Definitions Flashcards
Define the term absolute advantage.
A country will have an absolute advantage when it output of a product is greater per unit of resource used than any other country.
Define the term absolute poverty.
This is when someone doesn’t have the income or wealth to meet their basic needs, such as food, shelter and water.
Define the term accelerator process.
This is where any change in demand for goods/services beyond current capacity will lead to a greater percentage increase in the demand for the capital goods that firms need to produce those goods/services.
Define the term actual economic growth.
A measure of economic growth which is adjusted for inflation.
Define the term aggregate demand.
The total demand, or total spending, in an economy at a given price level over a given period of time. It’s made up of consumption, investment, government spending and net exports.
Define the term aggregate supply.
The total amount of goods and services which can be supplied in an economy at a given price level over a given period of time.
Define the term allocative efficiency.
This is when the price of a good is equal to the price that consumers are happy to pay for it. This will happen when all resources are allocated efficiently.
Define the term asymmetric information.
This is when buyer have more information than sellers (or the opposite) in a market.
Define the term automatic stabilisers.
These are parts of fiscal policies that will automatically react to changes in the economic cycle. For example, during a recession, government spending is likely to increase because the government will automatically pay out more unemployment benefits, which may reduce the problems the recession causes.
Define the term average cost.
The cost of production per unit of output - i.e. a firm’s total cost for a given period of time, divided by the quantity produced.
Define the term average revenue.
The revenue per unit sold - i.e. a firm’s total revenue for a given period of time, divided by the quantity sold.
Define the term balance of payments.
A record of a country’s international transactions - i.e. flows of money into and out of a country.
Define the term bank rate.
The official rate of interest set by the Monetary Policy Committee of the Bank of England.
Define the term barriers to entry.
Barriers to entry are any potential difficulties that make it hard for a firm to enter a market.
Define the term barriers to exit.
Barriers to exit are any potential difficulties that make it hard for a firm to leave a market.
Define the term budget deficit.
When government spending is greater than its revenue.
Define the term budget surplus.
When government spending is less than its revenue.
Define the term capital account on the balance of payments .
A part of the record of a country’s international flows of money. This includes transfers of non-monetary and fixed assets, such as through emigration and immigration.
Define the term cartel.
A group of producers that agree to limit production in order to keep the price of goods or services high.
Define the term circular flow of income.
The flow of national output, income and expenditure between households and firms. National output = national income = national expenditure.
Define the term comparative advantage.
A country has a comparative advantage if the opportunity cost of it producing a good is lower than the opportunity cost for other countries.
Define the term competition policy.
Government policy aimed at reducing monopoly power in order to increase efficiency and ensure fairness for consumers.
Define the term concentration ratio.
This shows how dominant firms are in a market, e.g. if three firms in market have 90% market share then the three-firm concentration ratio is 90%.
Define the term consumer surplus.
When a consumer pays less for a good than they were prepared to, this difference is the consumer surplus.
Define the term contestability.
A market is contestable if it’s easy for new firms to enter the market, i.e. barriers to entry are low.
Define the term cost benefit analysis.
This involves adding up the total private and external costs and benefits of a major project in order to decide if the project should go ahead.
Define the term cost-push inflation.
Inflation caused by the rising cost of inputs of production.
Define the term cross elasticity of demand.
This is a measure oh how the quantity demanded of one good/service responds to a change in the price of another good/service.
Define the term cross-subsidy.
Using profit from profitable routes or services to subsidise unprofitable routes or services.
Define the term current account on the balance of payments.
A part of the record of a country’s interantional flows of money. It consists of: trade in goods, trade in services, international flows of income (salaries, interest, profit and dividends), and transfers.
Define the term cyclical unemployment.
Unemployment caused by a shortage of demand in an economy, e.g. when there’s a slump.
Define the term demand-pull inflation.
Inflation caused by excessive growth in aggregate demand compare to aggregate supply.
Define the term demand-side policy.
Government policy that aims to increase aggregate demand in an economy. For example, a policy to increase consumer spending in an economy.
Define the term demerit good.
A good or service that has greater social costs when it’s consumed than private costs. Demerit goods tend to be overconsumed.
Define the term deregulation.
Removing rules imposed by a government that can restrict the level of competition in a market.
Define the term derived demand.
The demand for a good or factor of production due to its use in making another good or providing a service.
Define the term diseconomies of scale.
A firm is experiencing diseconomies of scale when the average cost of production is rising as output rises.
Define the term duopoly.
An ologopolistic market dominated by two firms.
Define the term dynamic efficiency.
This is about firms improving efficiency in the long term by carrying out research and development into new or improved products, or investing in new technology and training to improve the production process.
Define the term economic cycle.
The economic cycle is the fluctuations in actual growth over a period of time.
Define the term economic growth.
An increase in an economy;s productive potential. Usually measured as the rate of change of the GDP, or the GDP per capita.
Define the term economic integration.
The process by which the economies of different countries become more closely linked, e.g. through free trade agreements.
Define the term economies of scale.
A firm is experiencing economies of scale when the average cost of production is falling as output rises.
Define the term equilibrium.
A market for a product is in equilibrium when the quantity supplied is equal to the quantity demanded.
Define the term exchange rate.
The price at which one currency buys another.
Define the term externalities.
The external costs or benefits to a third party that is not involved in the making, buying/selling and consumption of a specific good/service.
Define the term factors of production.
These are the four inputs needed to make the things that people want. They are: land, labour capital and enterprise.
Define the term financial account on the balance of payments.
A part of the record of a country’s international flows of money. This involves the movement of financial assets (e.g. through foreign direct investment).
Define the term fiscal policy.
Government policy that determines the levels of government spending and taxation. Often use to increase or decrease aggregate demand in an economy.
Define fixed costs.
Costs that don’t vary with the level of output of a firm in the short-run.
Define the term foreign direct investment.
This is when a firm based in one country makes an investment in a different country.
Define the term franchise.
An agreement where the government allows a train operating company to run a certain set of passenger rail services, under a set of agreed conditions.
Define the term free market.
A market where there is no government intervention. Competition between different suppliers affects supply and demand, and as a result determines prices.
Define the term free rider problem.
This means that once a public good is provided it’s impossible to stop someone from benefiting from it, even if they haven;t paid towards it.
Define the term free trade.
International trade without any restrictions from things such as trade barriers.
Define the term frictional unemployment.
The unemployment experienced by workers between leaving one job and starting another.
Define the term globalisation.
The increasing integration of of economies internationally, which is making the world more like a single economy.
Define the term government failure.
This occurs when the government intervention into a market causes a misallocation of resources.
Define the term gross domestic product.
The total value of all the goods and services produced in a country in a year.
Define the term hit and run tactics.
This is when firms enter a market while supernormal profits can be made and then leave the market once prices have been driven down to normal-profit levels.
Define the term Human Development Index.
A measure of a country;s economic development, used by the UN, that combines measures of health (life expectancy), education (average and expected years in school), and the standard of living (real GNI per capita).
Define the term imperfect information.
A situation where buyers and/or sellers don’t have fill knowledge regarding price, costs, benefits and availability of a good or service.
Define the term income elasticity of demand.
This is a measure of how the demand for a good/service responds to a change in real income.
Define the term inflation.
The sustained rise in the average price of goods and service over a given period of time.
Define the term infrastructure.
The basic facilities and services needed for a country and its economy to function.
Define the term integrated transport policy.
Policy that considers the transport network as a whole rather than just focusing on a single transport mode or project (This includes policy to create an integrated transport system.)
Define the term integrated transport system.
A transport network where freight and passengers can easily move from one mode of transport to another.
Define the term labour immobility.
This occurs when labour can’t easily move around to find jobs (geographical mobility) or easily switch between different occupations (occupational immobility).
Define the term long-run aggregate supply.
In the long-run it is assumed that, because factors and costs of production can change, an economy will run at full capacity - so LRAS is the productive potential of an economy.
Define the term marginal cost.
The cost to a firm of producing the final unit of output.
Define the term marginal product.
The extra output that’s produced when a firm adds one more unit of one of the factors of production they’re using.
Define the term marginal propensity to consume.
The proportion of an increase in income that people will spend (and not save).
Define the term marginal revenue.
The extra revenue received as a result of selling more unit of output.
Define the term market failure.
This is where the price mechanism fails to allocate resources efficiently.
Define the term merit good.
A good or service which provides greater social benefits when it’s consumed than private benefits. Merit goods tend to be underconsumed.
Define the term minimum efficient scale of production.
The lowest level of output at which a firm can achieve the lowest possible average cost of production.
Define the term mode of transport.
A means of moving passengers or freight, for example train, motorbike or container ship.
Define the term monetary policy.
Government policy that involves controlling the total amount of ‘money’ in an economy (the money supply), and how expensive it is to borrow that money. It involves manipulating interest rates, exchange rates and restrictions on the supply of money.
Define the term monopoly.
A pure monopoly is a market with only one supplier. Some markets will be referred to as a monopoly if there’s more than one supplier, but one supplier dominates the market.
Define the term monopoly power.
The ability of a firm to be a ‘price maker’ and influence the price pf a particular good in a market.
Define the term monopsony.
A market with a single buyer.
Define the term multinational corporations.
Firms which function in at least one other country, aside from their country of origin.
Define the term multiplier effect.
The process by which an injection into the circular flow of income creates a change in the size of national income that’s greater than the injection’s size.
Define the term National Minimum Wage.
A legal minimum hourly rate of pay, set for different age groups.
Define the term nationalised industry.
An industry owned by the government.
Define the term natural monopoly.
An industry where economies of scale are so great that the lowest long-run average cost can only be achieved if the market is made up of a single provider.
Define the term natural rate of unemployment.
The rate of unemployment when the labour market is in equilibrium (i.e. when labour demand is equal to labour supply.
Define the term normal profit.
A firm is making normal profit when its total revenue is equal to its equal costs.
Define the term oligopoly.
A market dominated by a few large firms that offer differentiated products, with high barriers to entry. The firms are interdependent and may use competitive ot collusive strategies.
Define the term open skies agreement.
An agreement between governments that allows airlines to fly between (and sometimes within) the countries involved, with few restrictions.
Define the term opportunity cost.
The next best option forgone.
Define the term output gap.
The gap between the trend rate of economic growth and actual economic growth. Output gaps can be positive or negative.
Define the term participation rate.
The proportion of working age people in an economy that are either in work or actively seeking work.
Define the term perfect information.
This is when buyers and sellers have full knowledge of prices, costs, benefits and availability of product.
Define the term Phillips curve (long run).
A curve that shows the relationship between inflation and unemployment in the long run - it’s always a vertical line positioned at the natural rate of unemployment (NRU).
Define the term Phillips curve (short run).
A curve that shows the relationship between inflation and unemployment in the short run - as the level of one falls, the level of the other rises.
Define the term predatory pricing.
An aggressive pricing tactic which involves incumbent firms in a market lowering their prices to a level that a new entrant to the market can’t match, in order to force them out of the market.
Define the term price cap.
A limit on price rises that makes a market fairer to consumers. A price cap also provides an incentive for firms to increase efficiency. Two common price caps are RPI - X and RPI - X+K.
Define the term price discrimination.
This occurs when a seller charges different prices to different customers for exactly the same product.
Define the term price elasticity of demand.
This is a measure of how the quantity demanded of a good/service responds to a change in price.
Define the term price elasticity of supply.
This is a measure oh how the quantity supplied of a good/service responds to a change in its price.
Define the term price maker.
A firm that has some power to control the price it sells at.
Define the term price mechanism.
This is when changes in demand or supply of a good/service lead to changes in its price and the quantity bought/sold.
Define the term price taker.
A firm that had no power to control the price it sells at - it has to accept the market price.
Define the term price war.
A situation where one firm in a market lowers their prices, and other firms follow suit, possibly triggering a series of price cuts as firms try to undercut one another.
Define the term private finance initiatives.
These are schemes where a private firm provides public infrastructure, which the government then pays for by leasing it from that firm for a long period of time.
Define the term privitisation.
When a firm or a whole industry changes from being run by the public sector to the private sector.
Define the term producer surplus.
When a producer receives more for a good than they were prepared to accept, this difference is the producer surplus.
Define the term production possibility frontier.
A curve which shows the maximum possible outputs of two goods or service using a fixed amount of inputs.
Define the term productive efficiency.
This occurs when products are produced at a level of output where the average cost is lowest.
Define the term productivity.
The average output produced per unit of a factor of production - for example, labour productivity would be the average output per worker (or per worker-hour).
Define the term profit.
A firm’s total revenue minus its total costs.
Define the term progressive taxation.
A tax system where an individual’s tax rises (as a percentage of their income) as their income rises.
Define the term proportional taxation.
A tax system where everyone pays the same proportion of tax regardless of their income level.
Define the term protectionism.
When a government uses policies to control the level of international trade and protect its own economy, industries and firms.
Define the term public good.
A good which people can’t be stopped from consuming, even if they’ve not paid for it, and the consumption of which doesn’t prevent others from benefiting from it (e.g. national defence).
Define the term purchasing power parity.
An adjustment of an exchange rate to reflect the real purchasing power of the two currencies.
Define the term quantitative easing.
This involves a central bank ‘creating new money’ and using it to buy assets owned by financial institutions and other firms. it increases the money supply, which will enable individuals to spend more, or lend it to other people to spend.
Define the term quantity theory of money.
This theory is based on the idea that changes in the supply of money will cause changes to the price level. It uses the formula: MV=PT, which is known as Fisher’s equation of exchange.
Define the term quasi-public good.
A good which appears to have the characteristics of a public good, but doesn’t exhibit them fully.
Define the term real income.
A measure of the amount of goods/services that a consumer can afford to purchase with their income, adjusted for inflation.
Define the term real-wage unemployment.
Unemployment caused by real wages being pushed above the equilibrium level of employment. It can be caused by trade unions negotiating for higher wages, or the introduction of a national minimum wage.
Define the term recession.
This occurs when there’s negative economic growth for at least two consecutive quarters. Typically there’s falling demand, low levels of investment and rising unemployment during a recession.
Define the term regressive taxation.
A tax system where an individual’s tax falls (as a percentage of their income) as their income rises.
Define the term relative poverty.
This is when someone has a low income relative to other incomes in their country.
Define the term returns to scale.
How much a firm’s output changes as they increase input (i.e. increase all factors of production). Returns to scale are increasing if output increases proportionally with input, constant if output increases proportionally with input, and decreasing if output increases less than proportionally with input.
Define the term revenue.
The total value of sales within a time period. It can be calculated using the formula: price per unit X quantity sold.
Define the term staisficing.
Running a firm in a way that does just enough to satisfy important stakeholders in the firm, rather than trying to maximise something (e.g. profit or revenue).
Define the term shadow price.
A price given to something (e.g. an accident) that ha no market price (estimated using the opportunity cost).
Define the term short-run.
A time period in which at least one of a firm’s factors of production is fixed.
Define the term short-run aggregate supply.
This is aggregate supply when the factors of production are fixed.
Define the term static efficiency.
This occurs when allocative and productive efficiency are both achieved at a particular time.
Define the term structural unemployment.
Unemployment (usually) caused by the decline of a major industry, which is made worse by labour immobility (geographical or occupational).
Define the term subsidy.
An amount of money paid by a government to the producer of a good/service to lower the price and increase demand for the good/service.
Define the term sunk cost.
This is an unrecoverable cost of entering a market, e.g. advertising. It can be a barrier to exit.
Define the term supernormal profit.
A firm is making supernormal profit when its total revenue exceeds its total costs.
Define the term supply-side policy.
Government policy that aims to increase aggregate supply in an economy. For example, a policy to increase the productive capacity of the economy.
Define the term sustainability.
This is about meeting the needs of people now, without making it more difficult for people in the future to meet their own needs.
Define the term tariff.
A form of tax placed on certain imports to make them more expensive and discourage their consumption.
Define the term tax.
An amount of money paid to a government. It’s paid directly e.g. income tax or indirectly e.g. excise duty.
Define the term terms of trade.
A measure of the relative price of a country’s exports compared to its imports.
Define the term total costs.
All the costs for a firm involved in producing a particular amount of output.
Define the term total revenue.
The total amount of money a firm receives from its sales, in a particular period of time.
Define the term trade creation.
The removal of trade barriers within a trading bloc, allowing members to buy from the cheapest source.
Define the term trade diversion.
When trade barriers are imposed on non-members of a trading bloc, so trade is diverted away from any cheaper non-members.
Define the term trade liberalisation.
The reduction or removal of tariffs and other restrictions on international trade (i.e. reducing protectionism).
Define the term trade union.
An organisation of workers that acts to represent their interest, e.g. to improve their pay.
Define the term trading blocs.
These are associations between the governments of different countries that promote and manage trade between those countries.
Define the term transfer earnings.
The minimum pay that will stop a worker from switching to their next best pad occupation.
Define the term transport infrastructure.
Structures that need to be in place for transport to operate, for example roads and railways.
Define the term unemployment.
The level of unemployment is the number of people who are looking for a job but cannot find one. The rate if unemployment is the number of people out of work (but looking for a job) as a percentage of the labour force.
Define the term variable costs.
Costs that vary with the level of output of a firm.
Define the term wage differentials.
The differences that exist in wages between different groups of workers, or between workers in the same occupation.
Define the term wage rate.
The price of labour, i.e. the rate of pay to employ a worker.
Define the term World Trade Organisation.
The WTO is an international organisation which provides a forum for its member governments to discuss trade agreements and settle disputes, using a set of trade rules. it aims to help trade to be as free as possible.
Define the term x-inefficiency.
Inefficiency cause by unnecessary costs and waste (i.e. organisational slack)
