ATD Level III

Principles of Economics flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 50 cards are free; the rest come with the subject.

Card 1 of 50

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 40 come with the subject.

What is opportunity cost, and how is it read off a production possibility frontier?

The value of the best alternative forgone when a choice is made: the true economic cost of a decision, not merely its money price. On the frontier it is the amount of one good given up to produce more of the other: moving from 80 food and 10 clothing to 60 food and 20 clothing costs 20 food for 10 clothing, 2 food per unit of clothing.

What is market equilibrium, and what happens at prices above and below it?

The price at which quantity demanded exactly equals quantity supplied, where neither side has any incentive to change. Above it: a surplus (supply exceeds demand) pushes price down. Below it: a shortage (demand exceeds supply) pushes price up.

How is price elasticity of demand calculated, and how is the result classified?

PED = % change in quantity demanded / % change in price. Ignoring the sign: above 1 elastic, below 1 inelastic, exactly 1 unitary, 0 perfectly inelastic, infinity perfectly elastic.

What does the law of diminishing marginal utility say, and why does it matter for demand?

As a consumer takes successive units of a good in a period, the extra satisfaction from each additional unit eventually falls. It is why a normal demand curve slopes downward under the cardinal approach: the consumer buys more only if price falls to match the lower marginal utility.

What does the law of variable proportions say happens to marginal product as a variable factor is added to a fixed one?

Marginal product first rises (increasing returns, as specialisation improves), then falls while still positive (diminishing returns, as the fixed factor binds), and can eventually turn negative. Production is never rationally carried into the stage where marginal product is negative.

What is marginal cost, and where does it cross the average cost curves?

MC = change in total cost / change in output: the extra cost of producing one more unit. It cuts both average variable cost and average total cost at their minimum points.

What are the necessary and sufficient conditions for profit maximisation?

Necessary: marginal revenue equals marginal cost (MR = MC). Sufficient: marginal cost is rising through that point, cutting MR from below; otherwise the MR = MC point could be a profit-minimising output. The rule is the same in every market structure.

What are the three methods of measuring national income?

Output method: sums the value added by every producing sector. Income method: sums factor incomes, wages, rent, interest and profit. Expenditure method: sums consumption, investment, government spending and net exports (exports minus imports). In principle all three reach the same total.

What is the multiplier, and how is it calculated in the simple model?

An initial change in autonomous spending, such as investment, causes a larger final change in national income, because each round of spending becomes someone else's income and is partly spent again. Multiplier = 1 / (1 - MPC). With an MPC of 0.8 it is 5, so KES 100 million of new investment raises income by KES 500 million.

How does demand-pull inflation differ from cost-push inflation?

Demand-pull: aggregate demand persistently exceeds productive capacity at full employment (an inflationary gap), pulling prices up. Cost-push: production costs rise (wages, imported inputs, energy) and firms pass them on as higher prices, independent of demand.

Why does scarcity force choice?