Economics Flash Cards

Front 1

Three basic economic questions

Back 1

What to produce?

How to produce?

For whom to produce?

Front 2

Microeconomics

Back 2

the study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of good, services, and factors of production.

Front 3

Macroeconomics

Back 3

the study of aggregate economic activity. It investigates how the economy as a whole works.

Front 4

Ceteris paribus

Back 4

all other things being held equal.

Front 5

Positive economics

Back 5

matters of economics that can be proven to be right or wrong by looking at the facts.

Front 6

Normative economics

Back 6

matters of economics that are based upon opinion and so are incapable of being proved to be right or wrong.

Front 7

Scarcity

Back 7

the limited availability of economic resources relative to society's unlimited demand for goods and services.

Front 8

Land

Back 8

the physical factor of production. It consists of natural resources, some of which are renewable (e.g. wheat) and some of which are non-renewable (e.g. iron ore).

Front 9

Labour

Back 9

the human factor of production. It is the physical and mental contribution of the existing work force to production.

Front 10

Capital

Back 10

the factor of production that comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).

Front 11

Entrepreneurship

Back 11

the factor of production involving organising and risk-taking.

Front 12

Opportunity cost

Back 12

is the next best alternative forgone when making an economic decision.

Front 13

Economic good

Back 13

a good or service which is relatively scarce and so has a price. An opportunity cost is involved if it is consumed.

Front 14

Free good

Back 14

goods or services which are unlimited in supply and have no opportunity cost are free goods. A free good has an unlimited supply at market price zero.

Front 15

Utility

Back 15

the satisfaction or pleasure that an individual derives from the consumption of a good or service.

Front 16

Actual output

Back 16

the actual production of goods and services in an economy in a given time period.

Front 17

Production possibilities curve*

Back 17

it shows the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Front 18

Actual growth

Back 18

this occurs when previously unemployed factors of production are brought in to use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC

Front 19

Potential growth

Back 19

this occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC.

Front 20

Economic growth

Back 20

the growth of real output in an economy over time. Usually measured as growth in real GDP.

Front 21

Economic development

Back 21

it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)

Front 22

Sustainable development

Back 22

development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.

Front 23

Planned economy (command economy)

Back 23

an economy where the means of production are collectively owned (except labour). The state determines how much to produce, how/how many to produce, and for whom to produce.

Front 24

Free market economy (market economy)

Back 24

an economy where the means of production are privately held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, and for whom to produce.

Front 25

Potential output

Back 25

the possible production that would be possible in an economy if all available factors were being employed.

Front 26

Transition economy

Back 26

an economy in the process of moving from a centrally planned economic system towards a more market-oriented economic system.

Front 27

Law of demand*

Back 27

as the price of a good falls, the quantity demanded will normally increase.

Front 28

Veblen goods (HL only)

Back 28

goods that are exceptions to the Law of Demand, where at high prices, as price rises, then so does demand. This is because the product achieves "snob value".

Front 29

Giffen goods (HL only)

Back 29

goods that are exceptions to the Law of Demand, where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand (e.g. potatoes in Ireland in the 19th century).

Front 30

Law of supply

Back 30

as the price of a good rises, the quantity supplied will normally rise.

Front 31

Equilibrium price*

Back 31

it is the market-clearing price. It is set where D = S.

Front 32

Supply *

Back 32

it is the willingness and ability of a producer to produce a quantity of a good or service at a given price (in a given time period).

Front 33

Demand *

Back 33

the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.

Front 34

Maximum price*

Back 34

a price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Front 35

Buffer stock scheme*

Back 35

a situation where a government intervenes in a market to stabilise prices by buying up surplus stock when prices would go too low or by supplying stock from a previously built up "buffer stock" when prices would go too high.

Front 36

Price elasticity of demand

Back 36

a measure of the responsiveness of the quantity demanded of a good or service when there is a change in its price.

Front 37

Elastic demand

Back 37

where a change in the price of a good or service leads to a greater than proportional change in the quantity demanded of the good or service. (PED would be greater than one.)

Front 38

Inelastic demand

Back 38

where a change in the price of a good or service leads to a less than proportional change in the quantity demanded of the good or service. (PED would be less than one.)

Front 39

Income elasticity

Back 39

it is a measure of the responsiveness of the demand for a good or service to a change in income.

Front 40

Cross price elasticity

Back 40

it is a measure of the responsiveness of the demand for one good or service to a change in the price of another good or service.

Front 41

Minimum price*

Back 41

a price imposed by an authority and set above the market price. Prices cannot fall below this price.

Front 42

Normal goods

Back 42

A good where the demand for it increases as income increases.

Front 43

Price elasticity of supply

Back 43

a measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.

Front 44

Elastic supply

Back 44

where a change in the price of a good or service leads to a greater than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Front 45

Inelastic supply

Back 45

where a change in the price of a good or service leads to a less than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Front 46

Flat rate tax (specific tax)

Back 46

an indirect tax where a specific amount, e.g. $1, is added to the selling price of each unit.

Front 47

Ad valorem

Back 47

an indirect tax where a percentage, e.g. 20%, is added to the
selling price of each unit.

Front 48

Indirect tax

Back 48

a tax on expenditure. It is added to the selling price of a good or service.

Front 49

Inferior goods

Back 49

A good where the demand for it decreases as income increases and more superior goods are purchased.

Front 50

Subsidy

Back 50

an amount of money paid by the government to a firm, per unit of output.

Front 51

Variable costs

Back 51

costs that vary with the level of output.

Front 52

Total costs

Back 52

the total costs of producing a certain level of output - fixed costs plus variable costs.

Front 53

Average cost

Back 53

it is the average (total) cost of production per unit, calculated by dividing the total cost by the quantity produced. It is equal to the average variable cost plus the average fixed cost.

Front 54

Economic cost

Back 54

is accounting cost plus opportunity cost.

Front 55

Short run

Back 55

the period of time in which at least one factor of production is fixed — the production stage.

Front 56

Marginal cost

Back 56

it is the additional cost of producing one more unit of output.

Front 57

Fixed costs

Back 57

costs that do not change with the level of output. They will be the same for one or one thousand units. (The cost of producing nothing.)

Front 58

Law of diminishing average returns

Back 58

as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish.

Front 59

Long run

Back 59

the period of time in which all factors of production are variable, but the state of technology is fixed — the planning stage.

Front 60

Economies of scale*

Back 60

they are a fall in long run unit (average) costs that come about as a result of a firm increasing its scale of production (output).

Front 61

Diseconomies of scale

Back 61

they are an increase in long run unit (average) costs that come about as a result of a firm increasing its scale of production (output).

Front 62

Average revenue

Back 62

total revenue received divided by the number of units sold. Usually, price is equal to average revenue.

Front 63

Marginal revenue

Back 63

the extra revenue gained form selling one more unit of a good or service.

Front 64

Total revenue

Back 64

the aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Front 65

Law of diminishing marginal returns

Back 65

as extra units of a variable factor are applied to a fixed factor, the output from each extra unit of the variable factor will eventually diminish.

Front 66

Normal profits

Back 66

it is the amount of revenue needed to cover the total costs of production, including the opportunity costs.

Front 67

Profit-maximising level of output*

Back 67

the level of output where marginal revenue is equal to marginal cost.

Front 68

Shut down price*

Back 68

the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run. Break even price* - the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.

Front 69

Allocative efficiency*

Back 69

the level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it.

Front 70

Productive efficiency*

Back 70

it exists when production is achieved at lowest cost per unit of output. This is achieved at the point where average total cost is at its lowest value.

Front 71

Perfect competition

Back 71

it is a market structure where there are a very large
number of small firms, producing identical products, that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

Front 72

Monopolistic competition

Back 72

it is a market structure where there are many buyers and sellers, producing differentiated products, with no barriers to entry or exit.

Front 73

Abnormal profits

Back 73

a level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (An amount of revenue greater than the total costs of production, including opportunity costs.)

Front 74

Product differentiation

Back 74

ways in which suppliers attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling, or packaging. It is a form of non-price competition.

Front 75

Collusive oligopoly

Back 75

where a few firms act together to avoid competition by resorting to agreements to fix prices or output in an oligopoly.

Front 76

Non-collusive oligopoly

Back 76

where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

Front 77

Cartel

Back 77

A group of firms in an industry that join together to fix prices. These are usually illegal in most countries,

Front 78

Barriers to entry

Back 78

obstacles in the way of potential newcomers to a market, such as economies of scale, product differentiation, and legal protection.

Front 79

Natural monopoly

Back 79

a situation where there are only enough economies of scale available in a market to support one firm.

Front 80

Monopoly

Back 80

a market form where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.

Front 81

Oligopoly

Back 81

it is a market structure where there are a few large firms that dominate the market. There are many different theories of oligopoly.

Front 82

Contestable market

Back 82

a market where new entrants face costs similar to those of established firms and where, on leaving, firms are able to get back their capital costs, less depreciation.

Front 83

Market failure

Back 83

the failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

Front 84

Positive externalities*

Back 84

they are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed.

Front 85

Negative externalities*

Back 85

they are the "bad" effects that are suffered by a third• party when a good or service is produced or consumed.

Front 86

Sustainable development

Back 86

it is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.

Front 87

Public goods

Back 87

goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-diminishability, e.g. flood barriers.

Front 88

Merit goods

Back 88

goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed.

Front 89

Price discrimination

Back 89

it occurs when a producer charges a different price to different customers for an identical good or service.

Front 90

Demerit goods

Back 90

goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.

Front 91

Circular flow of income*

Back 91

a simplified model of the economy that shows the flow of money through the economy.

Front 92

Gross national product

Back 92

the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

Front 93

Net national product

Back 93

GNP [the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit)] minus depreciation (capital consumption).

Front 94

Real GDP

Back 94

the total money value of all final goods and services produced in an economy in one year, adjusted for inflation.

Front 95

Per capita GDP

Back 95

the total money value of all final goods and services produced in an economy in one year per head of the population.

Front 96

Nominal GDP

Back 96

the total money value of all final goods and services produced in an economy in one year, not adjusted for inflation.

Front 97

Tradable permits

Back 97

they are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.

Front 98

Economic growth

Back 98

the growth of real output in an economy over time. Usually measured as growth in real GDP per capita.

Front 99

Human development index [HDI]

Back 99

a composite index that brings together measurements of health, education, and living standards in order to attempt to measure relative development. (Elements are life expectancy at birth, literacy rate, school enrolment rate, and GDP per capita [PPP US$])

Front 100

Aggregate demand*

Back 100

An explanation that aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Front 101

Consumption

Back 101

An explanation that it is spending by households on consumer goods and services over a period of time.

Front 102

Investment

Back 102

An explanation that it is the addition of capital stock to the economy or expenditure by firms on capital.

Front 103

Inflationary gap

Back 103

the situation where total spending (aggregate demand) is less than the full employment level of output, thus causing inflation.

Front 104

Deflationary gap

Back 104

the situation where total spending (aggregate demand) is
greater than the full employment level of output, thus causing unemployment.

Front 105

Economic development

Back 105

it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)

Front 106

Business cycle* (trade cycle)

Back 106

it shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages, depression (slump), recovery, boom, and recession.

Front 107

Fiscal policy

Back 107

a demand-side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment.

Front 108

Monetary policy

Back 108

a demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to inflation and unemployment.

Front 109

Aggregate supply*

Back 109

the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

Front 110

Short run aggregate supply (SRAS)

Back 110

aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.

Front 111

Supply-side policy

Back 111

government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy.

Front 112

Long run aggregate supply (LRAS)

Back 112

aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.

Front 113

Demand-side policy

Back 113

any government policy designed to influence the aggregate demand in the economy, thus affecting the average price level and real national output.

Front 114

Multiplier (HL only)

Back 114

the ratio of an induced change in the level of national income to an original change in one or more of the injections into the circular flow of income (i.e. investment, government spending, or export revenue).

Front 115

Crowding out (HL only)

Back 115

a situation where the government spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption,
3.5 (15)

Front 116

Unemployment

Back 116

An explanation that it is the number of people without a job, who are actively seeking work.

Front 117

Full employment

Back 117

exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work.

Front 118

Unemployment rate

Back 118

the number of unemployed workers expressed as a percentage of the total workforce.

Front 119

Underemployment

Back 119

exists when workers are carrying out jobs for which they are over-qualified, i.e. they are not using their full skills and abilities or when workers are employed part-time, even though they are available for full time employment or when workers in a planned economy are undertaking jobs that would not exist in a free market.

Front 120

Structural unemployment

Back 120

equilibrium unemployment that exists when in the long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. There is a mismatch between skills and the jobs available.

Front 121

Accelerator (HL only)

Back 121

the relationship between the level of induced investment and the rate of change of national income.

Front 122

Frictional unemployment

Back 122

equilibrium unemployment that exists when people have left a job and are in the process of searching for another job.

Front 123

Demand deficient / cyclical unemployment*

Back 123

disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this.

Front 124

Real wage unemployment*

Back 124

disequilibrium unemployment that exists when wages in the economy get pushed up above the equilibrium wage rate, either by the government or by trades unions.

Front 125

Inflation

Back 125

a sustained increase in the general (or average) level of prices and a fall in the value of money.

Front 126

Demand-pull inflation*

Back 126

inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.

Front 127

Cost-push inflation*

Back 127

inflation that is caused by an increase in the costs of production in an economy, i.e. a shift of the SRAS curve to the left.

Front 128

Deflation

Back 128

a persistent fall in the average level of prices in an economy.

Front 129

Seasonal unemployment

Back 129

equilibrium unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer.

Front 130

Phillips curve (HL only)*

Back 130

a curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment (short run Phillips curve). The long run Phillips curve shows the monetarist view that there is no trade off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.

Front 131

Direct taxation

Back 131

taxation imposed on people's income or wealth, and on firms' profits. It is sometimes known as unavoidable tax.

Front 132

Indirect taxation

Back 132

a tax on expenditure. It is added to the selling price of a good or service. It is sometimes known as avoidable tax.

Front 133

Progressive taxation

Back 133

a system of direct taxation where tax is levied at an increasing rate for successive bands of income. The marginal tax rate is higher than the average tax rate.

Front 134

Regressive taxation

Back 134

a system of taxation in which tax is levied at a decreasing average rate as income rises. This form of taxation takes a greater proportion of tax from the low-income taxpayer than from the high-income taxpayer. Proportional taxation — a system of taxation in which tax is levied at a constant rate as income rises, for example 10% of each increment of income as income rises.

Front 135

Transfer payments

Back 135

a payment received for which no good or service is exchanged, e.g. a student grant or a pension.

Front 136

Natural rate of unemployment (HL only)*

Back 136

the rate of unemployment that is consistent with a stable rate of inflation. It is the rate where the long run Phillips curve touches the x-axis.

Front 137

Non-Price Determinants of Demand

Back 137

Tastes

Number of Buyers

Price of other Goods

Income

Extectations

Hint 137

TB-PIE

Front 138

Non-Price Determinants of Supply

Back 138

Taxes / Subsidies

Price of other goods

Resources

Expectations

Number of Sellers

Technology

Hint 138

TP-RENT

Front 139

Determinants of the Price Elasticity of Demand

Back 139

Definition (Food vs McNuggets)

Luxury or Necessity (YED)

Income (YED)

Substitutes (XED)

Time Period (More elastic as time goes by)

Hint 139

D-LIST

Front 140

Determinants of the Price Elasticity of Supply

Back 140

Storage Possibilities

Time Period Considered

Rise in Price as Output rises

Unused Capacity

Mobility of the Factors

Hint 140

STRUM