Praxis 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 best alternative forgone when a choice is made. It includes implicit costs such as forgone wages and excludes sunk costs, which cannot be recovered.

Production possibilities frontier

A curve showing maximum combinations of two goods producible with given resources and technology. Points on the curve are efficient, inside are inefficient, and outside are unattainable.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer. Specialization according to comparative advantage raises total output even when one producer has absolute advantage in both goods.

Marginal analysis

Comparing the additional benefit of one more unit with its additional cost. An activity should expand while marginal benefit exceeds marginal cost and stop where the two are equal.

Ceteris paribus

A Latin phrase meaning all other things held constant. It lets economists isolate the effect of one variable, such as price, on quantity demanded without confounding influences.

Positive versus normative economics

Positive statements are factual, testable claims about what is. Normative statements express value judgments about what ought to be and cannot be settled by data alone.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one and inelastic when it is below one.

Total revenue test

A way to infer elasticity: if raising price lowers total revenue, demand is elastic; if raising price raises total revenue, demand is inelastic.

Profit-maximizing rule

Firms maximize profit by producing where marginal revenue equals marginal cost. If price exceeds average total cost the firm earns economic profit; if price is below average variable cost it shuts down.

Price ceiling

A legal maximum price set below equilibrium, which creates a shortage, reduces quantity supplied, and requires rationing or queues. Rent control is a common example.

Price floor

A legal minimum price set above equilibrium, which creates a surplus. The minimum wage is a common example, producing surplus labor or unemployment when binding.

Deadweight loss

The loss of total surplus when quantity traded departs from the efficient level, caused by taxes, monopoly pricing, price controls, or externalities.

Negative externality

A cost imposed on third parties not reflected in market price, such as pollution. Marginal social cost exceeds marginal private cost, so the market overproduces relative to the efficient quantity.

Public good

A good that is nonrival in consumption and nonexcludable, such as national defense. Markets undersupply it because of free riding, so government provision is common.

Gini coefficient

A measure of income inequality ranging from zero for perfect equality to one for perfect inequality. It is derived from the area between the Lorenz curve and the equality line.

Gross domestic product

The market value of all final goods and services produced within a country's borders in a period. It equals consumption plus investment plus government spending plus net exports.

Real versus nominal GDP

Nominal GDP uses current prices; real GDP uses base-year prices to remove inflation's effect. Real GDP equals nominal GDP divided by the price index, times 100.

Unemployment rate

The number of unemployed persons divided by the labor force, times 100. Discouraged workers who stop searching leave the labor force and understate true joblessness.

Natural rate of unemployment

The unemployment rate consistent with full employment, consisting of frictional and structural unemployment but no cyclical unemployment. It shifts with labor-market institutions and demographics.

Consumer price index

A measure of the price of a fixed basket of consumer goods relative to a base year, used to estimate inflation and adjust wages and benefits for changes in the cost of living.

Expansionary monetary policy

Central-bank action to increase the money supply, such as buying bonds or lowering the policy rate. It lowers interest rates and shifts aggregate demand right to fight recession.

Spending multiplier

The ratio of the change in equilibrium output to an initial change in spending, equal to one divided by one minus the marginal propensity to consume.

Crowding out

The reduction in private investment when government borrowing raises interest rates. It weakens the effect of expansionary fiscal policy, especially when the economy is near full employment.

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, so there is no permanent trade-off.

Balance of payments

An accounting record of a country's transactions with the world, comprising the current account, the financial and capital accounts, and a statistical discrepancy; the accounts sum to zero.

Currency depreciation

A fall in a currency's value under floating rates. It makes exports cheaper and imports more expensive abroad, tending to improve the trade balance after a lag.

Terms of trade

The rate at which one country's exports exchange for imports. Mutually beneficial trade requires terms between the two countries' domestic opportunity costs.

Tariff

A tax on imported goods that raises the domestic price, reduces imports, and generates revenue, while creating deadweight loss from distorted consumption and production.

Import quota

A limit on the quantity of a good that may be imported. It raises domestic price like a tariff but transfers the resulting scarcity rent to license holders rather than the government.

Purchasing power parity

The theory that exchange rates adjust so identical baskets of goods cost the same across countries. It explains long-run exchange-rate movements better than short-run ones.

Human Development Index

A composite measure of development combining income per capita, education, and life expectancy. It broadens development beyond output to include health and knowledge.

Total factor productivity

The portion of output growth not explained by growth in capital and labor inputs. It reflects technology, efficiency, and institutional quality and is a key driver of long-run growth.