economic cycle without discretionary policy action, reducing the amplitude of booms and recessions.

Crowding out

A reduction in private investment caused by government borrowing raising interest rates. It weakens the expansionary effect of fiscal policy, especially near full employment.

Supply-side policy

Policies that raise potential output by improving the quantity or quality of factors of production, such as education, deregulation and labour market reform.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another country. Specialisation according to comparative advantage raises total world output.

Marshall-Lerner condition

A depreciation improves the current account only if the sum of the price elasticities of export and import demand exceeds one in absolute value.

J-curve

The pattern whereby a currency depreciation initially worsens the trade balance before improving it, because contracts and quantities adjust slowly.

Terms of trade

The ratio of a country's export price index to its import price index, multiplied by 100. A rise means a unit of exports buys more imports.