Free VCE Economics Flashcard Review

States that as the price of a good rises, the quantity demanded falls (and vice versa), all else equal. The inverse relationship reflects the income effect and substitution effect, giving the demand curve its downward slope.

A change in the good's own price causes a movement along the curve (contraction or expansion). A change in a non-price factor (income, tastes, price of substitutes/complements, population) shifts the whole curve left or right.

Achieved when resources are directed to produce the exact mix of goods and services that maximises society's overall satisfaction or wellbeing. Occurs where price equals marginal cost and the value placed on the last unit equals its production cost.

Relative prices act as signals and incentives: a rising relative price signals stronger demand or scarcity, encouraging producers to shift resources toward that good in pursuit of higher returns, steering resource allocation in a market economy.

Measures the responsiveness of quantity demanded to a change in price, calculated as %ΔQd ÷ %ΔP. Demand is elastic if the result exceeds 1 and inelastic if it is below 1. Influenced by substitutes, necessity, and proportion of income.

Measures how responsive quantity supplied is to a price change (%ΔQs ÷ %ΔP). Supply tends to be more elastic when producers can store stock, have spare capacity, or can adjust production quickly within the time period considered.

A situation where the free operation of the price mechanism fails to allocate resources in the way that maximises society's wellbeing, resulting in allocative inefficiency. Examples include public goods, externalities, asymmetric information and common access resources.

A cost imposed on an uninvolved third party not reflected in the market price, leading to overproduction relative to the socially optimal level. Example: factory emissions causing pollution that harms nearby residents who bear the health costs.

Public goods are non-excludable and non-rival (e.g. street lighting, national defence), so private firms cannot charge users effectively. The free-rider problem means people consume without paying, so the market under-provides and government supply is justified.

An indirect (Pigouvian) tax on a good generating negative externalities raises producers' costs, lifting the price and contracting quantity toward the socially optimal level, helping internalise the external cost and restore allocative efficiency.

The fastest rate of increase in real GDP consistent with maintaining low inflation, external balance, full employment and protecting the environment for future generations. The government's stated rate is around 3 percent per year on average.

Real GDP is the total value of final goods and services produced in a year, adjusted to remove the effect of price changes (inflation). Using constant prices isolates genuine increases in the volume of output rather than inflated dollar values.

Keeping the sustained rise in the general price level low enough to preserve purchasing power and certainty. The RBA targets consumer price inflation averaging between 2 and 3 percent over the course of the economic cycle.

A measure that tracks the change in the price of a representative basket of goods and services purchased by metropolitan households over time, used to calculate the inflation rate as the percentage change in the index between periods.

Demand-pull inflation occurs when aggregate demand grows faster than the economy's productive capacity, bidding prices up. Cost-push inflation arises when rising input costs (wages, energy, imports) force firms to lift prices to protect margins.

The situation where everyone willing and able to work who is actively seeking it can find a job, meaning cyclical unemployment is eliminated. It corresponds to the lowest unemployment rate that does not accelerate inflation, around 4 to 4.5 percent (the NAIRU).

The number of unemployed persons expressed as a percentage of the labour force, where the labour force is the sum of those employed and those unemployed (actively seeking and available for work) aged 15 and over.

Cyclical (demand-deficient) unemployment results from a downturn in aggregate demand and economic activity. Structural unemployment arises from a mismatch between workers' skills or location and the requirements of available jobs, often from technological or industry change.

The proportion of the working-age population (15 and over) that is either employed or actively seeking work, expressed as the labour force divided by the working-age population. A rising rate can keep unemployment elevated even as jobs grow.

Achieving strong growth, full employment and low inflation generally lifts material living standards (higher incomes and consumption) and can support non-material living standards (less stress, more leisure), though trade-offs such as pollution or overwork may emerge.