Basic Economics Lecture Notes Flashcards

A set of vocabulary flashcards covering basic economic concepts, systems, price mechanisms, elasticity, utility, production, money and banking, unemployment, inflation, and national income accounting.

Economics (Adam Smith)

The study of the wealth of nations.

Economics (Lionel Robins)

The science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

Scarcity

A basic concept that exists because resources are limited in supply, forcing individuals or communities to choose among them.

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms, involving demand and supply of particular industries.

Macroeconomics

The part of economic analysis that studies the behaviour of the economy as a whole, dealing with economy-wide problems like unemployment and national income.

Positive economics

Analysis strictly limited to making purely descriptive statements or scientific predictions about what is.

Normative economics

Analysis involving value judgments about economic policies, focusing on what ought to be.

Land

All gifts of nature such as water, fish, Gold, and timber; its reward is rent.

Labour

Mental and physical activities of human beings used in production; its reward is wages.

Capital

Manufactured resources like buildings, machines, and equipment used in production; its reward is interest.

Entrepreneur

Human resources that perform the functions of raising capital and organizing other factors of production; its reward is profit.

Opportunity cost

The highest-valued next best alternative that must be sacrificed to attain something or to satisfy a want.

Scale of preference

A table that shows an individual's wants arranged orderly with the most pressing wants put first.

Production Possibility Frontier (PPF)

A curve representing all possible combinations of inputs that can be used to produce a specific level of output.

Capitalist economic system

An economic system where goods and services are provided by private individuals and firms independent of government control.

Socialist economic system

An economic system where the majority of goods and services are provided by the state.

Price mechanism

A situation where demand and supply freely interact to determine prices and ensure equilibrium is restored.

Demand

The quantity of goods and services that consumers are willing and able to buy at a particular price and time.

Law of demand

The principle that, all things being equal, the higher the price, the lower the quantity demanded, and vice versa.

Determinants of demand

Factors including own price, price of substitutes/complements, advertising, income, tastes, credit availability, expectations, and population changes.

Giffen goods

Goods characterized by an upward sloping demand curve, which is an exception to the normal law of demand.

Supply

The quantity of goods and services producers are willing to offer for sale at a particular price and point in time.

Law of supply

The principle that, all things being equal, the higher the price, the higher the quantity supplied, and vice versa.

Equilibrium

A stable point where the supply and demand curves intersect, from which there tends to be no movement unless demand or supply changes.

Maximum price control (price ceiling)

A legal highest price set below the equilibrium price to protect consumers, often leading to shortages.

Minimum price control (price floor)

A legal lowest price set above the market equilibrium price to protect producers, often creating surpluses.

Price elasticity of demand ($E_p$)

The responsiveness of quantity demanded of a commodity to changes in its price, defined as $\frac{\text{percentage change in quantity demand}}{\text{percentage change in price of the good}}$.

Arc elasticity of demand

A method to calculate elasticity using average values: $E_p = \frac{\triangle Q}{\triangle P} \times \frac{P_1 + P_2}{Q1 + Q_2}$.

Unit elastic demand

A condition where a one percent change in price causes an exactly one percent change in quantity demanded ($E_p = 1$).

Cross Price elasticity of demand ($E_{xy}$)

The responsiveness of quantity demanded of one commodity as a result of a change in price of another; positive for substitutes and negative for complements.

Income elasticity of demand ($E_y$)

The responsiveness of quantity demanded of a commodity as a result of a change in the consumer's income.

Total Utility (TU)

The total satisfaction an individual gets from consuming a quantity of a commodity, measured in utils: $TU = \text{sum of } MU$.

Marginal Utility (MU)

The additional satisfaction derived from consuming one extra unit of a commodity: $MU = \frac{\triangle TU}{\triangle Q}$.

Satiation point

The point where total utility is at its maximum and marginal utility ($MU$) is zero.

Paradox of Value

An observation that necessities like water are priced lower than luxuries like diamonds because of their relative marginal utilities due to scarcity.

Short-run time period

A time period in production so short that at least one input is fixed.

Variable input

Inputs whose quantity varies with output, such as raw materials and labour.

Law of diminishing marginal returns

The principle that as more units of a variable factor are employed on a fixed input, the additional total product initially increases but eventually diminishes.

Average product (AP)

The total product per unit of the variable input: $AP = \frac{TP}{V}$.

Fiduciary issue (commodity money)

A form of money not backed by law that has intrinsic value, such as gold or salt.

Near Money

Highly liquid assets including time deposits, postal orders, bonds, and treasury bills.

Liquidity preference

The motives for holding money, specifically the transactionary, precautionary, and speculative motives.

Money Multiplier

The factor by which the money supply increases through the banking system, calculated as $\frac{1}{\text{required reserve ratio}}$.

Labour force

The total number of adults above age 16 who either have jobs or are available and looking for jobs.

Discouraged worker

Individuals who have stopped looking for work because they are convinced they will not find a suitable job.

Frictional unemployment

The continuous flow of individuals from job to job and in and out of employment.

Structural unemployment

Unemployment caused by long-term structural changes in an economy, such as technological shifts, rendering skills obsolete.

Inflation

A rise in the general price level, measured using the price index.

Price index formula

$\frac{\text{Cost of current market basket}}{\text{Cost of market basket in the base year}}$.

Demand Pull Inflation

Inflation occurring when aggregate demand exceeds aggregate supply, often described as 'too much money chasing fewer goods'.

Cost Push Inflation

Inflation caused by an increase in production costs, such as higher wages or oil prices, leading to a fall in supply.

National income

The sum total of the monetary value of all goods and services produced in a country within a year.

Gross Domestic Product (GDP)

The market value of final goods and services produced within a country's borders in a year, regardless of the nationality of the producer.

Gross National Product (GNP)

The market value of final goods and services produced in a year by a country's nationals, regardless of where they live.

Depreciation

The wear and tear of capital equipment, also known as Capital Consumption Allowance.

Net Factor Income from Abroad (NFYA)

The income from nationals living abroad minus the income of foreigners living in the country.

Disposable Income

The income received by individuals that gives them command over goods, calculated as Net National Income minus direct taxes and social security plus social transfers.

Expenditure approach formula

$GDE = C + I + G + X - M$.

Per capita income

The proportion of national income entitled to each individual: $\frac{\text{National Income}}{\text{Total Population}}$.