Economics Flashcards
fundamental economic problem
scarce resources but unlimited wants; sometimes called the basic economic problem.
resources
inputs available for the production of goods and services.
wants
the goods and services that people may lkie to have but are not always realized.
scarcity
a situation in which wants and needs are greater than the resources available.
choice
resources are scarce so individuals, firms and governments have to consider alternatives.
factors of production
resources or inputs available in an economy that are used in the production of goods and services.
firm
any business that hires factors of production to produce goods and services.
opportunity cost
the cost expressed in terms of the next best alternative that is foregone when a choice is made.
the three important questions related to the fundamental economic problem
What to produce?
How to produce?
For whom to produce?
macroeconomics
the study of an economy or a group of economies
microeconomics
the study of individual markets (households and firms).
model
a simplified view of reality used to explain economic problems and issues.
positive statement
a statement that is based on facts or actual evidence.
normative statement
a statement that is based on the economist’s opinion or value judgement and which cannot be proven.
ceteris paribus
a Latin phrase meaning ‘other things equal’ or ‘other things are unchanged’; used by economists to model the effects of one change at a time.
short run
time period when a firm can change at least one but not all factor inputs.
long run
time period when all factors of production are variable but with a constant, such as the state of technology.
very long run
time period when all key inputs into production are variable.
entrepreneur
an individual who seeks out new business opportunities and is willing to take risks.
land
a factor of production; natural resources in an economy.
labour
a factor of production; human resources available in an economy.
low-income countries
economies where income per head was $1025 or less in 2018 (World Bank).
capital
a factor of production; a physical resource made by humans that aids the production of goods and services.
enterprise
as a factor of production, enterprise involves organizing production and taking risks.
physical capital
factors of production such as machinery, buildings and infrastructure.
economic growth
in the short run, an increase in a country’s output and, in the long run, an increase in a country’s productive potential.
lower middle-income countries
countries where income per head was between $1026 and $3995 in 2018 (World Bank).
human capital
the value of labor to the productive potential (future growth) of an economy.
specialization
the process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others.
division of labor
where a manufacturing process is split into a sequence of individual tasks.
high-income countries
economies where income per head was $12,376 or more in 2018 (World Bank).
middle-income economies
economies where income per head was between $1026 and $3995 (lower middle-income economies) and $3996 and $12,375 (upper middle-income economies) in 2018 (World Bank).
economic system
the way in which production is organized and choices are made in an economy.
market economy
an economic system where most decisions are taken through the market mechanism.
planned economy
an economic system where resources are state owned and allocated by a central body.
mixed economy
an economic system where both market forces and government are involved in resource allocation decisions.
market mechanism
resource allocation decisions are taken by individual producers and consumers with no government intervention; also known as price mechanism.
producitve resources
resources that are available to be used.
private sector
that part of an economy under private ownership
public sector
that part of an economy under government ownership
privatization
where there is a change in ownership from the public to the private sector.
emerging economy
one that is making quick progress towards becoming a high-income economy.
Asian Tiger economy
export-led, high growth economies in Asia.
production possibility curve (PPC)
a simple representation of the maximum level of output that an economy can achieve, given its current resources and state of technology; may be referred to as a production possibility frontier.
ways PPCs can be represented
Production possibility curves can be represented by a straight line as well as by a curve that is convex to the origin. When drawing a production possibility curve, remember to label both axes carefully. The axes are always labelled in terms of two goods.
trade-off
what is involved in deciding whether to give up one good for another good.
productive capacity
the maximum output that can be produced when all resources are used fully.
excludability
where it is possible to stop someone from consuming a good or service
rivalry
where consumption by one person of a good or service reduces the availability of the good or service for others.
non-rival
where consumption by one person does not reduce consumption by someone else.
private goods
goods that are consumed by one person and not available to anyone else.
free goods
goods that are not scarce and have zero opportunity cost.
pure public good
good which is both non-excludable and non-rival.
quasi-public good
good that has some but not the full characteristics of a public good.
free rider
someone who does not pay to use a public good.
merit good
a good that is thought to be desirable for consumers but which is underprovided by the market because of information failure.
demerit good
a good that is thought to be undesirable for consumers and is overprovided by the market because of information failure.
information failure
a situation where consumers do not have full complete information when making decisions.
price mechanism
the means of allocating resources in a market economy.
consumers
individuals or households who but goods and services for their own use or for others.
market
where buyers and sellers get together and trade.
demand
the quantity of a product that consumers are willing and able to buy at different prices per period of time other things equal, ceteris paribus.
supply
the quantity of a product that producers are willing and able to sell at different prices within a time period, other things equal, ceteris paribus.
supply chain
all the stages of a product’s progress from raw materials, production and distribution until it reaches the consumer.
notional demand
where buyers may want to buy a product but which is not always backed up by the ability to pay.
effective demand
demand that is supported by the ability to pay.
demand curve (D)
a line plotted on a graph that represents the relationship between the quantity demanded and the price of a product.
market demand
the total amount demanded by consumers.
demand schedule
the data from which a demand curve is drawn on a graph.
movement up and down (along) a demand curve
shows how quantity demanded responds to a change in price.
different between ‘quantity’ and ‘quantity demanded’
Demand refers to the whole demand schedule and does not change when the price of the product changes. A price change causes a change in the quantity demanded.
normal goods
where the quantity demanded increases as income increases.
inferior goods
where the quantity demanded increases as income decreases.
substitute
an alternative good.
complement
a good consumed with another.
joint demand
when two goods are consumed together.
Supply curve (S)
a line plotted on a graph that represents the relationship between the quantity supplied and the price of the product.
supply schedule
the data from which a supply curve is drawn on a graph.
subsidies
direct payments made by governments to producers of goods and services.
indirect tax
a tax levied on goods and services, such as a general sales tax.
extension of demand or supply
an increase in quantity demanded or quantity supplied.
contraction of demand or supply
a decrease in the quantity demanded or quantity supplied.
elasticity
a numerical measure of responsiveness of one variable following a change in another variable, ceteris paribus (with other conditions remaining the same).
elastic
where the relative change in the quantity demanded is greater than the change in price, income or the prices of substitutes and complements.
inelastic
where the relative change in the quantity demanded is less than the change in price, income or the prices of substitutes and complements.
price elasticity of demand (PED)
measures the responsiveness of the quantity demanded for a product following a change in the price of the product.
price elastic
when the relative change in the quantity demanded is greater than the change in the price of the product.
price inelastic
when the relative change in quantity demanded is less than the change in price of the product.
price elasticity of demand (PED) formula
PED = (% change in quantity demanded)/(% change in price).
perfectly inelastic
where a change in price has no effect on the quantity demanded.
when PED = 0 (the change in the quantity demanded is equal to zero).
perfectly elastic
where all that is produced is sold at a given price.
when PED = infinity (the change in the quantity demanded is equal to infinity).
unit elasticity
where the change in price is relatively the same as the change in the quantity demanded.
when PED = positive or negative 1 (the change in the quantity demanded and the change in the price of a particular product are directly proportional).
income elasticity of demand (YED)
measures the responsiveness of the quantity demanded for a product following a change in income.
income elasticity of demand (YED) formula
YED = (% change in quantity demanded)/(% change in income)
necessity good
a type of normal good with a YED that is close to zero
superior good
a good with a YED greater than 1
classification of goods in relation to income
For normal goods, YED is positive and expected to be between 0 and 1.
For inferior goods, YED is negative.
For necessary goods, YED is positive but is likely to be close to 0.
For superior/luxury goods, YED is positive and greater than one (looks less steep on Quantity and income graph - inverse of traditional cartesian graph for mathematics).
cross elasticity of demand (XED)
measures the responsiveness of the quantity demanded for one product following a change in price of another product.
cross elasticity of demand (XED) formula
XED = (% change in quantity demanded of product A)/(% change in the price of product B)
what cross elasticity of demand (XED) indicates about two goods
When XED is positive, the two goods being compared are substitutes. This is because the increase in price of one good causes the other good to experience an increase in demand. This means the two goods are competitive (think Coca Cola and Pepsi). Therefore, if one is cheaper, people will buy that good over the other.
When XED is negative, the two goods being compared are substitutes. This means the two goods are complements, and are often times used together (they are ‘jointly demanded’). For example, an increase in the cost of computers might cause a decrease in the demand of computer mice or keyboards (all goods that are necessary to be used together).
Price elasticity of supply (PES)
a numerical measure of the responsiveness of the quantity supplied to a change in the price of a product.
price elastic supply
the quantity supplied responds more than proportionately to a change in its price.
price inelastic supply
the quantity supplied responds less than proportionately to a change in its price.
price elasticity of supply (PES) formula
PES = (% change in quantity supplied)/(% change in price)
equilibrium
a situation where there is no tendency to change in a market.
disequilibrium
a situation where demand and supply are not equal in a market.
equilibrium price
the price where demand and supply are equal, where the market clears.
equilibrium quantity
the amount that is traded at the equilibrium price
changes in demand (or supply)
when there is a shift in the demand (supply) curve due to a change in factors other than the price of the product.
Causes (determinants) of shifts in the demand curve
- the income/ability to pay for a product
- the price and availability of substitutes and complements (related products)
- fashion, taste and attitudes
Causes (determinants) of shifts in the supply curve
- the costs associated with supplying the product
- changes in the prices of other products
- the size and nature of the industry
- government policy
excise duties
a specific tax that is levied on goods such as cigarettes.
ad valorem tax
a tax that is charged as a given percentage of the price.
The effect of time on changes in the market
It is a common misconception that a market responds immediately to a change in demand or supply. Time lag is an important factor when measuring demand and supply at a given point in time. The time lag period is usually a bit shorter when the market has recently experienced a change in demand compared to when it has experienced a change in supply.
derived demand
where the demand for a good or service depends upon the use that can be made from it.
joint supply
when two items are produced together
rationing
where a producer limits the supply of products in the market to ensure the products remain exclusive.
signalling
where decisions taken by buyers or sellers are determined by price.
transmission of preferences
the automatic way in which the market allows the wants of consumers to be made known by producers.
incentive
where low or high prices influence consumption and production by encouraging buyers to consume and sellers to produce.
consumer surplus
the difference between the price a consumer is willing to pay for a product and its market price.
producer surplus
the difference between the price a producer is willing to accept and what is actually paid.
market failure
when the free market does not make the best use of scarce resources.
incidence
the extent to which the tax burden is borne by the producer or the consumer or both (incidence of tax).
maximum price
a price that is fixed; the market price must not exceed this price; sometimes called a price ceiling (must be set below the original equilibrium price for it to be effective).
minimum price
a price that is fixed; the market price must not go below this price; sometimes called a price floor.
buffer stock scheme
a type of commodity agreement designed to limit price fluctuations.
wealth
a stock of assets that has been built up over time.
Gini coefficient
a numerical measure of income inequality.
informal economy
the part of the economy that is not regulated, protected or taxed by the government.
minimum wage
the least amount an employer can legally pay one of its workers; it is usually expressed as a wage rate per hour.
transfer payment
a payment made by the government to certain members of the community who may be unable to work or are in need of assistance.
progressive tax
one where the rate of taxation rises more than proportionately to the rise in income.
inheritance tax
progressive tax on an inheritance or gift.
capital tax
a progressive tax paid annually on the difference between the buying and selling price of an asset.
national income
a country’s total output.
national income statistics
measures of the total output (income and expenditure) of an economy.
gross domestic product (GDP)
the total output produced in a country.
gross national income (GNI)
GDP plus net income from abroad.
net property income from abroad
receipts of profit, rent and interest earned on the ownership of foreign assets minus the payments of profit, rent and interest to non-residents.
compensation of employees
income of workers who work in another country for a short period of time.
gross national disposable income
GNI plus net transfers of workers’ income to their relatives to and from other countries.
multinational companies (MNCs)
firms that operate in more than one country.
circular flow of income
a simplified view of how income flows around the economy.
output method
a wat of measuring GDP by calculating the total production of goods and services of the country.
value added
the differences between the price at which products are sold and the price of goods and services used in their production.
income method
a way of measuring GDP by totaling all the incomes earned in producing the country’s output.
expenditure method
a way of calculating GDP by totaling all the spending on the country’s output.
market prices
prices paid by consumers; they take into account indirect taxes and subsidies.
basic prices
prices charged by producers before the addition of indirect taxes and the deduction of subsidies.
gross investment
total spending on capital goods.
net domestic product (NDP)
GDP minus depreciation.
net national income (NNI)
gross national income (GNI) minus depreciation.
net investment
additions to the capital stock.
depreciation (of capital goods)
the value of capital goods that have worn out or become out-of-date.
open economy
an economy that is involved in trade with other economies.
closed economy
an economy that does not trade with other economies.
injections
additions to the circular flow of income.
leakages
withdrawals from the circular flow of income.
Relationship between leakages and injections with respect to time
An injection will cause GDP to increase until, after a time, leakages will rise to match the higher total injections.
aggregate demand (AD)
the total demand for an economy’s goods and services at a given price level in a given time period.
consumer expenditure
spending by households on goods and services.
Aggregate demand (AD) formula
Aggregate Demand (AD) = Consumer expenditure (C) + Investment (I) + Government spending (G) + Net exports (X - M);
dissaving
consumer expenditure exceeds income, with people or countries drawing on past savings, or borrowing.
saving
income minus consumption.
investment
spending on capital goods.
government spending
the total of local and national government expenditure on goods and services.
net exports
exports minus imports.
exchange rate
the price of one currency in terms of another currency.
