A2 Economics Definitions Flashcards
Absolute poverty
When an individual or household’s income is insufficient for them to afford basic shelter, food and clothing.
Absolute advantage
Where a country using a given resource input is able to produce more than other countries with the same input.
Accelerator theory
The theory that the level on investment is related to past changes in national income.
Participation rate
The proportion of the population of working age in a job or actively seeking work.
Actual growth
An increase in the productive potential of the economy matched by an increase in demand.
Adaptive expectations
Where decisions about the future are based on past information.
Adjustable peg
When the value of the fixed exchange rate can be changed as circumstances require.
Allocative efficiency
The optimum allocation of scarce resources that best accords with the consumers’ pattern of demand.
Allocative inefficiency
When resources are not used to produce the goods and services wanted by consumers.
Anglo-Saxon neo-liberalism
Economic reform aimed at boosting the dynamism of economies - in contrast to the “social model” which stresses social objectives.
Anticipated inflation
Where economic agents correctly predict the future rate of inflation.
Automatic stabilisers
Features of government spending and taxation that minimise fluctuations in the economic cycle.
Average cost pricing
When the price is set at the average cost.
Backward bending supply curve for labour.
The individual labour supply curve is thought to be this shape because it is assumed workers will prefer to work fewer hours as their income increases above a certain level.
Base rate
The interest rate a bank sets to determine it’s lending and borrowing rates.
Benefit principle
The argument that taxes should be linked to the benefits received by taxpayers.
Broad money
Money held in banks and building societies that is not immediately accessible.
Canons of taxation
The characteristics of a “good tax”, after Adam Smith.
Capital expenditure
Government spending to improve the productive capacity of the nation, for example, on schools or hospitals.
Capital market discipline
Where firms may be taken over by other firms if they appear to be making lower profits than their assets would suggest.
Casual unemployment
A kind of frictional unemployment occurring when workers are laid off on a short-term basis.
Classical or real-wage unemployment.
Results from real wages being above their market-clearing level, creating an excess supply of labour.
Collusion
Where firms cooperate in their pricing and output policies.
Comparative advantage
Where a country can produce a good with a lower resource cost input than other countries.
Competition Commission
A government organisation responsible for implementing policy in relation to monopolies.
Competition policy
Methods that the UK government and EU authorities use in order to make markets more efficient.
Concentration ratio
The proportion of the market share held by the dominant firms.
Conglomerate merger
Where firms with no obvious connection combine.
Constant returns to scale
Where an increase in factor inputs leads to a proportional increase in factor outputs.
Contestable market
Where there is free entry and free exit of other firms.
Corporate citizenship
Indicates that organisations embrace sustainable development.
Cost-benefit analysis
An investment appraisal technique that takes into account all the private and external costs and benefits of an economic decision.
Credit crunch
A recently coined term used to refer to the reduced willingness of financial institutions to lend to households and one another.
Crowding out
Where a public sector deficit deters private sector investment and consumption.
Dead-weight loss
Reduction in consumer and producer surplus when output is restricted to less than the optimum level.
Decreasing returns to scale
Where an increase in factor inputs leads to a less than proportionate increase in factor inputs.
Direct controls
Controls on imports such as tariffs and quotas.
Dirty float
Manipulation of a floating rate to gain advantages over trading partners.
Discontinuous marginal revenue curve
Region over which a change in marginal costs will not lead to a change in the firm’s price and output levels.
Dominant market position
Where a firm, or group of firms working together, have a market share of 40 per cent.
Dynamic efficiency
Efficiency over time - new products, techniques and processes which increase economic growth.
Economically inactive
The percentage of the population who are either not in work nor seeking it.
Economic rent
The payment received by a factor of production over and above that which is needed to keep it in it’s present occupation.
Elasticity of demand for labour
The responsiveness of quantity demanded of labour to a change in the wage rate.
Elasticity of supply of labour
The responsiveness of quantity of labour supplied to a change in the wage rate.
Enterprise culture
A way of life that emphasises the importance of individuals who create their own businesses and create wealth.
Equilibrium unemployment
When aggregate demand for labour equals aggregate supply of labour.
Eurosclerosis
High unemployment and slow job creation despite economic growth.
Exchange controls
Restrictions on the ability to trade foreign currencies by a county’s central bank.
Expenditure-reducing policies
Policies used to correct current account imbalances by reducing consumer spending power.
Expenditure-switching policies
Policies used to correct current account imbalances by encouraging consumers to buy domestically produced output rather than imports.
First degree price discrimination
When the discriminating firm can charge a separate price to each individual consumer.
Fiscal drag
Increases in the burden of taxation when tax allowances are not increased in line with inflation.
Fischer equation
MV=PY.
Where M is the money supply, V is the velocity of circulation of money, P is the price level and Y is real output.
Foreign direct investment
Investments in the domestic economy in new manufacturing plants by foreign multinational companies.
Game theory
An analysis of how games players react to changing circumstances and plan their response.
Gini coefficient
A statistical measure of the degree of inequality of income or wealth.
Golden rule
The UK government’s fiscal rule that net government borrowing should only be to fund infrastructure projects.
Goodwill
The value of a firm in excess of its asset value including reputation, brand name, trade contacts and general expertise.
Hit and run entry
Where new firms enter the industry, cream off some of the supernormal profits of the incumbents and then exit.
Homogeneous
All products are the same irrespective of who makes them.
Horizontal equity
When people or firms with the same income and financial circumstances pay the same amount of tax.
“Hot money”
Volatile capital movements which take place in the foreign exchange markets due to interest rate changes.
Hysteresis
The tendency for a variable not to return to it’s original value or state when changed for example, unemployment can lead to higher unemployment.
Income effect
Depending upon an individual’s target level of income, he or she can work fewer hours for the same overall pay.
Increasing returns to scale
Where an increase in factor inputs leads to a more than proportionate increase in outputs.
Interdependent
Where actions by one firm will have an effect on the sales and revenue of other large firms in the market.
Intra-area trade
Trade between the members of a trade agreement.
Inventory investment/stock building
Investment by firms in stocks of raw materials and stocks of finished goods ready to be sold.
Involuntary unemployment
When a worker is willing to accept a job at the going rate but is not offered one.
J-curve effect
In the short term a devaluation or depreciation will lead to a deterioration of the current account before it starts to improve.
Joint profits
Where firms agree to maximise shared profits rather than their individual profits.
Kinked demand curve
A theoretical approach that endeavours to analyse the reasons for price stability in oligopoly.
Labour market failure
Where the free market fails to achieve an efficient allocation of resources in the labour market.
Ladder curve
A model that shows the theoretical relationship between tax rates and tax revenues.
Law of diminishing marginal returns
Where increasing amounts of a variable factor are added to a fixed factor and the amount added to total product by each additional unit of the variable factor eventually decreases.
Legal monopoly
A firm with 25% or more of the market share.
Limit pricing
Setting a price so low that other firms will not enter the industry.
Liquidity
The degree to which financial assets can be easily converted into money.
Long run
Period of time during which all factors become variable and the scale of output can change.
Long-term growth rate
The average rate of economic growth sustained over a period of time.
Lorenz curve
A diagrammatic representation of the distribution of income and wealth.
Marginal cost
The cost of the extra unit of output.
Marginal cost pricing
Setting the price at the level of marginal cost.
Marginal product
The output added by the extra worker or unit of a factor.
Marginal product of labour
The change in total output arising from hiring one more worker.
Marginal propensity to import
The proportion of an increase in income that is spent on imports.
Marginal revenue
The addition to total revenue from the production of one extra unit.
Marketable wealth
Wealth that can be transferred to others.
Marshall-Lerner condition
The devaluation or depreciation of a currency will lead to an overall improvement in the current account as long as the combined price elasticities of demand for exports and imports exceed one.
Measure of Domestic Progress
A measure of economic welfare designed to reflect progress in quality of life and progress towards a sustainable economy by factoring in the social and environmental costs of growth, and benefits of unpaid works such as household labour.
Menu costs
The time and money spent by businesses in changing their prices in line with inflation.
Minimum efficient scale
This corresponds to the lowest point on the long-run average total cost curve and is also known as the output of long-run productive efficiency.
Misery Index
A measure of economic welfare constructed by adding the unemployment rate to the inflation rate.
Monetary base control and reserve asset ratios
Macro Credential Measures
Restrictions imposed by the Bank of England on the ability if high street banks to supply credit and bank deposits.
Monetary factors
The financial rewards to a particular occupation, for example, wage, commission, bonus.
Money illusion
When economic agents fail to realise that changes in money values are not the same as changes in real values.
Monopsonist
A single, dominant buyer.
Multiplier effect
A change in one of the components of aggregate demand leads to a greater overall change in national income.
NAIRU
The non-accelerating inflation rate of unemployment, that is, the level of unemployment at which there is no tendency for inflation to accelerate.
Narrow money
Notes, coins and balances available for normal financial transactions.
Nash equilibrium
Where the optimum strategy is to maintain current behaviour.
Natural monopoly
A firm that can theoretically gain continuous economies of scale and where it is this uneconomic for more than one firm to supply the market.
Natural rate of unemployment
The unemployment that exists when aggregate demand for labour equals aggregate supply, that is, voluntary, frictional unemployment.
Net advantage
The overall rewards to a particular occupation, taking into account monetary and non-monetary factors.
Net current transfers
Mainly government transfers to and from overseas organisations.
Net income flows
The difference between inward and outward flows of interest, profits and dividends.
Neutral fiscal stance
Where the government runs a balanced budget
Non-monetarised sector
Valuable economic activity where no money exchanges hands.
Normal profit
The amount required to keep a factor employed in its present activity in the long run.
Occupational immobility
The difficulties faced by workers wishing to change occupations due to not have the right skills or qualifications.
Oligopoly
When a few large firms have the majority of the market share.
Open market operations (OMOs)
The buying and selling of government bonds in exchange for money to either increase or decrease the money supply.
Parallel pricing
Where firms charge identical prices
Patent laws
The grant of temporary rights over a new product.
Phillips curve
An economic model that shows a trade off between inflation and unemployment.
Poverty trap
When individuals or households are no better off following a lay increase because tax paid increases and benefits are withdrawn.
Predatory pricing
Setting a price that may bankrupt a competitor firm in order to try and take it over.
Price agreements
When firms collude to fix a price at which a product will be sold.
Price discrimination
Where an identical good/service is sold to different customers at different prices for reasons not associated with costs.
Price leader
A firm that establishes the market price that all other firms in the agreement follow.
Price taker
A firm that has to accept the price ruling in the market.
Price war
Where firms competitively lower prices to increase their market share.
Principles of taxation
A modern list of characteristics of a “good tax” system.
Product differentiation
A way of distinguishing a product from that of competitors.
Productive efficiency
When a firm operates at a minimum average total cost, producing the maximum possible output from inputs into the production process.
Productive inefficiency
When firms are not producing at minimum possible average total cost.
Profit maximisation
Where a firm chooses a level of output where marginal revenue equals marginal costs
Public interest
A term used broadly to cover the public’s right not be exploited by firms abusing monopoly power.
Public sector net cash requirement (PSNCR)
Difference between government spending and revenue.
Purchasing power parity
Exchange rates that take into account how much a typical basket of goods in one country costs compared to another country.
Quantity theory of money
The theory that increases in the money supply will lead to increases in the price level.
Rational choice theory
Where all costs and benefits are considered before a decision is taken.
Reactive behaviour
The action taken by firms in response to a change in behaviour of a competitor.
Regulation
Setting rules and controls that restrict market freedom.
Regulatory capture
Where agencies set up to regulate industries or firms can be “captured” or influenced by the firms they are intended to oversee.
Replacement ratio
Unemployment benefits divided by the income an unemployed worker could receive if in work.
Repo rate
The interest rate set by the Monetary Policy Committee of the Bank of England in order to influence inflation. Short for “sale and repurchase” rate.
Restrictive agreements
Where firms collude to indulge in anti-competitive policy.
Restrictive trade practices
Methods used by firms to reduce competition in a market.
Ricardian Theory
David Ricardo outlined the theory of comparative advantage.
Risk averse
Where one party does not take any action that might promote retaliatory activity by another party.
Second degree price discrimination
When the discriminating firm can charge a separate price to different groups of customer.
Semi-manufactures
Products beyond the raw material stage that are used in the production of finished products, for example, chemicals.
Shadow price
A price calculated to more accurately reflect the costs and benefits to society of a good, particularly where no market price has previously been calculated.
Shoe-leather costs
The time and money spent “shopping around” by consumers to find the best deals when prices are rising throughout the economy.
Single market
Removal of obstacles, such as customs checking, to allow the free movement of goods, services, capital and persons through the area.
Social dumping
Where goods are produced by low wage labour usually without expense by employers on workers’ social benefits.
Stagflation
The coexistence of high levels of inflation and unemployment.
Structural budget deficit
A budget resulting from fundamental changes in the structure of the economy.
Sub-normal profit
Profit below normal which should lead to firms leaving the industry.
Sunk costs
Irretrievable costs that occur when a firm exits an industry
Supernormal profit
A return above normal profit - a surplus payment.
Sustainable investment rule
The fiscal rule that over the economic cycle, public sector debt should not exceed 40% of GDP.
Sustainability (of economic growth)
Economic growth which does not impose costs on future generations.
Tacit collusion
Where firms have reached an “agreement” as to each other’s behaviour as a result of repeated observations over time.
Technological unemployment
Unemployment due to the introduction of labour-saving technology.
Theory of marginal productivity
Key theory underpinning the demand for labour.
Third degree price discrimination.
When the discriminating firm can charge a different price in each country.
Trade creation
An increase in international trade that results from the reduction in tariff barriers.
Trade deflection
Redirection of international trade due to the formation of a free trade area.
Trade union mark-up
The addition to wages secured by members of a trade union, compared to what they would earn if there were no union.
Transfer earnings
The minimum payment needed to keep a factor of production in its present use.
Transfer payments
Government payments to individuals for which no service is given in return, for example, state benefits.
Transmission mechanism of monetary policy
The process by which a change in interest rates affects aggregate demand and inflation.
Unanticipated inflation
Where economic agents do not accurately predict the future rate of inflation.
Unemployment trap
Where the income tax and benefit system reduces the net increase in income people can expect from taking paid work. This many people would choose not to take a job.
Velocity of circulation
The number of times the money supply changes hands in a year.
Vertical equity
When the amount that people and firms pay is based on their ability to pay.
Voluntary unemployment
When a worker chooses not to accept a job at the going wage rate.
Wage differentials
Differences in wages arising between individuals, occupations, industries, firms and regions.
Wage-price spiral
The process whereby increases in costs, such as wages, lead to increases in prices, which in turn leads to firms’ costs increasing, and so on.
Wealth
A stock of valuable assets.
“Welfare to work”
A series of policies designed to increase incentives to gain unemployment.
Zero sum game
Where a gain by one player is matched by a loss by another player.
