Economics Exam Study Guide

A set of flashcards covering essential economic concepts and principles for the Paper 3 economics exam.

Utility

The satisfaction or benefit a consumer derives from consuming a good or service.

Indifference Curves

Diagrams showing combinations of goods that give a consumer the same level of utility.

Budget Lines

Combinations of goods a consumer can afford given their income and the prices of the goods.

Productive Efficiency

Occurs when goods and services are produced using the least resources at the minimum cost.

Allocative Efficiency

Resources are allocated to produce the combination of goods that society values most.

Pareto Optimality

A situation where it is impossible to make one person better off without making someone else worse off.

Dynamic Efficiency

Efficiency achieved through innovation and improvements in production processes over time.

Market Failure

When the free market fails to allocate resources efficiently.

Externalities

Costs or benefits imposed on third parties not involved in the production or consumption of a good.

Negative Externality

When the production or consumption of a good imposes a cost on a third party.

Positive Externality

When the production or consumption of a good confers a benefit on a third party.

Asymmetric Information

A situation where one party in a transaction has more or better information than the other.

Short-Run Production

A period where at least one factor of production is fixed.

Long-Run Production

A period where all factors of production are variable.

Law of Diminishing Returns

As more variable factors are added to a fixed factor, the marginal product of the variable factor will eventually decrease.

Total Cost (TC)

The total expense incurred in producing a given level of output.

Average Cost (AC)

Total cost divided by the quantity of output.

Marginal Cost (MC)

The additional cost of producing one more unit of output.

Economies of Scale

Cost advantages that a firm can gain by increasing its scale of production.

Diseconomies of Scale

Cost disadvantages experienced when a firm's scale of production becomes too large.

Total Revenue (TR)

The total income a firm receives from selling its output.

Average Revenue (AR)

Total revenue divided by the quantity sold.

Marginal Revenue (MR)

The additional revenue from selling one more unit of output.

Normal Profit

The minimum level of profit needed to keep a firm in an industry long term.

Abnormal Profit (Supernormal Profit)

Profit earned in excess of normal profit.

Market Structure

Characteristics of a market that influence the behaviour of firms.

Perfect Competition

A market structure with many small firms, homogeneous products, and free entry and exit.

Imperfect Competition

Market structures that do not meet the conditions of perfect competition.

Monopoly

A market structure with a single seller dominating the market.

Monopolistic Competition

A market structure with many firms selling differentiated products.

Oligopoly

A market structure with a few dominant firms.

Natural Monopoly

A situation where it is most efficient for a single firm to supply the entire market.

Contestable Markets

Markets with low barriers to entry and exit.

Profit Maximisation

The traditional objective of firms to produce where marginal cost equals marginal revenue.

Price Discrimination

Selling the same product at different prices to different consumers.

Limit Pricing

Setting a price low enough to deter new entrants.

Predatory Pricing

Setting prices below cost to drive out competitors.

Price Leadership

A situation in oligopoly where one dominant firm sets the price.

Price Elasticity of Demand (PED)

Measure of the responsiveness of quantity demanded to a change in price.

Indirect Taxes

Taxes levied on goods and services.

Subsidies

Payments made by the government to encourage production or consumption.

Regulation

Rules imposed by the government to control market behaviour.

Government Failure

Situations where government intervention leads to a less efficient allocation of resources.

Equality vs. Equity

Equality means everyone is treated the same; equity involves fairness.

Poverty

A state of deprivation of essential human needs.

Labour Markets

Markets where labour services are bought and sold.

Minimum Wage

A legally mandated minimum price that employers must pay.

Trade Unions

Organizations of workers aiming to improve wages and working conditions.

Monopsony

A market structure with a single buyer of labour.

Wage Differentials

Differences in wage rates influenced by market forces.

Transfer Earnings

The minimum payment required to keep a factor in its current use.

Economic Rent

Any payment to a factor of production above its transfer earnings.

Economic Growth

An increase in the real output of goods and services over time.

Aggregate Demand (AD)

Total demand for goods and services in an economy at a given price level.

Consumption (C)

Spending by households on goods and services.

Investment (I)

Spending by firms on capital goods.

Government Spending (G)

Spending by the government on goods and services.

Net Exports (X-M)

The value of exports minus imports.

Multiplier Process

The process by which a change in AD leads to a larger change in national income.

Aggregate Supply (AS)

The total supply of goods and services that firms plan to produce at a given price level.

Money

Anything generally accepted as a medium of exchange.

Money Supply

The total amount of money in circulation in an economy.

Quantity Theory of Money (MV = PT)

Theory suggesting changes in the money supply directly affect price level.

Commercial Banks

Financial institutions that accept deposits and provide loans.

Creation of Credit

Banks can create credit by lending out a portion of their deposits.

Demand for Money

The desire to hold money in liquid form.

Interest Rate Determination

Influenced by the supply and demand for loanable funds.

Economic Cycle

Periodic fluctuations in economic activity around a trend growth rate.

Unemployment

The state of being willing and able to work but not having a job.

Full Employment

A situation where only frictional and structural unemployment exist.

Equilibrium Unemployment (Natural Rate)

The level of unemployment when the labour market is in equilibrium.

Disequilibrium Unemployment

Unemployment caused by factors like cyclical downturns.

Voluntary Unemployment

Individuals choosing not to work at the prevailing wage rate.

Involuntary Unemployment

Individuals willing to work but cannot find employment.

Frictional Unemployment

Short-term unemployment arising from matching workers with jobs.

Structural Unemployment

Unemployment arising from a mismatch of skills or location.

Cyclical Unemployment

Unemployment that rises during economic downturns.

Mobility of Labour

The ease with which workers can move between jobs or locations.

Price Stability

A low and stable rate of inflation.

Inflation

A sustained increase in the general price level.

Deflation

A sustained decrease in the general price level.

Disinflation

A fall in the rate of inflation.

Consumer Price Index (CPI)

A measure of changes in the price level of a basket of goods.

Demand-Pull Inflation

Inflation caused by excessive aggregate demand.

Cost-Push Inflation

Inflation caused by rising costs of production.

Balance of Payments

A record of all economic transactions between a country and the rest of the world.

Fiscal Policy

The use of government spending and taxation to influence aggregate demand.

Monetary Policy

Actions taken by the central bank to control money supply and interest rates.

Supply-Side Policy

Government policies aimed at increasing the productive capacity of the economy.

Macroeconomic Policy Objectives

Main aims include full employment and low inflation.

Policy Conflicts and Trade-offs

Achieving one macroeconomic objective may conflict with another.

Macroeconomic Government Failure

Government intervention may worsen economic outcomes.

Exchange Rates

The price of one currency in terms of another.

Fixed Exchange Rate System

Exchange rates are fixed by the government.

Floating Exchange Rate System

Exchange rates are determined by market forces.

Managed Exchange Rate System

Exchange rates determined by market forces with occasional intervention.

Economic Development

Encompasses improvements in living standards beyond mere growth.

Characteristics of Developing Economies

Low per capita income, high poverty, reliance on agriculture.

International Aid

Transfer of resources from developed to developing countries.

Multinational Companies (MNCs)

Firms that operate in more than one country.