Key definitions Flashcards
Creative destruction
Schumpeter’s name for the process by which firms using old technology that are unable to adapt are swept away by the new as they can no longer compete
Marginal Product
the additional amount of output produced if the factor input is increased by 1
Diminishing Marginal Product
as the factor input increases by one, there is a smaller output produced than the previous factor input increase by one.
Marginal return
The marginal return of a factor is the extra output derived per extra unit of factor employed
The law of diminishing returns
the variable factor could be increased in the short-run (e.g. the firm employs more labour). Over time, the labour will become less productive due to the constraints of the fixed factor (e.g capital) so the marginal return of employing extra labour drops.
This is why the short-run costs curve is a U-shape
Increasing returns to scale
refers to when output increases by a greater proportion to the increase in inputs. Linked to economies of scale and a lower average cost/unit
Okun’s Law
Okun’s Coefficient
Okun’s Law: that growth of GDP is negatively correlated with the rate of unemployment.
Okun’s Coefficient: the change in unemployment rate in percentage points predicted to be associated with a 1% change in GDP.
Short-run Economic Growth
Definition: when unemployed resources are used to maximise factors of production (on a PPF, where a point approaches the curve/AD shifts right/expansion along AD due to e.g SRAS shifts right).
Long-run Economic Growth
Definition: an increase in the quantity/quality of the factors of production (makes PPF curve shift outwards/makes LRAS shift to the right).
Income effect
The income effect refers to the change in quantity demanded of a good/service resulting from a change in a consumer’s real income/purchasing power
Substitution effect
The substitution effect is the change in consumer behaviour when the price of a good changes relative to other goods, causing consumers to switch towards or away from it.
- Minimising Unemployment (define unemployment rate)
Unemployment rate: the % of people in the labour force without a job but registered as being willing and available for work
- Price stability (define inflation)
Inflation: ‘the rate of change of average prices in an economy - as measured by the consumer price index (CPI)
- Stable balance of payments on current account
This measures the UK’s record of economic activities with other countries (imports and exports)
if imports > exports: deficit
if exports > imports: surplus
- Balanced Government Budget
Ensured the government keeps control of state borrowing (when total spending = total receipts) - so the national debt doesn’t escalate
- Equitable (equal) distribution of income
Income and wealth should be distributed equitably so the gap between the rich and poor doesn’t escalate. Associated with a fairer society
Market Failure
Market failure occurs whenever a market leads to a misallocation of resources
Welfare
Welfare refers to the overall well-being and quality of life of individuals or society as a whole.
Free Market
where the forces of supply and demand determine prices and resource allocation with minimal/none government intervention
Public Goods
Public goods are products/services that have 2 main characteristics: non-excludability and non-rival
- Non - excludability: means that it’s not possible to prevent people from using the good once it’s provided. For example, once a lighthouse is built, its light is available to all ships passing by, regardless of whether they contributed to its construction.
- Non-rivalry: implies that one person’s consumption of a good doesn’t reduce its availability to others. For instance, someone benefitting from a street light doesn’t diminish the amount of light another person could use.
Private Goods
They are rival and excludable e,g a chocolate bar. Property rights allow it to be yours and can only be consumed by you.
Free rider problem
when individuals can benefit from a good/service without paying their fair share of it.
The Tragedy of Commons
The Tragedy of Commons describes how individuals prioritise gain over the well-being of society
Fiscal Policy
Changes in taxes or government in order to stabilise the economy
Austerity
A set of policies the government introduces in order to control the national budget.
Phillips Curve
An inverse relationship between the rate of inflation and unemployment rate - dips slightly below the x-axis.
Invisible hand game
A game where the dominant strategy equilibrium leads to the highest payoffs for each player. Guided by ‘an invisible hand.’
Demonstrates how individual self-interest can lead to socially beneficial outcomes in a free market economy.
Prisoners’ dilemna
A game where the payoffs of the dominant strategy equilibrium are actually less than the payoffs if neither player decided to play their dominant strategy.
The ultimatum game
The ultimatum game involved 2 players, the proposer and the responder.
The proposer is given a sum of money and has to decide an amount to split with the proposer. The proposer can either:
agree to the split
reject and neither gets the money
When you add more than one responder, the split goes lower due to the increased competition.
Nash Equilibria
The best response given other players’ strategies, where no player has an incentive to deviate unilaterally.
In economic interactions, there is often not a dominant strategy equilibrium therefore we use the Nash equilibrium to predict the outcome.
Gini Coefficient
A measure of inequality of any variable such as income or wealth, varying from a value of zero (where there is no inequality) to one (if a single individual receives all of it).
GC = A/A+B
Lorenz Curve
A graphical indication of what income inequality looks like for a country.
y-axis: cumulative % of income
x-axis: cumulative % of population
Line through origin: perfect equality
Budget Deficit
Difference between government revenue and government spending
Marginal Utility
The extra benefit gained from consuming an additional good
The Law of Diminishing Marginal Utility
States that the marginal utility drops after the quantity keeps increasing.
abatement
Practices to limit or reverse environmental damages
PED formula
PED = %Change in Demand / %Change in Price
YED formula
% change in quantity demanded / % change in income
XED Formula
% change in quantity demanded of Good X / % change in price of Good Y
Accelerator effect
It states that a rise in GDP will lead to a proportionately larger increase in investment (as they want to meet future anticipated demand)
The multiplier effect
The multiplier effect occurs when an intial injection into the economy (circular flow of income) causes a proportionally larger final increase in the level of real national output
Marginal Propensity (MPC and MPS)
MPC: Marginal Propensity to Consume is the proportion of a raise in pay that a consumer spends on the consumption of goods/services as opposed to saving it.
Formula: change in Consumption/change in disposable income.
MPS: Marginal Propensity to Save is the proportion of a raise in pay that a consumer saves rather than spending on the consumption of goods/services.
Formula: change in saving/change in disposable income.
