NCEA Level 3 Economics cheat sheet

Opportunity cost: the value of the next best alternative forgone when a choice is made; on a PPC, it equals the slope magnitude between two points.

Production possibility curve (PPC): shows maximum combinations of two goods producible with given resources and technology; points inside are inefficient, outside unattainable, on the curve productively efficient.

Law of diminishing marginal returns: as more of a variable input is added to fixed inputs, marginal product eventually falls, making the PPC bow outward (increasing opportunity cost).

Circular flow model: households supply factors of production to firms and receive income; firms produce goods/services sold to households; injections (I, G, X) and withdrawals (S, T, M) affect equilibrium national income.

Equilibrium national income occurs where aggregate expenditure (AE = C + I + G + X - M) equals output (Y); the multiplier k = 1/(1 - MPC) or 1/(MPS + MPT + MPM) in an open economy with taxation.

Positive economics is objective and testable (cause-effect statements); normative economics involves value judgments and policy prescriptions.

Ceteris paribus: all other influences held constant; used to isolate the effect of one variable in economic models.

Real vs nominal values: real values are adjusted for inflation (nominal/price index × 100); real GDP per capita = real GDP / population.

Demand curve slopes downward (law of demand); supply curve slopes upward (law of supply); equilibrium price and quantity occur at intersection.

Price elasticity of demand (PED) = %Δ quantity demanded / %Δ price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic; total revenue rises with price cut if elastic.

Price elasticity of supply (PES) = %Δ quantity supplied / %Δ price; PES > 1 elastic (long run), < 1 inelastic (short run).

Income elasticity of demand (YED) = %Δ Qd / %Δ income; positive for normal goods, negative for inferior goods; >1 luxury.

Cross elasticity of demand (XED) = %Δ Qd of good A / %Δ price of good B; positive for substitutes, negative for complements.

Consumer surplus = area below demand curve and above price; producer surplus = area above supply curve and below price; total surplus maximised at competitive equilibrium.

Deadweight loss arises from market failure (e.g., taxes, monopoly, externalities); a tax drives a wedge between price paid and received, reducing quantity traded.

Externality: a cost or benefit to third parties not reflected in market price; negative externality (e.g., pollution) causes overproduction; positive externality (e.g., education) causes underproduction; government can use taxes, subsidies, regulation, or tradable permits.

GDP = C + I + G + (X - M); real GDP growth rate = (real GDP_t - real GDP_{t-1}) / real GDP_{t-1} × 100.

Inflation rate = (CPI_t - CPI_{t-1}) / CPI_{t-1} × 100; CPI measures price change of a fixed basket of goods and services.

Demand-pull inflation: caused by excess aggregate demand; cost-push inflation: caused by rising costs of production (e.g., wages, oil).

Unemployment rate = (unemployed / labour force) × 100; labour force = employed + unemployed (actively seeking work).

Types of unemployment: frictional (between jobs), structural (skills mismatch), cyclical (demand-deficient), seasonal.

Phillips curve: short-run inverse relationship between inflation and unemployment; long-run vertical at natural rate of unemployment (NAIRU).

Okun's law: a 1% rise in unemployment is associated with roughly 2% fall in GDP relative to potential (rule of thumb).

Business cycle: expansion, peak, contraction (recession), trough; potential output grows with productivity and labour force.

Fiscal policy: government use of spending (G) and taxation (T) to influence aggregate demand; expansionary (G↑, T↓) to close recessionary gap, contractionary (G↓, T↑) to reduce inflationary pressure.

Monetary policy: central bank sets official cash rate (OCR) to influence interest rates, aggregate demand, and inflation; inflation targeting typically 1-3% over medium term.

Transmission mechanism: OCR → short-term interest rates → exchange rate, spending, investment → aggregate demand → inflation.

Supply-side policies: aim to increase productive capacity (e.g., education, infrastructure, deregulation); shift LRAS right, reducing inflationary pressure.

Balance of payments: current account (goods, services, income, transfers) + capital and financial account = 0 (with statistical discrepancy).

Exchange rate: appreciation (higher value) makes exports dearer and imports cheaper, reducing net exports (X-M); depreciation has opposite effect.

Terms of trade = (index of export prices / index of import prices) × 100; improvement means exports buy more imports.

Trade protection: tariffs (tax on imports), quotas (quantity limit), subsidies to domestic producers; reduce imports, raise domestic price, create deadweight loss.