Definitions Flashcards
Production
The transformation of inputs into outputs by firms in order to earn profit (or to meet some other objective).
Consumption
The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.
Factors of production (or resources)
The inputs into the production of goods and services: labour, land and raw materials, and capital.
Labour
All forms of human input, both physical and mental, into current production.
Land and raw materials
Inputs into production that are provided by nature: e.g. unimproved land and mineral deposits in the ground.
Capital
All inputs into production that have themselves been produced: e.g. factories, machines and tools.
Scarcity
The excess of human wants over what can actually be produced to fulfil these wants.
Macroeconomics
The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy.
Aggregate demand
The total level of spending in the economy.
Aggregate supply
The total amount of output in the economy.
Microeconomics
The branch of economics that studies individual units: e.g. households, firms and industries. It studies the interrelationships between these units in determining the pattern of production and distribution of goods and services.
Inflation
A general rise in the level of prices throughout the economy.
(Annual) Rate of inflation
The percentage increase in the level of prices over a 12-month period.
Balance of trade
Exports of goods and services minus imports of goods and services. If exports exceed imports, there is a ‘balance of trade surplus’ (a positive figure). If imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure).
Recession
A period where national output falls for two or more successive quarters.
Unemployment
The number of people of working age who are actively looking for work but are currently without a job. (Note that there is much debate as to who should officially be counted as unemployed.)
Demand-side policy
Government policy designed to alter the level of aggregate demand, and thereby the level of output, employment and prices.
Supply-side policy
Government policy that attempts to alter the level of aggregate supply directly.
Opportunity cost
The cost of any activity measured in terms of the best alternative forgone.
Rational choices
Choices that involve weighing up the benefit of any activity against its opportunity cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
Marginal costs
The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Marginal benefits
The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
Rational decision making
Doing more of an activity if its marginal benefit exceeds its marginal cost and doing less if its marginal cost exceeds its marginal benefit.
Economic efficiency
A situation where each good is produced at the minimum cost and where individual people and firms get the maximum benefit from their resources.
Productive efficiency
A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost.
Allocative efficiency
A situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income. Note that a redistribution of income would lead to a different combination of goods that was allocatively efficient.
Equity
A distribution of income that is considered to be fair or just. Note that an equitable distribution is not the same as an equal distribution and that different people have different views on what is equitable.
Production possibility curve
A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.
Increasing opportunity costs of production
When additional production of one good involves ever-increasing sacrifices of another.
Investment
The production of items that are not for immediate consumption.
Barter economy
An economy where people exchange goods and services directly with one another without any payment of money. Workers would be paid with bundles of goods.
Market
The interaction between buyers and sellers.
Centrally planned or command economy
An economy where all economic decisions are taken by the central authorities.
Free-market economy
An economy where all economic decisions are taken by individual households and firms and with no government intervention.
Mixed economy
An economy where economic decisions are made partly by the government and partly through the market. In practice all economies are mixed.
Informal sector
The parts of the economy that involve production and/or exchange, but where there are no money payments.
Subsistence production
Where people produce things for their own consumption.
Input–output analysis
This involves dividing the economy into sectors, where each sector is a user of inputs from and a supplier of outputs to other sectors. The technique examines how these inputs and outputs can be matched to the total resources available in the economy.
Price mechanism
The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.
Equilibrium price
The price where the quantity demanded equals the quantity supplied: the price where there is no shortage or surplus.
Equilibrium
A position of balance. A position from which there is no inherent tendency to move away.
Mixed market economy
A market economy where there is some government intervention.
Relative price
The price of one good compared with another (e.g. good X is twice the price of good Y).
Economic model
A formal presentation of an economic theory.
Induction
Constructing general theories on the basis of specific observations.
Deduction
Using a theory to draw conclusions about specific circumstances.
Ceteris paribus
Latin for ‘other things being equal’. This assumption has to be made when making deductions from theories.
Abduction
Using pieces of evidence to develop a plausible explanation. This can then be tested by gathering more evidence.
Positive statement
A value-free statement which can be tested by an appeal to the facts.
Normative statement
A value judgement.
Perfect competition (preliminary definition)
A situation where the consumers and producers of a product are price takers.
Price taker
A person or firm with no power to be able to influence the market price.
Law of demand
The quantity of a good demanded per period of time will fall as price rises and will rise as price falls, other things being equal (ceteris paribus).
Income effect
The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change.
Substitution effect
The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.
Quantity demanded
The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.
Demand schedule for an individual
A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.
Market demand schedule
A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.
Demand curve
A graph showing the relationship between the price of a good and the quantity of the good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or group of consumers, or more usually for the whole market.
Substitute goods
A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.
Complementary goods
A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall.
Normal good
Goods whose demand increases as consumer incomes increase. They have a positive income elasticity of demand. Luxury goods will have a higher income elasticity of demand than more basic goods.
Inferior good
Goods whose demand decreases as consumer incomes increase. Such goods have a negative income elasticity of demand.
Change in demand
The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes.
Change in the quantity demanded
The term used for a movement along the demand curve to a new point. It occurs when there is a change in price.
Demand function
An equation which shows the mathematical relationship between the quantity demanded of a good and the values of the various determinants of demand.
Regression analysis
A statistical technique which allows a functional relationship between two or more variables to be estimated.
Econometrics
The science of applying statistical techniques to economic data in order to identify and test economic relationships.
Supply schedule
A table showing the different quantities of a good that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers, or for all producers (the market supply schedule).
Supply curve
A graph showing the relationship between the price of a good and the quantity of the good supplied over a given period of time.
Substitutes in supply
These are two goods where an increased production of one means diverting resources away from producing the other.
Joint supply goods
These are two goods where the production of more of one leads to the production of more of the other.
Change in the quantity supplied
The term used for a movement along the supply curve to a new point. It occurs when there is a change in price.
Change in supply
The term used for a shift in the supply curve. It occurs when a determinant other than price changes.
Market clearing
A market clears when supply matches demand, leaving no shortage or surplus.
Identification problem
The problem of identifying the relationship between two variables (e.g. price and quantity demanded) from the evidence when it is not known whether or how the variables have been affected by other determinants. For example, it is difficult to identify the shape of a demand curve simply by observing price and quantity when it is not known whether changes in other determinants have shifted the demand curve.
Price elasticity of demand
The responsiveness of quantity demanded to a change in price.
Formula for price elasticity of demand
The percentage (or proportionate) change in quantity demanded divided by the percentage (or proportionate) change in price.
Elastic demand
Where quantity demanded changes by a larger percentage than price. Ignoring the negative sign, it will have a value greater than 1.
Inelastic demand
Where quantity demanded changes by a smaller percentage than price. Ignoring the negative sign, it will have a value less than 1.
Unit elasticity of demand
Where quantity demanded changes by the same percentage as price. Ignoring the negative sign, it will have a value equal to 1.
Total consumer expenditure on a product (TE) (per period of time)
The price of the product multiplied by the quantity purchased: TE = P × Q.
Total revenue (TR) (per period of time)
The total amount received by firms from the sale of a product, before the deduction of taxes or any other costs. The price multiplied by the quantity sold: TR = P x Q.
Arc elasticity
The measurement of elasticity between two points on a curve.
Average (or ‘midpoint’) formula for price elasticity of demand
∆QD/average QD , ∆P/average P.
Point elasticity
The measurement of elasticity at a point on a curve. The formula for price elasticity of demand using the point elasticity method is dQ/dP × P/Q, where dQ/dP is the inverse of the slope of the tangent to the demand curve at the point in question.
Price elasticity of supply
The responsiveness of quantity supplied to a change in price.
Formula for price elasticity of supply
The percentage (or proportionate) change in quantity supplied divided by the percentage (or proportionate) change in price: %∆QS ÷ %∆P. Using the arc formula, this is calculated as ∆QS/average QS ÷ ∆P/average P. Using the original formula, this is calculated as ∆QS/original QS ÷ ∆P/original P
Formula for price elasticity of supply (arc method)
∆Qs/average Qs ÷ ∆P/average P.
Income elasticity of demand
The responsiveness of demand to a change in consumer incomes.
Formula for income elasticity of demand (YϵD)
The percentage (or proportionate) change in demand divided by the percentage (or proportionate) change in income: %DQ ÷ %∆Y.
Cross-price elasticity of demand
The responsiveness of demand for one good to a change in the price of another.
Formula for cross-price elasticity of demand
The percentage (or proportionate) change in demand for good A divided by the percentage (or proportionate) change in price of good B: %∆QDA ÷ %∆PB.
Speculation
Where people make buying or selling decisions based on their anticipations of future prices.
Speculators
People who buy (or sell) commodities or financial assets with the intention of profiting by selling them (or buying them back) at a later date at a higher (lower) price.
Self-fulfilling speculation
The actions of speculators tend to cause the very effect that they had anticipated.
Stabilising speculation
Where the actions of speculators tend to reduce price fluctuations.
