Economics Fundamentals: Models, GDP, Efficiency, and the Circular Flow

Comprehensive vocabulary flashcards covering macroeconomics, microeconomics, market efficiency, production costs, and economic models based on the lecture notes.

Certus Paribus

An economic assumption meaning 'all other variables remain constant,' used to simplify models and explain specific interactions or effects.

Gross Domestic Product (GDP)

The total value of all goods and services produced in an economy within a year, used to measure the rate of change of national output.

Expenditure Approach

A method of measuring GDP by adding up all spending in the economy over one year, including government spending, consumption, firm investment, and net exports.

Income Approach

A method of measuring GDP by adding up all rewards earned by the factors of production, including wages, land rent, interest from capital, and profit from entrepreneurship.

Nominal GDP

The actual value of all goods and services produced in an economy in one year, unadjusted for price changes.

Real GDP

The value of all goods and services produced in an economy evaluated at constant prices.

GDP per Capita

Calculated as $\frac{\text{Real GDP}}{\text{Population}}$, representing average output and mean wealth per resident as a rough estimate of living standards.

Allocative Efficiency

Occurs when average revenue equals marginal cost ($AR = MC$), allocating resources so consumers and producers receive maximum benefit and no one can be made better off without making someone else worse off.

Productive Efficiency

Occurs when output is produced at a firm's lowest possible average cost, ensuring high productivity with no waste or resource scarcity.

Dynamic Efficiency

Long-term efficiency achieved when a firm reinvests profits into research, development, and innovation to improve manufacturing methods and reduce costs over time.

Static Efficiency

An efficiency condition achieved at a specific point in time when a firm is both productively and allocatively efficient.

X-Inefficiency

Inefficiency that occurs when a firm lacks the incentive or accountability to control production costs, often found in firms without competition or those funded by the government.

Homogeneous Products

Products offered by competing firms in a market that are completely identical.

Differentiated Products

Unique products sold by firms that are sustainably distinct from those of their competitors.

Internal Economies of Scale

Cost reductions internal to a firm as it grows, arising from bulk purchasing discounts, technical specialization, spreading fixed costs in marketing, lower interest rates in finance, and effective specialist managers.

External Economies of Scale

Reductions in firm production costs caused by external industry or environmental factors, such as improvements in transport links and internet infrastructure.

Fixed Costs

Production costs incurred by a business that do not change when the level of output changes.

Variable Costs

Production costs that change directly with changes in the volume of output produced, such as raw materials.

Circular Flow of Income

An economic model illustrating how money, goods, services, and factors of production flow between households, firms, and the government in an economy.

Factors of Production

The four fundamental inputs owned by households and supplied to firms: land, labor, capital, and enterprise (or entrepreneurship).

Injections

Additions of money into the circular flow of income that expand its size, consisting of government spending, investment, and exports.

Withdrawals (Leakages)

Removals of money from the circular flow of income that reduce its size, consisting of household savings, government taxes, and import purchases.

Multiplier Effect

The expansion that occurs when an injection into the circular flow causes real national income to increase by a greater total amount than the initial injection.

National Income

The total monetary value of all final goods and services produced within an economy over a given period of time.

Wealth vs. Income

Wealth represents the stock of assets owned in an economy, whereas income represents the continuous flow of money used to generate wealth over time.