CB2 Formula Definitions Flashcards
1
Q
What does scarcity refer to?
A
The limited availability of resources compared to unlimited wants.
Limited availability but unlimited people want it.
2
Q
Define opportunity cost.
A
The cost of an activity measured in terms of the best alternative that is forgone.
Cost of an activity measured by the cost of the other option you gave up.
3
Q
How is opportunity cost computed?
A
Opportunity cost = What is given up / What is gained.
Lower = good, gained more than gave up.
Higher = bad, gave up more than gained.
4
Q
What are rational choices?
A
Choices made by weighing the benefit of any activity against its cost measured in terms of opportunity cost.
Make choice by comparing benefit of activity vs opportunity cost. (Cost to forego alternative).
5
Q
What is allocative efficiency?
A
Resources are distributed such that the combination of goods produced maximizes consumer satisfaction relative to cost.
Distribute resources so that combination of goods produced will maximise consumer satisfaction relative to cost.
6
Q
Define productive efficiency.
A
The situation where firms combine inputs to produce maximum output at the least cost.
7
Q
What is economic efficiency?
A
Each good or service is produced at minimum cost, maximizing objectives of firms and consumers.
8
Q
What does the production possibility curve represent?
A
All possible combinations of two goods that can be produced when all resources are fully utilized.
9
Q
What does increasing opportunity cost state?
A
As the production of a good increases, the opportunity cost of producing additional units increases.
(Meaning giving up on using the money for other things in order to make more)
10
Q
Define command economy.
A
An economic system where the means of production and distribution are owned and controlled by a central authority.
One central authority owns and controls how things are produced and distributed.
11
Q
What is a free market economy?
A
An economic system where all decisions are made by individual households and firms without government intervention.
12
Q
What characterizes a mixed economy?
A
Economic decisions are made partly by the government and partly through the market.
13
Q
What does macroeconomics study?
A
The economy at the aggregate (overall) level, such as output, employment, and inflation.
14
Q
What is microeconomics?
A
The study of individual units within the economy, such as households and firms.
15
Q
What does the classical school predict about the economy?
A
The economy is always at full employment due to flexibility in wages, prices, and interest rates.
16
Q
What does the Keynesian school argue?
A
Markets face rigidities that can keep them in disequilibrium, encouraging government spending to stimulate demand.
17
Q
What is the focus of the monetarist school?
A
The quantity theory of money, stating changes in money supply only affect prices in the long run.
18
Q
What does the neoclassical school assume about markets?
A
Markets are highly competitive and clear rapidly, with demand expansions leading to higher prices.
19
Q
State the law of demand.
A
Higher prices lead to lower quantity demanded, and lower prices lead to higher quantity demanded.
20
Q
What is a change in quantity demanded?
A
Change in units consumed due solely to a change in the price of the commodity.
21
Q
What does a change in demand refer to?
A
Change in units consumed due to factors other than the price.
22
Q
State the law of supply.
A
Higher prices lead to higher quantity supplied, and lower prices lead to lower quantity supplied.
23
Q
What is a change in quantity supplied?
A
Change in units supplied due solely to a change in the price of the commodity.
24
Q
What does a change in supply indicate?
A
Change in units supplied due to factors other than price.
25
Define price elasticity.
The degree of responsiveness of quantity demanded or supplied to changes in price.
26
What signifies inelastic demand or supply?
|Pe| < 1.
27
What signifies elastic demand or supply?
|Pe| > 1.
28
What signifies unit elastic demand or supply?
|Pe| = 1.
29
What signifies perfectly inelastic demand or supply?
|Pe| = 0.
30
What signifies perfectly elastic demand or supply?
|Pe| = ∞.
31
What is income elasticity of demand?
The degree of responsiveness of quantity demanded to changes in consumer income.
32
What indicates a normal good in terms of income elasticity?
Positive income elasticity.
33
What indicates an inferior good in terms of income elasticity?
Negative income elasticity.
34
What is cross price elasticity of demand?
The degree of responsiveness of the quantity demanded of a commodity to changes in the price of a related commodity.
35
What does a positive cross-price elasticity indicate?
The two goods are substitutes.
36
What does a negative cross-price elasticity indicate?
The two goods are complements.
37
What is a minimum price control?
A price floor, the lowest price set by the government below which it is illegal to sell a good.
38
What is a maximum price control?
A price ceiling, the highest price set by the government above which it is illegal to sell a good.
39
What is tax incidence?
The measure of the distribution of the burden of a tax between buyers and sellers.
40
Define marginal utility.
The additional utility gained from consuming an extra unit of a commodity.
41
What is the paradox of value?
The contradiction that items like diamonds are more valuable than water, despite water being more useful.
42
What does the principle of diminishing marginal utility state?
As more units of a good are consumed, additional units yield less additional utility.
43
What is consumer surplus?
The monetary value of the gain consumers obtain because they purchase a commodity at a price less than the highest price they would have been willing to pay.
44
What is the equi-marginal principle?
Consumers maximize utility when the marginal utility per dollar is the same across all goods consumed.
45
Define indifference curves.
Curves showing all combinations of two goods that yield the same level of satisfaction.
46
What does the marginal rate of substitution measure?
The amount of one good a consumer has to give up to consume one extra unit of another good.
47
What is a budget line?
A line showing all combinations of two goods that a consumer can afford given their income and the prices of the goods.
48
What is the income effect of a price change?
The change in quantity demanded resulting from a change in real income due to a price change.
49
What is the substitution effect of a price change?
The change in quantity demanded attributed to the change in the relative price of the good.
50
What indicates an optimal consumption decision?
When the budget line is tangent to the furthest indifference curve.
51
What is a Giffen good?
A good whose demand increases as the price increases due to the positive income effect outweighing the negative substitution effect.
52
Define expected value.
The probability-weighted average of the payoffs associated with all possible outcomes of an event.
53
What is risk premium?
The expected value of a gamble minus a person's certainty equivalent.
54
What is certainty equivalent?
A guaranteed amount of money considered equally desirable to a risky outcome.
55
What is asymmetric information?
When one party in an economic transaction has better information than another.
56
Define moral hazard.
Occurs when an insured party changes behavior in ways that make the insured event more likely.
57
What is bounded rationality?
When decision-making ability is limited by a lack of information or understanding.
58
What is the short-run?
The time period over which at least one factor input is fixed in supply.
59
What is the long-run?
A time period long enough for all factor inputs to be variable.
60
Define total physical product.
The total output produced in a period given the available inputs.
61
What is average physical product?
Output per unit of the variable input employed.
62
What is marginal physical product?
The extra output produced by employing an extra unit of the variable factor.
63
What does the average-marginal relationship imply?
When average and marginal product curves are both rising, the marginal product lies above the average product.
64
What does the law of diminishing marginal returns state?
When one or more factors are fixed, additional units of the variable input will eventually yield diminishing returns.
65
What are fixed costs?
Costs that do not vary with output levels, incurred on fixed inputs.
66
What is total variable cost?
Total cost incurred in using variable inputs in the short run.
67
What is average variable cost?
The cost per unit of variable inputs employed in production.
68
Define total cost.
The sum of all costs incurred in the production process.
69
What is average cost?
The cost per unit of production.
70
What is marginal cost?
The extra cost of producing one more unit of output.
71
What are economies of scale?
Cost advantages a firm enjoys as it increases output in the long run.
72
What are diseconomies of scale?
Cost disadvantages that a firm incurs as it increases output in the long run.
73
What is the formula for Marginal Cost (MC)?
MC = ∆TC / ∆Q
74
What are Economies of Scale?
Cost advantages a firm enjoys as it increases output in the long run
75
What is the difference between internal and external economies of scale?
Internal economies arise from the firm's expansion, while external economies arise as the entire industry grows
76
What are Diseconomies of Scale?
Cost disadvantages incurred as a firm increases output in the long run
77
What are Economies of Scope?
Cost savings experienced as a firm diversifies its production
78
What is the Least Cost Input Combination?
Occurs where the marginal product from the last pound spent on each factor is equal
79
What does the Long-run Average Cost Curve represent?
The lowest cost of producing each quantity in the long run where all costs are variable
80
What is Total Revenue (TR)?
Total earnings from sales of a product within a specified period of time, TR = P × Q
81
When is demand price inelastic?
When an increase in price causes a less than proportionate decrease in quantity demanded
82
When is demand price elastic?
When an increase in price causes a more than proportionate decrease in quantity demanded
83
What is Average Revenue (AR)?
Revenue per unit of output, AR = TR / Q
84
What is Marginal Revenue (MR)?
Extra revenue from selling one more unit per period of time, MR = ∆TR / ∆Q
85
What condition indicates Profit Maximization?
Occurs when marginal revenue equals marginal cost, MR = MC
86
What is Normal Profit?
A situation where total revenue equals total costs in a perfectly competitive market, also called zero economic profit
87
What is Supernormal Profit?
Occurs when a firm's total sales exceed its total cost of production
88
What is the Shutdown Point of the firm?
The level of output where the price equals the minimum average variable cost, P ≥ AVC
89
What defines Perfect Competition?
Many buyers and sellers, no single buyer or seller has control over price, firms are price-takers
90
What characterizes a Monopoly?
Only one firm is the sole producer and seller of a commodity, making it a price maker
91
What is Monopolistic Competition?
Many firms produce slightly differentiated products, free entry and exit, zero economic profit in the long run
92
What is an Oligopoly?
Market structure characterized by a few firms controlling the market, engaging in strategic interaction
93
What does the short-run supply curve of the firm represent?
The upward-sloping portion of the marginal cost curve above the average variable cost curve
94
What is an Increasing Cost Industry?
An industry where average cost increases as the size of the industry expands
95
What is a Constant Cost Industry?
An industry where average cost stays constant as the size of the industry expands
96
What is a Decreasing Cost Industry?
An industry where average cost decreases as the size of the industry expands
97
What are Natural Monopolies?
Monopolies that emerge in industries where startup and other costs of production are very high
98
What is a Collusive Oligopoly?
Occurs when oligopolists agree to limit competition, such as by setting output quotas
99
What is Tacit Collusion?
When oligopoly firms act collusively without a formal agreement, exemplified by price leadership
100
What is Cournot Competition?
A duopoly model where each firm considers the output decisions of the other firm in their pricing and output decisions
101
What is a Kinked Demand Curve?
A demand curve that has different elasticities at low and high prices, common in oligopolistic markets
102
What is a Dominant Strategy?
A strategy that yields the best outcome for a firm regardless of what rivals do
103
What is Nash Equilibrium?
An optimal solution where all players are playing their most optimal strategies and no firm has an incentive to deviate
104
What is a Maximin Strategy?
Choosing a policy whose worst possible outcome is the least bad
105
What is a Maximax Strategy?
Choosing the policy that has the maximum payoff possible
106
What is First-degree Price Discrimination?
Charging each buyer the maximum price they are willing to pay for each unit
107
What is Second-degree Price Discrimination?
Providing a range of pricing options for the same or similar products, allowing consumers to self-select
108
What is Third-degree Price Discrimination?
Dividing consumers into groups based on characteristics that influence how much they are willing to pay
109
What is Predatory Pricing?
An illegal practice where a dominant firm sets prices below average variable costs to drive competitors out of business
110
What is Average Cost Pricing?
Setting price by adding a profit markup on top of average cost, P = AC + Profit mark-up
111
What is Limit Pricing?
Charging a price below short-run profit maximizing level to deter new entrants
112
What is Peak-Load Pricing?
Higher charges during peak demand times, justified by inelasticity of demand
113
What is the Product Life Cycle Theory?
Explains the phases a product goes through from introduction to decline
114
What is Pareto Optimality?
Resource distribution where no further improvements can be made to society's well-being
115
What are Externalities?
Costs or benefits of production or consumption that affect people not directly involved in the transaction
116
What is Marginal Consumer Surplus?
Excess utility a consumer gains from consuming one more unit over the price paid, MCS = MU - P
117
What is Marginal Social Cost?
Sum of marginal private cost and marginal external cost, MSC = MPC + MEC
118
What is Total Social Surplus?
Total benefits to society from consumption minus total costs from production
119
What is Socially Optimal Output?
Occurs when marginal social cost equals marginal social benefit, MSC = MSB
120
What is Deadweight Loss?
Loss of economic efficiency when the socially optimum outcome is not achieved
121
What are Public Goods?
Goods that are non-excludable and non-rivalry, usually not provided by the free market
122
What is a Pigouvian Tax/Subsidy?
Designed to 'internalize' an externality, equal to the marginal external cost or benefit
123
What is Absolute Cost Advantage?
A country can produce a good with fewer resources than another country
124
What is Comparative Cost Advantage?
A country can produce a good at a lower opportunity cost than another country
125
What is Terms of Trade?
Price index of exports divided by price index of imports, expressed as a percentage
126
What are the methods of trade restrictions?
* Tariffs
* Import quotas
* Exchange controls
* Import licensing
* Embargoes
* Administrative barriers
* Procurement policies
127
What are arguments in favor of trade restrictions?
* Protecting infant industries
* Spreading risks of fluctuating markets
* Preventing dumping and unfair trade
* Preventing foreign-based monopolies
128
What is an Optimum Tariff?
A tariff that reduces imports to the point where marginal costs equal marginal social benefit
129
What are the rules of the WTO?
* Non-discrimination
* Reciprocity
* Prohibition of quotas
* Fair competition
* Binding tariffs
130
What are the goals of macroeconomic policy?
* High and stable economic growth
* Low unemployment
* Low inflation
* Avoidance of balance of payments deficits
* A stable financial system
131
What is a Flow Variable?
Measured over an interval of time, e.g., wages, interest, rent
132
What is a Stock Variable?
Measured at a given point in time, e.g., land area, savings account balance
133
What is the Labour Force?
Sum of employed and unemployed people in an economy at a given time, Labour Force = E + U
134
What is the Unemployment Rate?
Share of the labor force currently without a job but actively looking, Unemployment Rate = (U / Labour Force) × 100
135
What is Potential Output?
Total output an economy can produce when all resources are fully utilized
136
What is the Output Gap?
Difference between actual output and potential output
137
What does the Business Cycle represent?
Periodic fluctuations in business activity, with upswings indicating economic expansion and downswings indicating recessions
138
What is Aggregate Demand?
Total spending on goods and services, AD = C + I + G + (X - M)
139
What is Aggregate Supply?
Total output firms are willing and able to supply at any given price level
140
What are Injections in the economy?
Variables that add income to the circular flow, including government purchases, exports, and investments
141
What are Withdrawals in the economy?
Variables that leak income out of the circular flow, including saving, taxation, and imports
142
What is Equilibrium National Income?
Situation where aggregate supply equals aggregate demand, W = J or Y = C + I + G + (X - M)
143
What factors cause unemployment?
* High real wages
* Downswings in the business cycle
* Lack of information
* Structural changes
* Seasonal factors
144
What is Frictional Unemployment?
Unemployment due to people changing jobs, often prolonged by lack of information
145
What is Cyclical Unemployment?
Unemployment associated with business cycles, caused by economic downturns
146
What is Seasonal Unemployment?
Occurs when demand for certain labor fluctuates with seasons
147
What is Structural Unemployment?
Arises from changes in demand and supply patterns, leading to a mismatch of skills
148
What is the Natural Rate of Unemployment?
The long-term rate of unemployment where the economy is in equilibrium
149
What is cyclical unemployment?
Unemployment associated with business cycles caused by economic downturns or recessions
## Footnote
It is zero when the economy is in equilibrium.
150
What causes seasonal unemployment?
Fluctuations in demand for certain labor with the seasons of the year
151
Define structural unemployment.
Arises from changes in demand and supply patterns leading to a mismatch of skills
152
What is the natural rate of unemployment?
The unemployment that exists when the economy is in equilibrium, sum of frictional and structural unemployment
153
How is the inflation rate calculated?
Inflation Rate = (CPIt − CPIt−1) / CPIt−1 × 100
154
What is demand-pull inflation?
Inflation caused by a persistent rise in aggregate demand not matched by supply
155
What is cost-push inflation?
Inflation caused by a persistent rise in the cost of production
156
Define Gross Domestic Product (GDP).
Monetary value of all final goods and services produced within a country in a year
157
How is GDP calculated using the expenditure approach?
GDP = C + I + G + (X − M)
158
What is GDP at market price?
GDP at actual prices, including taxes but excluding subsidies
159
What is GDP at factor cost?
GDP measured at the cost of factors of production, calculated by adding subsidies and subtracting indirect taxes
160
Define Nominal GDP.
GDP measured at current prices
161
What is Real GDP?
GDP adjusted for inflation, measured in constant prices
162
What does Gross National Product (GNP) include?
Value of all final goods and services produced by a nation’s factors of production, regardless of location
163
How is Net National Product (NNP) calculated?
NNP = GNP − Depreciation
164
What is disposable personal income?
Household income remaining after deductions of taxes and addition of benefits
165
What does the consumption function represent?
Positive relationship between household consumption and national income, slope is Marginal Propensity to Consume (MPC)
166
How is Marginal Propensity to Consume (MPC) defined?
MPC = ∆C / ∆Y
167
What is the Marginal Propensity to Save (MPS)?
MPS = ∆S / ∆Y
168
Define Marginal Propensity to Import (MPM).
MPM = ∆M / ∆Y
169
What is the Marginal Propensity to Tax (MPT)?
MPT = ∆T / ∆Y
170
Fill in the blank: The proportion of an increase in national income withdrawn from the circular income flow is called _______.
Marginal Propensity to Withdraw (MPW)
171
What is the Spending Multiplier?
Spending Multiplier (K) = 1 / (1 − MPC)
172
What does the accelerator theory state?
Investment is the most volatile component of aggregate expenditure; modest rise in national income causes larger increase in investment
173
Define balance of payments.
Account of a country’s transactions with the rest of the world, divided into current, capital, and financial accounts
174
What is the trade balance?
Difference between the value of a country’s exports and imports of goods and services
175
What is an exchange rate?
Rate at which one country’s currency exchanges for another currency
176
What happens when a currency appreciates?
The exchange value of the currency increases compared to a foreign currency
177
What is currency depreciation?
When the exchange value of the currency falls compared to a foreign currency
178
Define nominal exchange rate.
The exchange rate expressed in terms of currency units
179
What is the real exchange rate?
Exchange rate adjusted for changes in relative prices of goods between two countries
180
What is a fixed exchange rate regime?
Government ties the official exchange rate to another currency, keeping it unchanged
181
What is a floating exchange rate regime?
Exchange rate determined by supply and demand without government intervention
182
Define currency devaluation.
Deliberate action by the government to reduce the value of a country’s currency
183
What does the Purchasing Power Parity Theory state?
Exchange rate adjusts to offset differences in inflation rates between countries
184
List the three main functions of money.
* Unit of account
* Medium of exchange
* Store of value
185
What is liquidity?
Ease of converting an asset to cash without loss in value
186
What does the liquidity ratio measure?
A bank’s ability to meet short-term debt obligations
187
What are the functions of the central bank?
* Acts as a banker to the government and banks
* Conducts government’s monetary policy
* Provides liquidity to banks
* Oversees banks and financial institutions
* Operates government’s exchange rate policy
188
Define money supply.
Total sum of currency and liquid assets in circulation in an economy
189
What is the monetary base?
Total amount of currency in circulation plus total reserves held by banks
190
How is the bank deposit multiplier calculated?
Deposit Multiplier = 1 / Reserve Requirement
191
Define money multiplier.
Measure of how much money supply changes for a unit change in monetary base
192
What is money demand?
Total desired holding of financial assets in the form of money, negatively related to interest rate
193
What does the quantity theory of money state?
General price level is directly proportional to the amount of money in circulation
194
What is systemic risk?
Risk of an entire system breaking down due to failure of individual parts
195
What are the key principles of Islamic finance?
* Prohibition from charging interest (Riba)
* Profit and Loss Sharing (mudarabah)
* Prohibition of excessive risk (Gharar)
* Prohibition of Gambling (Maisir)
* Promotion of charitable giving (Zakat)
196
What is the full employment level of national income?
Level of national income at which there is no deficiency in aggregate demand
197
Define inflationary gap.
Amount by which aggregate expenditure exceeds national income at full-employment level
198
What is a recessionary gap?
Occurs when real GDP is lower than full employment or potential GDP
199
What does the Phillips curve illustrate?
Inverse relationship between inflation and unemployment
200
What is fiscal policy?
Policies designed to affect aggregate demand by altering government expenditure and taxation
201
What are automatic stabilizers?
Mechanisms that adjust government spending and taxes in response to changes in aggregate demand
202
What is fiscal drag?
Occurs when earnings growth and inflation push earners into higher tax brackets, increasing government revenue without explicit rate changes
203
What are contractionary and expansionary monetary policies?
* Contractionary: Reduce money supply during expansions
* Expansionary: Increase money supply during recessions
204
What is recognition lag?
Time taken for authorities to recognize a recession
205
What is legislative lag?
Time taken to design and pass a bill addressing a recession
206
What is implementation lag?
Time from policy approval to actual implementation
207
What is the primary purpose of open market operations?
Sale or purchase of government securities to control money supply
208
What is legislative lag?
The time it takes to design and pass a bill that will address the recession
## Footnote
Legislative lag affects the effectiveness of fiscal policy.
209
What is implementation lag?
The time it takes from when a policy designed to address the recession is approved to when it is actually implemented
## Footnote
Implementation lag can hinder timely economic recovery.
210
What are open market operations?
The sale or purchase of government securities in the open market
## Footnote
Open market purchases increase the money supply, while sales reduce it.
211
What does changing the reserve requirement affect?
The deposit creation process of banks
## Footnote
A lower reserve requirement increases the money supply, and a higher requirement reduces it.
212
What is the discount rate?
The interest rate at which the central bank lends to other banks
## Footnote
Higher rates reduce lending and the money supply, while lower rates increase them.
213
Define deficit bias.
The tendency for governments to accrue frequent fiscal deficits and rising debt-to-GDP ratios
## Footnote
This occurs due to their reluctance to tighten fiscal policy.
214
What is the crowding-out effect of government spending?
The rise in government spending crowds out private investment spending
## Footnote
Government borrowing diverts funds away from the private sector.
215
What are supply-side policies?
Government policies designed to influence aggregate supply directly
## Footnote
Supply-side policies shift the aggregate supply curve to the right.
216
What are market-oriented supply-side policies?
Policies designed to increase aggregate supply by freeing up the market
## Footnote
Examples include reducing tax rates and government regulations.
217
What are interventionist supply-side policies?
Policies designed to increase aggregate supply through government intervention
## Footnote
Examples include direct provision of transport and funding of R&D.
218
How does advertising affect demand?
Advertising can shift the demand curve to the right by increasing product awareness
## Footnote
It can also reduce elasticity by fostering brand loyalty.
219
What is market concentration?
The degree to which a small number of firms dominate total output in a market
## Footnote
Concentration ratios help reveal market concentration.
220
Should healthcare be provided free of charge?
Yes, advocates argue for free healthcare for low-income individuals
## Footnote
This addresses equity issues and promotes public health benefits.
221
What are the costs of unemployment?
Direct financial losses, personal hardships, loss of output, and increased social service spending
## Footnote
Unemployment affects both individuals and the economy.
222
What is purchasing power erosion?
The reduction in purchasing power due to inflation, especially if wages don’t keep pace
## Footnote
It leads to menu costs for firms.
223
What is the redistribution of income and wealth?
Inflation redistributes income from those on fixed incomes to those with economic power
## Footnote
It impacts individuals with savings in low-interest assets.
224
What is financial crowding out?
Increased government borrowing leading to higher interest rates
## Footnote
This discourages private borrowing and investment.
225
What pricing issues exist in the ticketing market?
Prices are often set below market clearing levels due to demand uncertainties
## Footnote
This creates profit opportunities in the secondary market.
226
What is the secondary market in ticketing?
A market where tickets are resold, often at marked-up prices
## Footnote
Ticket touts exploit the shortage by purchasing tickets in the primary market.
227
What are the effects of inflation on investment?
Inflation induces uncertainty, discouraging investment
## Footnote
This can hamper economic growth.
228
Fill in the blank: The crowding-out effect can manifest in two forms: _______ and financial crowding out.
Resource Crowding Out
