Definitions 2020 Flashcards
Demand
The amount of a good or service that consumers are willing and able to buy at different prices
Opportunity Cost
The best alternative foregone when an economic decision is made
Inferior Good
An inferior good is a good whose demand decreases when consumer income rises and vice versa. It has a negative YED value
Supply
The amount of a good or service that producers are willing and able to supply at different price
Competitive supply
Two goods competing for the same resources for production
Complementary goods
Goods that are consumed with each other. They have a negative XED value
Joint supply
Goods that are supplied together from the production of one product.
Indirect taxes
Taxes on spending of goods and services by consumers, collected by the supplier on behalf of the government.
Producer surplus
The price received by a producer in excess of the price that the producer would be willing and able to offer for sale.
Allocative efficiency
Where resources are allocated in such a way that neither too much nor too little is produced from society’s point of view.
Subsidies
Money given to firms by the government to (choose one)
- Reduce production costs
- Reduce prices
- Increasing supply
- Increase consumption,
- Increase investment and employment
- Protect domestic industries from imports
Substitute
A good that offers similar benefits to the consumer as another good. It has a positive XED value
Normal goods
Goods that will increase in demand as income rises and vice versa. They have a YED greater than 0.
Market
The interaction between buyers and sellers in order to exchange goods or services
Consumer surplus
The difference between what consumers are willing and able to pay and the market price.
Primary commodities
A raw or unprocessed material that is harvested or extracted
Cross price elasticity of demand
The responsiveness of the demand of one good to a change in the price of another good
Price elasticity of demand
The responsiveness of quantity demanded to a change in price
Income Elasticity of Demand
A measure of the responsiveness of demand to a change in income.
Price elasticity of supply
The responsiveness of quantity supplied to a change in price
Luxury good
A luxury good is a good for which demand increases more than proportionally as income rises. They are not necessary for living, but are deemed as highly desired within a culture or society
ad valorem taxes
An indirect tax which is a percentage of the selling price
Underground (Informal) Markets
Markets where there is economic activity that is unrecorded (illegal/not taxed) by the government.
Price Floor
A minimum price set by the government which is above the market equilibrium price.
Price Ceiling
A maximum price set by the government which is below the market equilibrium price.
Specific taxes
An indirect tax which is a fixed amount of tax per unit sold.
Demerit goods
Goods or services considered to be harmful to people which are over-provided by the market and therefore over-consumed
Sustainability
Development that meets the needs of the present generation without compromising the needs of future generations
Positive externalities of consumption
Positive effects on third parties that arise when a good or service is consumed.
Merit Goods
Goods and services considered to be beneficial society that would be underprovided by the market and under-consumed
Positive externalities of production
Positive effects on third parties that arise when a good or service is produced..
Negative externalities of production
Harmful effects on third parties that arise when a good or service is produced.
Public good
Non-rivalrous and non-excludable goods that are available for all to consume, regardless of who pays and who does not.
Negative externalities of consumption
Harmful effects on third parties that arise when a good or service is consumed.
Common access resources
Goods that are rivalrous but non-excludable
Investment
The spending by firms (or the government) on capital
Green GDP
A modified measure of GDP that takes into account the costs of environmental damage
Recession
It is two consecutive quarters of negative economic growth
Consumption
The spending from households (consumers) on goods and services.
GNI (Gross National Income)
Gross Domestic Product plus net income from abroad
Net Exports
The value of exports minus the value of imports
Saving
Income that is not spent, but stored in financial institutions
GDP (Gross Domestic Product)
The dollar value of all final goods and services produced within a country’s borders
Government Spending
All government expenditure on goods and services.
Aggregate supply
The total quantity of goods and services produced in an economy (real GDP) over a particular time period at different price levels
Potential output
Total gross domestic product (GDP) that could be produced when the economy is at full employment
Aggregate demand
The total demand for all goods and services produced in an economy, compromising of C+ I+G+(X-M)
Recessionary Gap
When the economy is at an equilibrium below potential output
Business Confidence
A measure of the expectations of businesses about the future economic conditions that affects the level of investment
Interest rates
The cost of borrowing money
Direct taxes
Taxes paid to the government on the income of households and firms
Consumer confidence
A measure of the optimism of consumers about their future income and future economic conditions
Inflationary Gap
When the economy is at an equilibrium above potential output.
Long-run Aggregate Supply
The level of real output that an economy can produce when there is full employment. Represents potential output of an economy
Frictional Unemployment
Short-term unemployment that can occur when a person enters or re-enters the workforce
Natural Rate of Unemployment
Unemployment that still occurs when an economy operates at its potential. Includes frictional, seasonal and structural unemployment.
Underemployment
When a worker is either in a job below their skill level or are employed part-time but willing and able to work full-time
Producer Price Index
The measure of a weighted average price index of inputs and intermediate goods that are bought by producers
Deflation
A sustained decrease in the price level.
Unemployment
People of working age who are actively seeking work but are without work
Consumer price index
The measure of a weighted average price index of a basket of consumer goods and services that a typical household consumes.
Inflation
A sustained increase in the price level.
Structural unemployment
Unemployment caused by a decline in demand for a particular type of labour
Disinflation
Where the price level increases at a decreasing rate
Transfer payments
Payments made by the government to individuals and businesses for which no good or service is exchanged.
Economic growth
Increase in real GDP
OR
Increase in potential real GDP.
Progressive Taxes
A tax that imposes a lower tax rate on low-income earners and a higher tax rate on high-income earners
Regressive Taxes
Taxes where as income increases, the tax rate decreases. Lower income groups feel a bigger impact as they pay a larger proportion of their income on the tax.
Physical capital
The capital goods which exist within an economy.
Seasonal Unemployment
A level of unemployment that is expected to occur at specific times of the year.
Relative Poverty
The inability of an individual or family to maintain a socially acceptable standard of living.
Natural capital
The natural resources that exist within an economy
Cyclical Unemployment
Unemployment due to a lack of aggregate demand for goods and services
Absolute Poverty
A condition where people live below a certain level of income necessary to meet basic needs.
Human Capital
The skills, abilities and knowledge acquired by the labour force
Automatic stabilisers
Government tax and expenditure policies that automatically vary with the level of economic activity and national income, and that act to reduce short-term fluctuation in income
Budget surplus
It is when government expenditure is less than government revenue
Automatic stabilisers
Government tax and expenditure policies that automatically vary with the level of economic activity and national income, and that act to reduce short-term fluctuation in income
Budget surplus
It is when government expenditure is less than government revenue
Crowding out
Increased government spending exceeds government revenue and so needs to borrow money, forcing interest rates up, thereby reducing investment and consumption
Monetary Policy
Actions carried out by the central bank to change the money supply and therefore change interest rates
Two responsibilities of a central bank
- Control of interest rates
- Control of money supply
- Banker to the banks
- Control of exchange rate policy
- Regulator of commercial banks
- Maintenance of price stability
trade liberalisation
The removal or reduction of restrictions or barriers on the free exchange of goods between nations.
Market-based supply-side policies
Policies whereby the government reduces its role in the economy to allow market forces to increase productivity and therefore increase potential output and achieve long-term economic growth.
Infrastructure
The large scale physical and organisational structures, usually provided by the government, that are essential for economic activities
Interventionist Supply-side Policy
Policies whereby the government intervenes to increase the quality and quantity of resources in the economy to increase potential output and achieve long-term economic growth
Labour Market Reforms
Reform intended to make labour markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labour costs and increase employment by lowering the natural rate of unemployment
Free Trade
International trade that takes place without any trade barriers
List two functions of the WTO
- Set and enforce rules for international trade
- Resolve trade disputes
- Provide a forum for negotiating trade liberalisation
- Help developing countries benefit from trade
Infant Industries
A new industry that does not benefit from economies of scale and needs protection to compete with imports
Trade war
A situation in which countries attempt to damage each other’s trade by the imposition of quotas and/or tariffs.
List two administrative trade barriers
- Safety standards
- Health standards
- Environmental standards
- Customs procedures
- Bureaucratic procedures
- Product standards
- Packaging requirements
Tariff
A tax on imports
Economies of Scale
Exist when the average costs for a firm decrease as the firm increases its output.
Quotas
Limits on the number or value of a good that can enter a country
Dumping
The practice of selling a good in international markets at a price that is below the cost of producing it (usually by providing export subsidies);
Exchange Rates
The price of a currency in terms of another currency .
Depreciation
A decrease in the value of a currency in terms of another currency in a floating exchange rate system
Appreciation
A rise in the value of a currency in terms of another currency in a floating exchange rate system
Devaluation
Decrease in the value of a currency in terms of another currency as a result of government or central bank intervention.
Revaluation
An increase in the value of one currency in terms of another currency as a result of government or central bank intervention.
Fixed exchange rate
Where the government or central bank ties the value of the official exchange rate to the value of another currency
Managed Float
Periodic intervention by a central bank in order to influence exchange rate.
Bilateral Trade Agreements
A trade agreement between two countries which aims to lower trade barriers or to increase trade
Preferential Trade Agreement
A preferential trade area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely.
Free trade area
A group of countries who all come under the same Free Trade Agreement to allow for lower trade barriers
Customs union
A form of economic integration where member countries agree to liberalise trade and adopt a common tariff for non-members
Common Market
Economic integration; countries that have formed a customs union proceed further to eliminate any barriers to trade between them. They have common external policy and agree to freely move factors of production within the common market.
Monetary union
A form of economic integration where a common market also share a common currency, central bank and interest rates.
Marshall-Lerner condition (HL)
HL - States that for a currency devaluation/depreciation to improve a CAD, the sum of PED for exports and the PED for imports must be greater than one
Trade Creation (HL)
Trade Creation occurs when trade is diverted from a less efficient domestic producer towards a more efficient producer. Countries can then enjoy cheaper imports.
Trade Diversion (HL)
HL - When trade protections cause imports to shift from low-cost countries to higher cost countries as a result of economic integration.
Improvement in terms of trade (HL)
HL - When average export prices increase relative to average import prices
Terms of trade (HL)
HL - the value of a country’s average export prices relative to their average import prices.
Deterioration in Terms of trade (HL)
HL - when average export prices decrease relative to average import prices
Explicit costs (HL)
HL - Direct payments that are made for costs of production
Law of diminishing marginal returns (HL)
HL - States that an increasing number of variable inputs are added to at least one fixed input, marginal product first increases and then eventually decreases
Variable Costs (HL)
HL - costs that vary with the level of output.
Average cost (HL)
HL - average cost per unit of output. Total cost divided by quantity
Marginal cost (HL)
HL - The cost of producing one extra unit of output
Economic costs (HL)
Implicit cost and explicit cost of a firm when producing a certain quantity of goods and services
Implicit costs (HL)
HL - The value of opportunity costs
Productivity (HL)
Measure of output per unit of input/time/labour
Normal profit (HL)
HL - One of the below
- Revenue that covers all cost, including opportunity cost
- Total revenue = implicit and explicit costs
- Economic profit = 0
- Amount of profit needed to keep a firm in business in the long run
Total revenue (HL)
HL - The total money received by a firm from the sale of a particular quantity of output.
Satisficing (HL)
HL
A firm tries to make enough profit in order to satisfy different stakeholders and to pursue other objectives
OR
A firm tries to make enough profit because decision makers do not have the necessary information in order to maximize profits.
Perfect competition (HL)
HL - A market structure where
- there are many buyers and sellers:
- a homogenous product
- free entry and exit
- perfect Knowledge
- perfect Mobility
- Producers are price takers
Productive efficiency (HL)
HL - Exists when production takes place at minimum ATC or when ATC=MC
Abnormal profit (HL)
HL - When a firm earns a level of revenue that is greater than the total costs of production, including opportunity costs (or where a firm earns a level of revenue that is greater than that required to ensure that a firm will continue to supply its existing good or service).
Monopoly
HL - It is a market structure where a single firm dominates the market.
Monopolistic competition
HL - a market structure with:
- A large number of firms
- Similar but differentiated products
- Barriers to entry and exit the market are low
- Each firm possesses some market power.
Perfect competition
HL - A market structure where
- there are many buyers and sellers:
- a homogenous product
- free entry and exit
- perfect Knowledge
- perfect Mobility
- Producers are price takers
Open/Formal collusion
HL - A situation where a small number of firms act together to avoid competition through agreements to fix prices
Price discrimination
HL - Price discrimination occurs when different customer groups are charged different prices and the difference is not justified by cost differences
Oligopoly
HL - A market structure where:
- a small number of firms dominate the industry
- there is interdependence of firms
- high barriers to entry
- homogeneous or differentiated products
- price rigidity
- non-price competition.
Collusive oligopoly
A situation where a small number of firms work together to avoid competition through agreements to fix prices
Tacit/Informal collusion
HL - a situation where firms follow a leading firm to set the same price
Cartel
HL - A group of producers in an industry that join together to regulate supply or fix prices
Economic development
A broad concept involving any two of:
- Improvement in standards of living
- Reduction in poverty
- Improved health and education
- Reduction in unemployment
- Greater equality in income distribution
- Environmental protection
- Increased freedom and economic choice
Poverty trap or poverty cycle
Low incomes lead to low saving which leads to low investment which leads to low growth which leads to low income
Sustainable development
It is the development that meets the need for the present without compromising the ability of future generations to meet their own needs
Two characteristics of an economically less developed country
Any twp of the following:
- Low levels of GDP per capita
- High levels of poverty
- Relatively large agricultural sector
- Large informal sectors
- High birth rates
- Poor infrastructure
- Underdeveloped capital markets
- Heavily indebted
- Unable to access international markets
- Over-specialized on a narrow range of production
- Small tax base
- Dependency on primary sector exports
Components of the HDI
- Real gross national income per capita
- Mean years of schooling
- Expected years of schooling
- Life expectancy
Two millenium development goals
- Eradicate extreme poverty and hunger
- Achieve universal primary education
- Promote gender equality and empowerment of women
- Reduce child mortality
- Improve maternal health
- Combat HIV/AIDS, malaria and other diseases
- Ensure environmental sustainability
- Develop a global partnership for development
Diversification
A strategy to increase the variety of goods and services produced in order to avoid over-specialisation
Market-oriented policies
A policy in which economic decisions are made by the private sector (firms and consumers) where government intervention is limited
Sustainable development
It is the development that meets the need for the present without compromising the ability of future generations to meet their own needs
Official Development Assistance (ODA)
Aid or financial assistance given from a Government for the purposes of development and/or welfare
Concessional long-term loans
A loan stretched over 25 to 40 years with lower than market interest rates. The loan may be include a grace period or be repayable in local currency.
Multilateral aid
Money given by countries to international (multilateral) institutions which are distributed to countries.
Multinational Corporations (MNCs)
A company that has productive units in more than one country
Tied aid
When a country donates money or resources to another on the condition that the funds are used to buy imports from the donor country or linked to a specific project.
Main functions of the IMF
- Ensure the stability of the international monetary system
- Promote international monetary system.
- Lend money to help members in balance of payments difficulties
Foreign Direct Investment
Long-term investment in a foreign country by a multinational corporation
Corruption
Abuse and dishonest use of power
Components of the HDI
- Real gross national income per capita
- Mean years of schooling
- Expected years of schooling
- Life expectancy
World Bank
An international organisation whose aims include providing aid and advice to developing countries and reducing poverty levels.
