AICE Economics AS Cram Sheet

Flashcards for AICE Economics AS Level Exam Preparation

What is scarcity in economics?

A situation in which wants and needs are in excess of the resources available.

Why is choice a central concept in economics?

Resources are scarce, so consumers, firms, and governments must make choices.

What is opportunity cost?

The cost expressed in terms of the best alternative that is forgone.

What is the fundamental economic problem?

Scarcity of resources relative to unlimited wants.

What are the three basic questions of resource allocation?

What to produce? How to produce? For whom to produce?

What is a positive statement in economics?

A statement based on empirical or actual evidence.

What is a normative statement in economics?

A subjective statement about what should happen.

What does 'ceteris paribus' mean?

"Other things remain equal."

What is the short run in economics?

A time period when a firm can only change some, but not all, factor inputs.

What is the long run in economics?

A time period when all factors of production are variable.

What are the four factors of production?

Land, Labor, Capital, and Entrepreneurship

What is the reward for land as a factor of production?

Rent

What is the reward for labor as a factor of production?

Wages

What is the reward for capital as a factor of production?

Interest

What is the reward for entrepreneurship as a factor of production?

Profit

What is division of labor?

Skilled workers do more skilled jobs while unskilled workers do more basic jobs.

What is specialization?

The process by which individuals, firms, and economies concentrate on producing goods and services where they have an advantage.

How are resources allocated in a Market Economy?

Resources are allocated as buyers and sellers in the market for goods and services.

How are resources allocated in a Planned Economy?

The central government is in charge of rationing and allocating resources for consumers.

What is a Production Possibility Curve (PPC)?

A simple representation of the maximum level of output that an economy can achieve when using its existing resources in full.

What does a rightward shift in the Production Possibility Curve indicate?

Economic growth and increased production.

What does a leftward shift in the Production Possibility Curve indicate?

Economic decline and decreased production.

What is a free good?

A resource that is abundant in its availability; it is not a constraint on economic activity (e.g., sunlight, air).

What are the characteristics of a private good?

Excludability and rivalry.

What are the characteristics of a public good?

Non-excludable and non-rival.

What is a merit good?

A good that has positive side effects when consumed (e.g., vegetables).

What is a demerit good?

A good that has adverse side effects when consumed (e.g., junk food).

What is demand?

The quantity of a product that consumers are willing and able to buy at different prices.

What is supply?

The quantity of a product that producers are willing and able to sell at different prices.

What is effective demand?

Demand that is supported by the ability to pay.

How does income affect the demand curve?

When demand for goods increases with income it is normal goods, while the opposite is known as inferior goods.

How do complements affect the demand curve?

Goods that have a joint demand meaning a change in price or availability for either one means an effect on the demand of the other.

What are the determinants of supply?

Cost of production, Size and nature of the market, Change in price in competitors, Government policy and other factors.

What causes a shift in the demand curve?

Changes in determinants of demand such as increased income or decreased number of substitutes.

What causes a shift in the supply curve?

Changes in determinants of supply such as decreased cost of production and increased price on competitor goods.

What does PED measure?

Price Elasticity of demand (PED): a numerical measure of the responsiveness of the quantity demanded to a change in price of a product.

What does YED measure?

Income Elasticity of demand (YED): a numerical measure of the responsiveness of the quantity demanded following a change in income.

What does XED measure?

Cross Elasticity of demand (XED): a numerical measure of the responsiveness of the quantity demanded for one product following a change in the price of another related product.

Give the formula for PED

PED = % change in quantity demanded of a product / % change in price of that product

What does a positive coefficient for YED mean?

Normal goods

What does a negative coefficient for YED mean?

Inferior goods

What does a positive coefficient for XED mean?

Substitutes

What does a negative coefficient for XED mean?

Complements

What is perfectly inelastic?

Where a change in price has no effect on the quantity demanded

What is perfectly elastic?

Where all that is produced is sold at a given price

What is the formula for price elasticity of supply (PES)?

PES = % change in quantity supplied / % change in price

What is equilibrium?

A situation where there is no tendency for change.

Name three types of demand

Joint, alternative, and derived

What does the price mechanism do?

Makes it easy to ration products on the market in order to keep high prices and keep exclusivity

What is consumer surplus?

The difference between the value a consumer places on units consumed and the payment needed to actually purchase that product

What is producer surplus?

The difference between the price a producer is willing to accept and what is actually paid

How do public sectors obtain goods such as railroads or electricity?

Privatization

Why does the government typically not oversee merit goods?

Market failure

What is a maximum price?

A price that is fixed; the market price must not exceed this price.

What is a specific tax?

A tax in the form of fixed amount per unit purchased

What is an ad valorem tax?

A tax that is a proportion or percentage charged by the retailer.

What is a proportional tax?

A tax that takes the same proportion or percentage from all who have to pay it

What is a progressive tax?

A tax that takes a higher percentage from those with higher incomes

What is a regressive tax?

A tax that takes a greater percentage from those on lower incomes

What is a subsidy?

Direct payments made by the government to producers for goods and services.

What is a transfer payment?

A hand-out or payment made by the government to certain members of the community

What is national income?

The total amount of goods and services produced in an economy in a given year.

What is Gross Domestic Product (GDP)?

Measures the monetary value of final goods and services produced in a country in a given period of time.

What is Gross National Income (GNI)?

The sum of incomes of residents of an economy in a given period.

What is Net National Income (NNI)?

Gross national income minus the depreciation of fixed capital assets

What is Aggregate Demand (AD)?

The total spending on an economy’s goods and services at a given price level in a given time period.

What are the four components of AD?

Consumption (C), Investment (I), Government spending (G), and Net Exports (X – M)

What is Aggregate Supply (AS)?

The total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period.

What causes shifts in SRAS?

Change in price of the factors of production, Change in taxes on firms, Change in quality of resources and Change in quantity of resources

What can cause shifts in LRAS?

Net immigration, An increase in retirement age, More women entering labor force, Net investment and Discovery of new resources

What is macroeconomic equilibrium?

The output and price level achieved where AD equals AS.

What is inflation?

A sustained increase in an economy’s price level.

What is deflation?

A sustained fall in the price level.

What is disinflation?

A fall in the inflation rate.

What is the Consumer Price Index (CPI)?

Index that shows the average change in the prices of a representative basket of products purchased by households.

What is Cost-Push Inflation?

Inflation caused by increases in costs of production.

What is Demand-Pull Inflation?

Inflation caused by increases in aggregate demand not matched by equivalent increases in aggregate supply.