NCEA L2 Economics 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 resource is used for one purpose rather than another. It exists because resources are scarce relative to unlimited wants.

Scarcity

The condition where limited resources cannot satisfy all wants. Scarcity forces choices, and every choice generates an opportunity cost for individuals, firms and government.

Production possibility frontier

A curve showing maximum combinations of two goods an economy can produce with given resources and technology. Points on the curve are efficient; points inside are inefficient.

Law of demand

Ceteris paribus, as the price of a good rises, quantity demanded falls, and as price falls, quantity demanded rises. The demand curve slopes downward.

Demand curve shift

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

Law of supply

Ceteris paribus, as the price of a good rises, quantity supplied rises, because higher prices raise potential profit and attract more producers into the market.

Market equilibrium

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

Price elasticity of demand

The responsiveness of quantity demanded to a price change, calculated as percentage change in quantity demanded divided by percentage change in price. Values above one are elastic.

Substitute goods

Goods that can replace each other for the same purpose. A rise in the price of one increases demand for the other, shifting its demand curve to the right.

Complementary goods

Goods consumed together, such as cars and petrol. A rise in the price of one reduces demand for the other, shifting its demand curve to the left.

Circular flow model

A model showing flows of money, goods, services and factors of production between households and firms, including government, financial and overseas sectors, in factor and product markets.

Real versus nominal GDP

Nominal GDP is measured at current prices; real GDP adjusts for inflation, so changes in real GDP reflect changes in actual output rather than price changes.

Inflation

A sustained increase in the general price level over time, usually measured by the percentage change in the consumers price index (CPI) between periods.

Unemployment rate

The number of unemployed people divided by the labour force, expressed as a percentage. The labour force includes employed plus unemployed people actively seeking work.

Economic growth

An increase in a country's real GDP over time, reflecting greater output. Growth can come from more resources, better technology or improved productivity.

Positive statement

A statement about what is or will be, which can be tested against evidence. It is factual and does not include value judgements about what should happen.

Normative statement

A statement about what ought to be, based on values or opinions. It cannot be proved or disproved purely by data because it involves a judgement.

Ceteris paribus

A Latin phrase meaning all other things held constant. Economists use it to isolate the effect of one variable, such as price, on quantity demanded or supplied.

Consumer surplus

The difference between what consumers are willing to pay for a good and what they actually pay. It is represented by the area above price and below the demand curve.

Producer surplus

The difference between the price producers receive and the minimum price they would accept. It is shown by the area below price and above the supply curve.

Deadweight loss

The loss of total surplus when a market is not at equilibrium, for example due to a tax, subsidy, price control or monopoly, meaning some mutually beneficial trades do not occur.

Price ceiling

A maximum legal price set below equilibrium, creating a shortage. It protects consumers from high prices but can cause queues, rationing or black markets.

Price floor

A minimum legal price set above equilibrium, creating a surplus. Examples include minimum wages, which may raise incomes but reduce quantity of labour demanded.

Indirect tax incidence

The sharing of a tax burden between buyers and sellers. The side with more inelastic curves bears more of the burden, shown by smaller quantity change.

Subsidy

A government payment to producers that lowers production costs, shifting supply right, lowering price and increasing quantity traded, often to encourage consumption or production.

Externality

A cost or benefit from production or consumption that falls on third parties not involved in the transaction, such as pollution or vaccination benefits, causing market failure.

Public good

A good that is non-rival and non-excludable, such as national defence. Markets underprovide these goods because people can free-ride on others' payment.

Merit good

A good considered beneficial to society, such as education or healthcare, which may be underconsumed in a free market due to information gaps or positive externalities.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer. Specialising according to comparative advantage increases total output and gains from trade.

Terms of trade

The ratio of export prices to import prices, usually expressed as an index. An improvement means a country can buy more imports per unit of exports.

Exchange rate depreciation

A fall in the value of one currency against another. It makes exports cheaper and imports dearer, which can raise export demand and worsen import costs.

Balance of payments

A record of all transactions between residents of a country and the rest of the world, comprising the current account and the capital and financial accounts.

Fiscal policy

Government use of taxation and spending to influence the economy. Expansionary fiscal policy raises spending or cuts taxes to stimulate demand and growth.