Economics Paper 3 Formulas

Front 1

Explain what the x- and y-intercept on demand and supply function graphs represent

Back 1

X-intercept: the quantity demanded where price equals zero

Y-intercept: the price at which the quantity demanded becomes zero, all firms are driven out of the market

Front 2

PED

Back 2

percentage change in QD / percentage change in price

Front 3

YED

Back 3

percentage change in QD / percentage change in income

Front 4

XED

Back 4

percentage change in QD in good X / percentage change in price of good Y

Front 5

PES

Back 5

percentage change in QS / percentage change in price

Front 6

equation for QS after specific tax

Back 6

quantity x (price - value of tax)

Front 7

equation for QS after subsidy

Back 7

quantity x (price + subsidy)

Front 8

Total product

average product

marginal product

Back 8

total product: TP of n-1 + MP of the nth variable

average product: TP / no. of variable factors

marginal product: change in TP / change in no. of variable factors

Front 9

total cost

total fixed cost

total variable cost

Back 9

total cost: total fixed costs + total variable costs

total fixed cost: (number of fixed factors) x (cost)

total variable cost: (number of variable factors) x (cost)

Front 10

average fixed cost

average variable cost

average total cost

marginal cost

Back 10

AFC: TFC/output

AVC: TVC/output

ATC: TC/output

Marginal cost: change in TC / change in output

Front 11

total revenue

average revenue

marginal revenue

Back 11

TR = price x quantity

AR = TR/q = price

MR = change in TR / change in q

Front 12

shut-down price:

break-even price:

Back 12

shut-down: when AR = average variable cost

break-even: when AR = average total cost

Front 13

nominal GDP

real GDP

Back 13

nominal: C + I + G + (X-M)

real: (nominal / price index for that year) x 100

Front 14

multiplier:

Back 14

K = 1 / (1-MPC)

K = 1 / (MPS+MPT+MPM)

Front 15

unemployment rate

labour force

Back 15

unemployment: (number of unemployed / labour force) x 100

labour force: number of employed + number of unemployed

Front 16

weighted indices and inflation rate (3 steps)

Back 16

step 1: calculate total cost of basket

step 2: weighted price indices:

(cost of basket in the year considered / cost of basket in base year) x 100

step 3: inflation rate

(price index for year (t) - price index for the year before (t-1) / price index for the year before (t-1)) x100

Front 17

economic growth/growth rate

Back 17

((real GDP in year 2 - real GDP in year 1) / real GDP in year 1)) x 100

Front 18

average tax rate

marginal tax rate

Back 18

average: (total tax paid / income) x 100

marginal: (change in total tax paid / change in income) x 100

Front 19

comparative advantage:

opportunity cost of one unit of good A

Back 19

output of good B / output of good A

Front 20

balance of payments:

balance of trade in goods

balance of trade in services

net income flows

current account balance

Back 20

- (exports - imports of products)

- (exports - imports of services)

- net income receipts (income receipts - payments) - net current transfers

- current account balance (balance of trade in goods + balance of trade in services + net income flows

Front 21

terms of trade

Back 21

(index of average export prices / index of average import prices) x 100

Front 22

normal profit

Back 22

An economic condition occurring when the difference between firms total revenue and total cost is equal to zero, and hence it is the minimal profit needed for a firm to remain competitive.

Front 23

implicit vs explicit costs

Back 23

Explicit costs are the physical production costs that can be directly connected to a resource of production, such as wages, rent and materials. Implicit costs are the opportunity costs that arise when choosing to use a certain production method instead of the next best thing.

Front 24

freely floating exchange rates

Back 24

A floating exchange rate is a regime where the currency price is set by the forex market based on supply and demand compared with other currencies.

Front 25

exchange rate

Back 25

The price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly.

Front 26

Income elastic:

Back 26

Refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant.

Front 27

Terms of trade

Back 27

A term that represents the value of the exports of a county, relate to the value of its imports; the value is calculated by dividing the value of the exports by the imports.

Front 28

Current account

Back 28

The difference between a nation's savings and its investment. The current account is an important indicator about an economy’s health.

Front 29

Financial account

Back 29

A financial account is a component of a country’s balance of payments that covers claims on or liabilities to nonresidents, specifically with regard to financial assets.

Front 30

Consumer surplus

Back 30

An economic measure of consumer benefit, which is calculated by analysing the difference between what consumers are willing and able to pay for a good or service relative what they actually do spend on the good or service.

Front 31

Producer surplus

Back 31

An economic measure of the difference between the amount of a producer of a good receives and the minimum amount the producer is able and willing to accept for the good.

Front 32

Indirect tax

Back 32

A tax that is paid to the government by one entity in the supply chain, but it is passed on to the consumer as part of the price of a good or service.

Front 33

Allocative efficiency

Back 33

Occurs when there is an optimal distribution of goods and services, taking into account consumer’s preferences.

Front 34

Productive efficiency

Back 34

Is producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

Front 35

Unemployment

Back 35

That occurs when a person who is actively searching for employment is unable to find work.

Front 36

Satisficing

Back 36

A decision-making strategy that aims for a satisfactory or adequate result, rather than the optimal solution and is done when the optimal solution is too time consuming or resource expensive.

Front 37

Pros and cons of subsidies

Back 37

Pros: will protect a market or industry and can encourage innovationCons: can hurt other industries, can present opportunity costs

Front 38

Pros and cons of taxes

Back 38

Pros: can decrease income inequality, will raise government revenueCons: can lower innovation

Front 39

Green GDP

Back 39

An index of economic growth the environmental consequences of that growth factored in

Front 40

Nominal GDP

Back 40

Is GDP evaluated at current market prices, where GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

Front 41

real gdp

Back 41

An inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices.

Front 42

GNI

Back 42

The sum of a nation’s gross domestic product plus net income received from overseas, and measures income received by a country both domestically and from overseas.

Front 43

Non-collusive

Back 43

Non-collusive oligopolies occur when a few firms dominate the majority of the market share, and have the ability to influence the market prices of certain products. However, non-collusive suggests that these firms are in no way cooperating to maximise profits between themselves.

Front 44

Why aggregate demand has a negative slope

Back 44

The price levels drops, because at a lower price a higher quantity is demanded

This is because more people are willing and able to purchase products at a lower price

Front 45

Lorenz curve: how the Gini coefficient is calculated

Back 45

The ratio of the area under the lorenz curve to the area under the diagonal on a graph of the Lorenz curve. As gini coefficient rises closer to 1, society is less equal.

Front 46

Reasons for change in TOT

Back 46

Changes in the condition of demand and supplyChange in relative inflation rates

Front 47

Problems with calculating unemployment

Back 47

Hidden unemployment: when a person is not actively searching for work

Does not account for those who are underemployed; those who are only part-time workers for instance

Front 48

Pros and cons of trade protection

Back 48

Pros:

Protects domestic employment

Protects economy from low-cost labour

Prevent dumping

Cons:

May raise prices and limit choice for consumers

Competition would decrease

May hinder economic growth

Front 49

Factors that determine the PES of a product

Back 49

The availability of substitutes, if the sellers of the good can easily switch between various goods, the elasticity of supply will be high.

The length of the time period

Advancement in technology and skill of labour, could make it easier for producers to switch between products.