Unit 2: Microeconomics
The benefit lost from the next best alternative choice foregone. A classic limitation of government policy decisions.
What is opportunity cost?
The productive potential of an economy. A perfectly inelastic supply curve at YF (full employment output). Keynesian and Monetarist perspectives.
What is long-run aggregate supply?
A country can produce a good/service at a lower opportunity cost than a trading partner country can.
What is comparative advantage?
This diagram demonstrates the welfare loss caused by a negative externality, showing MSC > MPC.
What are negative externalities?
This fundamental concept explains why choices must be made: resources are limited but wants are unlimited.
What is scarcity?
A good or service that is underprovided by the free market and creates positive externalities for society. Education, healthcare and safe roads.
What is a merit good?
A system where the average tax increases as income increases. This system claims to improve equity, government budgets, and the increasing revenues provide funding for well-being support schemes for those households in poverty.
What is a progressive tax system?
A limit on the quantity or value of a good or service that a country will permit to be imported in a given time period.
What is a quota?
This version of the AD/AS diagram uses a perfectly inelastic supply curve to demonstrate long-run aggregate supply at a country's full employment output.
What is the monetarist (classical) LRAS diagram?
This concept refers to fairness in accessing opportunities to increase family income and wealth. The unequal impact of, and unintended consequences from, a particular government policy can worsen income and wealth gaps.
What is equity?
This inefficient allocation of resources can arise because a government imposes a maximum price below the market equilibrium price.
What is a shortage?
This rate of unemployment includes both frictional and structural unemployment numbers. Considered to be an inflation and growth-balancing optimal rate of unemployment in the short run.
The natural (classical) rate of unemployment
A tax on the value of imported goods and services. Paid by the importer at the port of entry. Increases costs of production for firms and thus creates some cost-push inflationary pressure as firms pass on the indirect tax to the consumer, depending on the likely price elasticity of demand.
What is a tariff?
This diagram shows income inequality, using the Gini coefficient between the curve and the 45 degree line of perfect income equality
What is the Lorenz curve?
The HDI goes beyond GDP by incorporating education, life expectancy, and income per capita. Overall HDI tries to record changes in this over time.
What is well-being?
A price control that is supposed to bring the market equilibrium price up to a new, higher, more equitable legal minimum price.
What is a price floor (minimum price)?
When an economy is experiencing high inflation and high unemployment, at the same time. Often occurs in economies only because of external shocks, such as the Covid pandemic, or a record-setting Hurricane Irma.
What is stagflation?
A free trade area that has agreed to reduce protectionism between members and has agreed to charge a common external tariff to non-members.
What is a customs union?
This diagram shows how an increase in aggregate supply (e.g., due to lower production costs) can reduce inflation and increase real GDP ($).
What is cost-push deflation?
Governments use this concept in order to create a law to tax the negative externalities of consumption from fossil-fuel based car fuel.
What is government intervention?
The voluntary community actions that aim to combat negative environmental externalities arising from the overuse of common access resources.
What is collective self-governance?
Weak levels of spending cause aggregate demand to fall persistently month to month. Insufficient demand eventually leads to the average price level falling over a year. This reduces real GDP growth and encourages a cut in interest rates to stimulate borrowing and thus spending.
What is demand-pull deflation?
The US Federal Reserve Bank intervenes in forex markets to try to strengthen the value of the US dollar.
What is a currency revaluation?
When a government imposes a price floor in the labour market. This intervention will create surplus labour and potentially lead to increased unemployment.
What is a minimum wage in the labour market?
Can be productive (AC=MC) and allocative (MB=MC). Broadly defined as output per input, per time period.
What is efficiency?