Economics Flashcards
Allocative Efficiency
Consumer valuation is equal to the economic cost. Occurs when Price=Marginal Cost. P>MC more should be produced. P
Productive Efficiency
Combination of capital and labour in the most effective way, minimising their ATC. Producing at an output that coincides with the lowest point of a firm
EOS Definition
The benefits to a firm of operating at an increased scale of production leading to reductions in average total cost.
X-Efficiency
The need to be able to control the costs of the firm.
Internal EofS
Economies of scale that arise within the firm as a result of growth, resulting in lower long run average costs. Moves AC down.
External EofS
Economies of scale that arise from the growth of an industry and benefits firms within the industry, resulting in lower long run average costs. Moves AC down
LDMR
As each unit of a variable factor is increased to a fixed factor, output increases at first, then it will decrease and become negative, due to the restraints of that factor.
Marginal Product
The change in total product from employing one more variable factor.
MRP
Change in a firms revenue from employing one more worker.
Pecuniary Factors
Wage rate and the opportunity of bonus’s and working overtime.
Lorenz Curve / Gini coefficient Definition
Illustrates the extent of income and wealth inequality in a society. Gini used to make international comparisons.
Lorenz Curve Explain
Percentage of income Y axis
Percentage of population X axis
Shows how far from being perfectly equal, not straight lower groups don’t earn as much. Governments can use progressive taxation and amount of benefits paid.
Circular Flow Definition
The flow of goods/services and income between producers/firms and households/consumers.
Leakages (Expenditure):
The outflow from the circular flow of income. Imports, taxation, savings.
Injections (Income):
When people spend money on goods/services money is put into the economy. Government spending, Exports, Investment. Expenditure of people into the economy.
Expenditure Method
C + I + G + ( X - M )
Cyclical Unemployment
Demand deficient - Less demand for firms products, labour isn’t required. Loss in growth of economy.
Structural Unemployment
Immobility of labour
Occupational - Loss of skills from the changing of industry
Geographical - Don’t move to find work
Aggregate Demand
Total spending on domestic output at a given time.
Automatic Stabilisers
Forms of government spending and taxation that dampen down the affects of fluctuations without government policy changes.
Cost Push Inflation
Increases in the average price levels as a result of increases in the cost of production.
Demand Pull Inflation
Increases in the average price level resulting from excessive increases in aggregate demand.
Economic Growth
The growth in the value of output in the economy.
Expansionary Monetary Policy
Changes in the money supply (increase), rate of interest (cut) and exchange rate (lower) which are designed to stimulate aggregate demand.
Fiscal Drag
The reduction in disposable income that occurs when tax bands are not in line with inflation.
Fiscal Policy
A governments policy in regards to taxation, public spending. It can be loose/expansionary or tight/deflationary.
GDP
The total value of goods and services produced by a country based in an economy.
Multiplier
An increase in the levels of injections in the circular flow of which increases aggregate demand.
1 / (1 – mpc(1 - t))
Production Possibility curve
The allocation of resources between two products in production, given current resources and state of technology.
Consumer Surplus
The difference between the price a consumer is willing and able to pay and the price that is required to make the purchase.
PED
The responsiveness of quantity demanded given a change in price. % change in quantity / % change in price.
Normal Good
Goods for which an increase in income leads to an increase in demand.
Inferior Good
Goods for which an increase in income leads to a decrease in demand.
YED
The responsiveness of demand given a change in income. % change in quantity / % change in income.
XED
The repsonsiveness of quantity demanded of one good given a change in price of another. % change in demand for good 1 / % change in price of good 2.
Producer Surplus
The difference in price a producer receives for a good / service and the actual price they are willing to accept for the good/service.
Economic Problem
The need to make choices regarding the allocation of limited and finite resources amongst infinite and competing wants.
Giffen Good
Higher price increases demand, increase in demand is due to the income effect of the higher price outweighing the substitution effect. Can’t buy other goods.
Veblen Good
Demand rises as price rises, attribute it with quality
Complementary Goods
Goods for there is joint demand.
Substitute Good
Competing goods.
Income Effect
Price change effects consumer income. If price rises, it cuts disposable income and lower demand.
Substitution Effect
An increase in the price encourages consumers to buy alternative goods. Measures how much the higher price encourages use of other goods, assuming same income
Philips Curve
Relationship between inflation and unemployment
Classical reject, Keynesian support
Okuns Law
As unemployment increases production decreases
Classical Economics
Long run aggregate supply curve is inelastic
Real GDP effected supply side, investment/productivity
Increase AD only cause inflation
Laffer Curve
Determines optimal tax rate, until a point people willing to to pay a certain rate, after people seek to reduce tax liability or not work because money will go to governmen
Reserve Ratio
The amount banks keep in liquid reserve i.e cash
1/RRR
