Definitions Flashcards
Government Failure
When intervention is ineffective, wasteful or damaging.
Public Interest Theory
That governess intervene in kindly fashions in the economy in order to eliminate waste and to achieve an efficient and socially desirable resource allocation.
Public Choice Theory
As long as market failure arises there is also the possibility of government failure occurring whenever the state attempts to improve on the working of the market.
Accelerator Theory
Where changes in the level of investment are induced by a change in output.
Free good
No costs of production and no scarcity.
Giffen good
Demand increases as price rises.
Economic good
Has value to people and can be sold in a market.
Can satisfy wants and has exchange value.
Composite demand
Demand for a good that has more than one use.
Derived demand
The demand of a good or service that occurs as a result of the demand of another intermediate or final good or service.
Joint demand
Complementary goods - negative XED. Demanded to fulfil the same want.
Competing demand
Substitute goods - positive XED.
XED
Measures how the demand for one good responds to changes in the price of another good.
Market equilibrium
When planned demand equals planned supply in the market.
Aggregate demand
Total planned expenditure in the economy. Known by the C+I+G+X-M.
Allocative efficiency
This is achieved in an economy when it is not possible to make anyone better of without making someone worse off, or you cannot produce more of one good without making less of another.
Balance of payments
Exports minus imports - a deficit means more is imported than exported.
Balance of trade
Visible exports minus visible imports.
Boom/bust policy
The government using macroeconomic tools to stimulate and then contract the economy.
Broad money
Money that is held in banks and building societies but that is not immediately accessible.
Buffer stock
An intervention system that aims to limit the fluctuations of the price of a commodity.
Capital spending
Government spending to improve the productive capacity of the nation, including infrastructure, schools and hospitals.
Central bank
The financial institution in a country or group of countries typically responsible for issuing notes and coins and setting short-term interest rates.
Commodity
A good that is traded, but usually refers to raw materials or semi-manufactured goods.
Competition
A market situation in which there are a large number of buyers and sellers.
Complementary goods.
Goods with a negative cross elasticity of demand.
Complete market failure
Where the free market fails to provide a good. There is a missing market. E.g. public goods.
Composite demand
A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other, usualy leading to higher prices, e.g. milk used in butter and cheese.
Cost push inflation
Where increased costs of production result in firms increasing their prices leading to an increase in the general price level.
Credit crunch
Where borrowing becomes more expensive or unavailable.
Current spending
Government spending on the day-to-day running of the public sector, including raw materials and wages of public sector workers.
Cyclical unemployment
Demand deficient unemployment that occurs as a result of the economic cycle. Insufficient aggregate demand in the economy to employ the available labour.
Deflation
The persistent fall in the general price level.
Demand
The amount that consumers are willing and able to buy at each given price level.
Demand pull inflation
Where aggregate demand exceeds aggregate supply leading to an increase in the level of prices.
Demand-side fiscal policy
Changes in the level or structure of government spending and taxation aimed at influencing one or more of the components of aggregate demand.
Demerit good
A good that would be over-consumed in the free market, as it brings less overall benefit to consumers than they realise. Negative external benefits.
Deregulation
The process of removing government controls from markets.
Derived demand
When the demand for one good or service comes from the demand for another good or service. E.g. the demand for steel is derived from the demand for cars.
Discouraged workers
Workers who leave the job market because, despite numerous attempts, they are unable to find a job.
Diseconomies of scale
Where an increase in the scale of production leads to increases in average total costs for firms.
Disequilibrium
A situation within the market where supply does not equal demand.
Disposable income
Income available to households after the deduction of necessary payments such as taxes.
Division of labour
Breaking the production process down into a sequence of tasks, with workers assigned to particular tasks in order to increase production.
Economic goods
Goods that are scarce and therefore have an opportunity cost
Economic indicators
Economic statistics that provide information about the expansions and contractions of business cycles.
Economic welfare
The benefit or satisfaction an individual or society gets from the allocation of resources.
Economies of scale
Where an increase in the scale of production leads to reductions in average total cost for firms.
Employment
Where labour is actively engaged in a productive activity in exchange for wages.
Equilibrium
The price at which demand is equal to supply and there is no tendency to change.
Excess demand
When demand is greater than supply at a given price.
Excess supply
When supply at a particular price is greater than demand, this should signal to producers to lower prices.
Exchange rate
The price at which one currency exchanges for another.
Externalities
Costs or benefits that spill over to third parties external to a market transaction.
Information failure
Where economic agents do not properly perceive the benefits or disadvantages of a transaction
Fixed costs
Costs of productions that do not vary as output changes.
Flow
Measured over a specified period of time.
Free goods
Goods that have no opportunity cost.
Free-rider problem
Where some consumers benefit from other consumers purchasing a good, particularly in the case of public goods.
Geographical immobility
Where workers find it difficult to move to where employment opportunities, due to family ties and difference in housing costs.
Globalisation
The ability to produce goods anywhere in the world and sell them in any country.
Government failure
When government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation. The costs of government intervention may therefore exceed the benefits.
Incidence of tax
The proportion of a tax that is passed onto the consumer. If most of a tax rise is added to the consumer then the incidence of tax is said to be “high”. When demand is price inelastic then the incidence of tax tends to be high.
Income elasticity of demand
The proportional change in demand after a change in income.
Indirect tax
A tax on spending
Inferior good
a good or service where demand falls when income rises - negative IED.
Inflation
A persistent increase in the general price level
Interest rate
The cost of borrowing or the reward for saving expressed as an annual percentage of the principal
Investment
Total amount spent by firms on capital goods in the economy
Investment good
A product that will increase in value over time
Invisibles
Intangible goods such as the provision of insurance or banking services.
Joint supply
When the production of one good also results in the production of another
Law of unintended consequences
When the actions of consumers, producers and governments have effects that are unanticipated.
Long-run aggregate supply
Th economy’s productive capacity
Marginal private benefit
The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service.
Marginal private cost
The cost of producing or consuming an additional unit of a good.
Marginal external benefit
The benefit to third parties of the production or consumption of an additional unit of a good.
Marginal external cost
The cost on third parties of the production or consumption of an additional unit of a good.
Marginal social benefit
The total benefit to society as a whole for the production of one further unit of a good.
Marginal social cost.
The total cost to society as a whole for producing one further unit of a good.
Market-clearing price
The price at which all goods that are supped will be demanded. D=S.
Market demand
Total demand in a market for a good, the sum of all individuals’ demand, at each given price.
Market failure
Where the market fails to produce what consumers require at the lowest possible cost.
Market supply
The sum of all individual firm’s supply curves at each given price
maximum price
a price ceiling above which the price of a good or service is not allowed to increase
Merit good
A good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption.
Minimum price
A price floor below which the price of a good or service is not allowed to decrease.
Monetary policy
Controlling the macroeconomy via changes in monetary variables such as the money supply or interest rates.
Money supply
the total amount of money in an economy
Monopoly
a market structure dominated by a single seller of a good
Multiplier effect
Where an increase or decrease in one economic variable leads to a larger than proportionate change in output.
Negative expectations
When businesses expect future sales and profits to be less due to factors like falling aggregate demand.
Negative externalities
Costs imposed on a third party not involved with the consumption or production of the good.
Negative output gap
When the economy is producing less that its trend rate of output.
Net government spending
The difference between government spending and taxation.
Nominal GDP
GDP figures that are not adjusted for inflation.
Normal goods
Goods are services that will see an increase in demand as incomes rise. Positive IED.
Occupational immobility
As patterns of demand and employment change, many workers may find it difficult to easily secure new jobs, since they may lack the necessary skills.
Opportunity cost
The benefit derived from the next best alternative foregone.
Partial market failure
When the free market provides a good but with a misallocation of resources.
Planned supply
The amount producers plan to produce at each given price
Policy instrument
Techniques used to achieve policy objectives.
Policy objective
The governments major macroeconomic objectives.
Positive expectations
When businesses expect the future sales and profits to improve due to factors like increased aggregate demand.
Positive externality
When the consumption or production of a good results in a benefit to a third party.
Positive output gap
When the economy’s GDP exceeds trend GDP, increasing inflationary pressure.
Price elasticity
The responsiveness of demand to a change in price.
%change in Q / %change in P
Private good
A good that is both excludable and rival in consumption.
Privatisation
The sale of government owned assets to the private sector.
Production
The conversions of factor inputs into outputs of goods and services.
Production possibility boundary
The maximum possible output that can be achieved given a fixed set of resources and technology in a particular time period.
Productive efficiency
When a firm operates at minimum average total cost, producing the maximum possible output from inputs into the production process.
Productivity
A measure of efficiency, measuring the ratio of inputs to outputs. The most common measure is labour productivity, which is the output per worker.
Profit
when total income or revenue for a firm is greater than total costs
the reward for entrepreneurship.
Public good
A good that is non-excludable and non-rival in consumption.
Quasi-public good
A good that has some of the qualities of a public good but does not fully posses the two required characteristics of non-rivalry and non-excludabilty.
Real GDP/NI/output
GDP figures adjusted for inflation
Real interest rate
the money rate of interest minus the rate of inflation
Recession
two consecutive sectors of negative economic growth
renewable resources
resources that are able to be replenished over time, whereas non-renewables are likely to run out.
Repo rate
The interest rate that is set by the MPC of the BoE in order to influence inflation. Short for “Sale and repurchase rate”.
Savings
Disposable income minus the amount of consumer expenditure. Withdrawal from the circular flow.
Specialisation
The production of a limited range of goods by an individual factor of production, firm or country, in cooperation with others so that together a complete range of goods is produced
Structural unemployment
Unemployment caused by a change in the pattern of the demand side or supply side of the economy.
Subsidies
Payments by governments to producers to encourage production of a good or service or to lower the price of a good.
Substitutes
Goods that can be used as alternatives to another good. They have a positive XED.
Supply
the quantity of a good or service that frms plan to sell at given prices in a given period of time.
Supply-side fiscal policy
Changes in the level or structure of government spending and taxation designed to improve the supply side of the economy. This is through influencing incentives to save, to supply labour, to be entrepreneurial and to promote investment.
Supply-side policies
A range of measures designed to increase aggregate supply and hence the potential output of the economy.
Supply-side shock
Something that will increase or reduce the costs to all firms in the economy.
Sustainable
An activity carried out today that does not stop future generations maximising their welfare.
Total factor productivity
The overall productivity of inputs used by a firm in producing a particular level of output.
Trade-off
Where one macroeconomic objective had to be curtailed in favour of another objective.
Transfer payments
Government payments to individuals for which no service is given in return, e.g. state benefits.
Transmission mechanism of monetary policy
How changes in the base interest rate influence the components of aggregate demand.
Unemployment
Those without a job but who are seeking work at current wage rates
Unemployment trap
Where individuals receive more in benefit payments than they would be paid if they were in a job
Variable costs
Costs of production that vary with output
Visibles
Exports or imports that are tangible.
Voluntary unemployment
Workers who are not prepared to take a job at current wage levels.
Wealth
A stock of owned assets
Weighting
Where a commodity is given a weighting proportional to its importance in the general pattern of consumer spending.
Withdrawals
Any money not passed on in the circular flow and has the effect of reducing national output.
Government spending
total amount spent on goods and services by the public sector for government functions.
Exports
Total value of goods and services sold by one country to the rest of the world
Imports
Total value of goods and services consumed in one country that were produced abroad.
Net exports
Total value of exports minus the total value of imports
Boom
Growth above the trend rate of growth - positive output gap.
Output - 3 definitions!
- total amount of goods and services produced by firms in an economy
- wages+profits+rent
- total amount of goods and services over a certain period of time
Scarce resources
The finite number of factors of production required to placate the unlimited wants and needs for goods and services.
law of diminishing returns
States that in all productive processes, adding more of one factor of production, while holding all others constant will at some point yield lower per-unit returns
Three functions of prices
Signalling
Incentive
Allocating or rationing
Types of economies of scale
Technical
Managerial
Marketing
Financial
