ECONOMICS FLASHCARDS

Economics

The study of how scarce resources are allocated to satisfy unlimited wants.

Scarcity

Limited resources compared with unlimited human wants.

Opportunity cost

The value of the next best alternative forgone.

Free good

A good available in sufficient supply with no opportunity cost.

Economic good

A scarce good that has an opportunity cost.

Factors of production

Land, labour, capital and entrepreneurship.

Land

Natural resources used in production.

Labour

Human physical and mental effort used in production.

Capital

Man-made resources used to produce other goods and services.

Enterprise

The ability to organise the other factors of production, take risks and make business decisions.

Division of labour

Dividing production into tasks performed by different workers.

Interest

The reward for capital.

Profit

The reward for entrepreneurship.

Free-market economy

An economy where resource allocation is mainly determined by demand and supply.

Planned economy

An economy where the government makes most resource-allocation decisions.

Mixed economy

An economy where markets and government both allocate resources.

Economic model

A simplified representation of reality used to explain economic behaviour.

Ceteris paribus

All other things being equal.

Microeconomics

The study of individual consumers, firms and markets.

Macroeconomics

The study of the economy as a whole.

Behavioural economics

The study of how psychological factors influence economic decisions.

Cognitive bias

A systematic error in thinking that affects decisions and judgments.

Confirmation bias

Favouring information that supports existing beliefs.

Anchoring bias

Relying too heavily on the first information received.

Availability bias

Judging likelihood by how easily examples come to mind.

Overconfidence bias

Overestimating one's knowledge or abilities.

Herd behaviour

Following other people's actions instead of deciding independently.

Bandwagon effect

Adopting a behaviour or belief because many others do.

Framing effect

Decisions changing depending on how information is presented.

Status quo bias

Preferring the current situation and avoiding change.

Present bias

Valuing immediate rewards more than future rewards.

Endowment effect

Valuing something more highly simply because you own it.

PPC

A diagram showing maximum possible combinations of two goods an economy can produce with available resources and technology.

Productive efficiency

Using resources fully and efficiently to produce output.

Actual economic growth

An increase in real output, often from using previously unemployed resources.

Potential economic growth

An increase in productive capacity, shown by an outward PPC shift.

Constant opportunity cost

Producing more of one good sacrifices the same amount of another each time.

Increasing opportunity cost

Producing more of one good sacrifices increasingly larger amounts of another.

Outward PPC shift

An increase in productive capacity due to more resources or better technology.

Inward PPC shift

A decrease in productive capacity, e.g. due to war or natural disasters.

Unemployment of resources

Resources are not fully used; shown by a point inside the PPC.

Economic growth

An increase in real GDP over time.

Economic development

Improvements in living standards and overall quality of life.

Inflation

A sustained increase in the general price level.

Equity

Fairness in distribution of resources, opportunities or outcomes.

Demand

Quantities consumers are willing and able to buy at different prices over a period.

Law of demand

As price rises, quantity demanded falls, ceteris paribus.

Supply

Quantities producers are willing and able to sell at different prices over a period.

Law of supply

As price rises, quantity supplied rises, ceteris paribus.

Price mechanism

Demand and supply determine prices and help allocate resources.

Market equilibrium

Quantity demanded equals quantity supplied.

Equilibrium price

The price at which quantity demanded equals quantity supplied.

Equilibrium quantity

Quantity bought and sold at equilibrium price.

Excess demand (shortage)

Quantity demanded exceeds quantity supplied at a particular price.

Excess supply (surplus)

Quantity supplied exceeds quantity demanded at a particular price.

Extension of demand

Increase in quantity demanded caused by fall in own price.

Contraction of demand

Decrease in quantity demanded caused by rise in own price.

Extension of supply

Increase in quantity supplied caused by rise in own price.

Contraction of supply

Decrease in quantity supplied caused by fall in own price.

Substitute goods

Goods that can be used instead of one another.

Complementary goods

Goods that are used together.

Market

An arrangement that brings buyers and sellers together to exchange goods or services.

PED

A measure of how responsive quantity demanded is to a change in price.

PES

A measure of how responsive quantity supplied is to a change in price.

Elastic demand

Percentage change in quantity demanded exceeds percentage change in price; absolute PED > 1.

Inelastic demand

Percentage change in quantity demanded is smaller than percentage change in price; absolute PED<1.

Unit elastic demand

Percentage changes in quantity demanded and price are equal; absolute PED = 1.

Perfectly elastic demand

Consumers buy at one price but none at a higher price.

Perfectly inelastic demand

Quantity demanded does not change when price changes.

Elastic supply

Percentage change in quantity supplied exceeds percentage change in price.

Inelastic supply

Percentage change in quantity supplied is smaller than percentage change in price.

Unit elastic supply

Percentage changes in quantity supplied and price are equal.

Total revenue

Total money received from sales; price multiplied by quantity sold.

Consumer surplus

Maximum willingness to pay minus price actually paid.

Producer surplus

Price received minus minimum price producers are willing to accept.

Community surplus

Sum of consumer surplus and producer surplus.

Marginal cost

Additional cost of producing one more unit.

Allocative efficiency

Resources are allocated to maximise net social benefit.

Marginal benefit

Additional benefit from consuming or producing one more unit.