Definitions Flashcards
Learn the definitions
Demand
The amount of a good or service that consumers are willing and able to buy at different prices
Market
The interaction between buyers and sellers in order to exchange goods or services
Inferior Good
An inferior good is a good whose demand decreases when consumer income rises and vice versa. It has a negative YED value
Normal goods
Goods that will increase in demand as income rises and vice versa. They have a YED greater than 0.
Substitute
A good that offers similar benefits to the consumer as another good. It has a positive XED value
Complementary goods
Goods that are consumed with each other. They have a negative XED value
Supply
The amount of a good or service that producers are willing and able to supply at different price
Joint supply
Goods that are supplied together from the production of one product.
Competitive supply
Two goods competing for the same resources for production
Indirect taxes
Taxes on spending of goods and services by consumers, collected by the supplier on behalf of the government.
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
Opportunity Cost
The best alternative foregone when an economic decision is made
Consumer surplus
The difference between what consumers are willing and able to pay and the market price.
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.
Price elasticity of demand
The responsiveness of quantity demanded to a change in 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
Income Elasticity of Demand
A measure of the responsiveness of demand to a change in income.
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
Price elasticity of supply
The responsiveness of quantity supplied to a change in price
Specific taxes
An indirect tax which is a fixed amount of tax per unit sold.
ad valorem taxes
An indirect tax which is a percentage of the selling price
Price Ceiling
A maximum price set by the government which is below the market equilibrium price.
Price Floor
A minimum price set by the government which is above the market equilibrium price.
Underground (Informal) Markets
Markets where there is economic activity that is unrecorded (illegal/not taxed) by the government.
Negative externalities of production
Harmful effects on third parties that arise when a good or service is produced.
Negative externalities of consumption
Harmful effects on third parties that arise when a good or service is consumed.
Positive externalities of production
Positive effects on third parties that arise when a good or service is produced..
Positive externalities of consumption
Positive effects on third parties that arise when a good or service is consumed.
Demerit goods
Goods or services considered to be harmful to people which are over-provided by the market and therefore over-consumed
Merit Goods
Goods and services considered to be beneficial society that would be underprovided by the market and under-consumed
Public good
Non-rivalrous and non-excludable goods that are available for all to consume, regardless of who pays and who does not.
Common access resources
Goods that are rivalrous but non-excludable
Sustainability
Development that meets the needs of the present generation without compromising the needs of future generations
GDP (Gross Domestic Product)
The dollar value of all final goods and services produced within a country’s borders
GNI (Gross National Income)
Gross Domestic Product plus net income from abroad
Recession
It is two consecutive quarters of negative economic growth
Consumption
The spending from households (consumers) on goods and services.
Saving
Income that is not spent, but stored in financial institutions
Investment
The spending by firms (or the government) on capital
Government Spending
All government expenditure on goods and services.
Green GDP
A modified measure of GDP that takes into account the costs of environmental damage
Net Exports
The value of exports minus the value of imports
Consumer confidence
A measure of the optimism of consumers about their future income and future economic conditions
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
Aggregate demand
The total demand for all goods and services produced in an economy, compromising of C+ I+G+(X-M)
Aggregate supply
The total quantity of goods and services produced in an economy (real GDP) over a particular time period at different price levels
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
Potential output
Total gross domestic product (GDP) that could be produced when the economy is at full employment
Recessionary Gap
When the economy is at an equilibrium below potential output
Inflationary Gap
When the economy is at an equilibrium above potential output.
Unemployment
People of working age who are actively seeking work but are without work
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
Cyclical Unemployment
Unemployment due to a lack of aggregate demand for goods and services
Seasonal Unemployment
A level of unemployment that is expected to occur at specific times of the year.
Frictional Unemployment
Short-term unemployment that can occur when a person enters or re-enters the workforce
Structural unemployment
Unemployment caused by a decline in demand for a particular type of labour
Natural Rate of Unemployment
Unemployment that still occurs when an economy operates at its potential. Includes frictional, seasonal and structural unemployment.
Inflation
A sustained increase in the price level.
Disinflation
Where the price level increases at a decreasing rate
Deflation
A sustained decrease in the price level.
Consumer price index
The measure of a weighted average price index of a basket of consumer goods and services that a typical household consumes.
Producer Price Index
The measure of a weighted average price index of inputs and intermediate goods that are bought by producers
Economic growth
Increase in real GDP
OR
Increase in potential real GDP.
Physical capital
The capital goods which exist within an economy.
Natural capital
The natural resources that exist within an economy
Human Capital
The skills, abilities and knowledge acquired by the labour force
Absolute Poverty
A condition where people live below a certain level of income necessary to meet basic needs.
Relative Poverty
The inability of an individual or family to maintain a socially acceptable standard of living.
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.
Progressive Taxes
A tax that imposes a lower tax rate on low-income earners and a higher tax rate on high-income earners
Transfer payments
Payments made by the government to individuals and businesses for which no good or service is exchanged.
Fiscal policy
Government policy that amends government spending and/or taxes to achieve economic objectives
Budget surplus
It is when government expenditure is less than government revenue
Budget deficit
When government expenditure is greater 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
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
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
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
trade liberalisation
The removal or reduction of restrictions or barriers on the free exchange of goods between nations.
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
Economies of Scale
Exist when the average costs for a firm decrease as the firm increases its output.
Free Trade
International trade that takes place without any trade barriers
List two administrative trade barriers
- Safety standards
- Health standards
- Environmental standards
- Customs procedures
- Bureaucratic procedures
- Product standards
- Packaging requirements
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
Tariff
A tax on imports
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);
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.
Exchange Rates
The price of a currency in terms of another currency .
Appreciation
A rise in the value of a currency in terms of another currency in a floating exchange rate system
Depreciation
A decrease 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.
Current Account
A measure of the flow of funds from the trade of goods and services, net income flows and net transfers
Current account deficit
When the outflow of funds from the trade in goods and services, income flows and transfers are greater than inflows
Current Account Surplus
When the inflow of funds from the trade in goods and services, income flows and transfers are greater than the outflows
List 3 components of the current account
- Balance of trade in goods
- Balance of trade in services
- Net flows of income
- Net current Transfers
Financial Account
Measures the net change in the foreign ownership of domestic financial assets
Capital account
Measures inflows minus outflows of funds for capital transfers and transactions in non-produced, non-financial assets.
Foreign Currency Reserves
Reserves of foreign currencies held by central banks or governents.
Marshall-Lerner condition
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
Bilateral Trade Agreements
A trade agreement between two countries which aims to lower trade barriers or to increase trade
Preferential Trade Agreement
A trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement.
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.
Trade Creation - HL
HL - When trade is diverted from a less efficient domestic producer towards a more efficient producer as a result of economic integration.
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.
Terms of trade - HL
HL - the value of a country’s average export prices relative to their average import prices.
Improvement in terms of trade (HL)
HL - When average export prices increase relative to average import prices
Deterioration in Terms of trade (HL)
HL - when average export prices decrease relative to average import prices
Law of diminishing marginal returns
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
Productivity
Measure of output per unit of input/time/labour
Economic costs
Implicit cost and explicit cost of a firm when producing a certain quantity of goods and services
Explicit costs
HL - Direct payments that are made for costs of production
Implicit costs
HL - The value of opportunity costs
Marginal Cost
HL - The cost of producing one extra unit of output
Variable Costs
HL - costs that vary with the level of output.
Average cost
HL - average cost per unit of output. Total cost divided by quantity
Fixed costs - HL
HL - Costs that remain the same regardless of the level of output
Total revenue
HL - The total money received by a firm from the sale of a particular quantity of output.
Normal profit
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
Abnormal profit
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).
Satisficing
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.
productive efficiency
HL - Exists when production takes place at minimum ATC or when ATC=MC
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
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.
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.
Open/Formal collusion
HL - A situation where a small number of firms act together to avoid competition through agreements to fix prices
Collusive oligopoly
A situation where a small number of firms work together to avoid competition through agreements to fix prices
Cartel
HL - A group of producers in an industry that join together to regulate supply or fix prices
Tacit/Informal collusion
HL - a situation where firms follow a leading firm to set the same price
Price discrimination
HL - Price discrimination occurs when different customer groups are charged different prices and the difference is not justified by cost differences
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
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
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
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
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
Components of the HDI
- Real gross national income per capita
- Mean years of schooling
- Expected years of schooling
- Life expectancy
Diversification
A strategy to increase the variety of goods and services produced in order to avoid over-specialisation
Corruption
Abuse and dishonest use of power
Foreign Direct Investment
Long-term investment in a foreign country by a multinational corporation
Multinational Corporations (MNCs)
A company that has productive units in more than one country
Official Development Assistance (ODA)
Aid or financial assistance given from a Government for the purposes of development and/or welfare
World Bank
An international organisation whose aims include providing aid and advice to developing countries and reducing poverty levels.
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
Multilateral aid
Money given by countries to international (multilateral) institutions which are distributed to countries.
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.
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.
Market-oriented policies
A policy in which economic decisions are made by the private sector (firms and consumers) where government intervention is limited
