Econ definitions Flashcards
Absolute poverty
Inability to afford basic necessities, not enough money
Relative poverty
A comparison of the standard of living of a person with another
Actual production
Utilization of already available resources in an economy that were not being put in use before. This can be shows by a movement within the PPC curve towards a point closer to the curve
Production potential
When the quantity or quality of resources improves. Shown by shift to the right of the PPC curve
Ad valorem tax
Tax based on the value of a product. The more expensive a product is, the higher the ad valorem tax
Specific tax
This is when the tax amount per unit is a fixed amount. Based on the number of units purchased.
Asymmetric information
When one of the parties in a transaction has more information than the other.
Moral hazard
Change in behaviour after agreement. Between buyer and seller
Devaluation and depreciation of currency
Devaluation is due to government actions while depreciation is due to market forces
Direct taxes
Tax directly paid to the government. Tax on income
Indirect taxes
Taxes applied on consumer expenditure
Economic growth
Increase in real output of an economy
Economic development
Improvement of quality of life and well being of citizens in an economy. Increase in literacy rate and life expectancy
Economies of scale
Decrease in average cost per unit in the long run due to expansion of a business. Benefits of business expansion
Increasing return to scale
When percentage change in output exceeds the percentage change in inputs
Equality
When everyone receives the same outcome/income
Equity
The fair ratio of reward and effort
Free goods
Resources that are not scarce and do not have an economic cost attached to them. e.g. sunshine
Economic goods
Goods that are desirable and scarce. Examples include: public, private, merit and demerit goods.
Free trade area
Area where trade barrier are completely abolished for its members. Allows them to independently decide tariffs for non-members
Custom union
Not only removes all trade barriers for members but also maintains a uniform tariff policy for non members
Government borrowing
Borrowing that is needed to finance a budget deficit
National debt
Rising public sector borrowings raise national debt and the decision of the government to repay loans reduces it.
Inflation
Persistent increase in general price levels. Price levels rise when there is positive inflation
Disinflation
Fall in inflation rate. Price levels still rise but at a slower rate
Deflation
Negative inflation rate. Price levels fall
Internal value of money
The purchasing power of money to buy goods and services. It reduces when inflation rises
External value of money
This is the exchange rate. How much foreign currency can be purchased with a given amount of national currency.
Kinked demand curve
Assumes that the decision of a firm to raise its prices is not matched by its competitors, leading to a proportionately larger fall in its quantity demanded. Firms choosing to raise prices face a flatter price elastic demand curve.
However, decision to reduce prices is followed by competitors, leading to price inelastic demand. Demand curve is kinked at the point of initial price and quantity.
Kuznets curve
Shows relationship between per capita income and income inequality. According to the curve, a rise in per capita income initially raises income inequalities, but eventually income inequalities begin to fall
Laffer curve
Increase in tax rates initially raises tax revenues, but eventually tax receipts begin to fall. High tax rates reduce incentive to work and also lead to tax evasion.
Lorenz curve
Graphical representation of income or wealth inequality. The further the Lorenz curve is from the line of equity (45 degree line). The greater would be the Gini coefficient and income disparities
Liquidity trap
Very low interest rates and high savings
Poverty trap
Situation where benefits of rising income are offset by the removal of means tested benefits, leaving the person no better off
Market equilibrium
When demand equals supply with no tendency to change in equilibrium price and quantity
Consumer equilibrium
When a consumer maximizes his total utility by equating the marginal utility per dollar for the last units of all commodities
Normal goods
Goods whose demand rises with income
inferior goods
Goods whose demand falls when income rises
Necessities
Demand does not change much with income. Price inelastic
Primary income
Income earned from providing factor services in other countries. e.g wages, rent, interest payments and dividends
Productivity
Ratio of output produced and inputs employed
Profitability
The ratio of profits and sales or capital employed
Private goods
Goods that are excludable and rivalrous
Functions of money
Medium of exchange
Store of value
Unit of value
Standard for deferred payments
Real income
Purchasing power
Disposable income
Income minus direct taxes
Secondary income
Payment received from another country. Not used for production purposes. e.g. pensions and donations
Social cost
Sum of private and external costs of an economic transaction.
External cost
Costs affecting people outside economic activity
Tax rate
Ratio of tax amount and income. It is progressive when tax rate rises with income, proportionate when tax rate does not change with income and regressive when tax rate falls when income rises
Terms of trade
The ratio of average export price and average import price
Balance of trade
Difference between exports and imports of goods
Trade deficit
When exports of goods fall short of their imports
Budget deficit
When government expenditure exceeds tax revenues
Current account deficit
When inflows from exports of goods and services, factor incomes and net transfers fall short of outflows for the same.
Transfer payments
Payments that have no relation to production activity. Examples include pensions and unemployment allowances
Universal benefits
Medical care, public schooling and pensions. These are unconditional and given to everyone, irrespective of their income.
Means tested benefits
Given to individuals and families on the basis of their income and resources. These benefits are gradually withdrawn when income rises.
X-efficiency
The degree of efficiency maintained by firms in imperfect markets (little competition). It is the difference between actual efficiency and potential efficiency
Dynamic efficiency
Involves improving efficiency over time. Achieved by developing new/better products or by discovering better production techniques.
