definitions and need to knows Flashcards
what is economics
the study of how to best allocate scarce resources amongst alternative needs and wants.
Ceteris paribus
where we analyse the impact of two variables on each other but assume all other variables are equal
Positive Statements
– statements that can be proven right or wrong according to data.
Normative Statements
value judgement based on opinion.
the economic problem
resources are scarce but wants are infinite. A choice within the allocation process therefore needs to be made. Distinguished by 3 parts - what is to be produced? How is production organised? For whom is production for?
what are the four firms
the top 4 supermarkets - Asda, Morrisons , Tesco Sainsburys
what is a monopsony
when a single buyer controls the market for a particular good or service
enterprise
a human resource that takes risks and seeks to make profit from organising the other factors of production
labour
human resources. Related to human capital - the economic value of a person’s skills.
land
raw materials. Includes anything that is extracted from land.
ppf
a diagram illustrating the maximum quantities that can be produced of 2 goods with a given amount of resources and technology
capital
machinery. It can make labour more productive but may also be used as a substitute for labour
productive capacity
. The point at which all factors of production are fully employed.
specialisation
refers to the concentration of firms on producing a limited range of goods and services
division of labour
the breaking up of the labour production process into specific tasks
money
a medium of exchange for goods and services. Ensures exchange is fast and effective
different economies
Command Economy – an economic system where decisions about how to allocate resources are made by the government.
Free Market Economy – an economic system where all resources are allocated by the forces of demand and supply.
Mixed Economy – an economic system that allows for some government intervention where the market fails to allocate resources efficiently.
The law of Diminishing marginal utility
where an individual experiences decreasing utility/value per extra unit of a product consumed. A reason as to why the demand curve is downward sloping.
profits
Profits = Revenue - Costs.
demand
Demand – the willingness and ability of consumers to buy a good or service at a given price.
Derived Demand
where a factor of production is demanded not for what it is but for what it can provide e.g. Transport is demanded for a destination or labour is demanded for its skills.
supply
the willingness and ability of producers to supply a good or service at a given price.
productivity
Productivity – output per unit of input.
Labour productivity – output per unit of labour input.
Substitution effect
the impact on quantity demanded where a change in price switches the consumer from or to another substitute product.
Stamp duty
a tax paid on a property when it is sold.
Revenue
price x quantity
costs
Fixed costs - costs that do not change with output (capital and fixed contract Labour).
Variable costs - costs that change with output (raw materials and part-time labour).
Menu costs – an inflation cost for firms as they have to change the prices on their menus.
Administration costs – an inflation cost for firms as they have to renegotiate wages for labour and search for cheaper raw materials.
spare capacity
A point within the PPF where there are unemployed factors of production.
Habitual behaviour
where consumers have a preference towards consuming a good based purely on habit as opposed to rational decision making based on net benefits.
Consumer computation
where consumers behave irrationally based on their inability to accurately compute the probability of an outcome resulting from a purchasing decision.
socially optimum
The target point to eliminate externalities. This is where MSB=MSC.
Net welfare Loss
this is where social costs are greater than social benefits.
tax
a charge that is levied on a good or service.
regulation
a law or piece of legislation designed to increase consumption or production.
REAL GDP
The total value of goods and services in the economy for inflation
NOMINAL GDP
the total value of goods and services in the economy, unadjusted for inflation.
GROSS NATIONAL INCOME
the total value of income generated at home and abroad.
National happiness
is a qualitative measure of progress or development. Differs to material growth (real GDP) which is quantifiable
Sustainable economic growth
economic growth that meets the needs of today without compromising the needs of future generations
GROWTH
Actual Growth - where AD is equal to AS.
Potential growth - Where AS is operating at full capacity. Equates to the PPF, where all resources in an economy are fully employed.
INFLATIONS
Inflation – a sustained rise in the price level.
Deflation – a sustained fall in the price level
Disinflation - a fall in the rate of inflation, where inflation is rising but at a slower rate than the previous year.
Cost-push inflation – a general rise in the price level because of increasing costs of production (a decrease in SRAS). This shows a decrease in Real GDP and a fall in productive capacity.
Demand-pull inflation – when AD increases at a faster rate than AS. Milton Friedman quoted it as, ‘too much money chasing too few goods’.
WAGE PRICE SPIRAL
Where labour demands higher wages due to inflation, which in turn creates more inflation through higher costs for firms.
UNEMPLOYMENT DEFINITIONS
Claimant count – a measure of unemployment. Counts how many are collecting benefits. Claimant count is often lower than the labour force survey as not everyone collects benefits when out of work.
Labour force survey – a measure of unemployment that takes into account the composition of the unemployed via a survey of households.
Unemployment rate - % of the labour market that are unemployed.
Structural unemployment – unemployment caused by occupational immobility and declining industries. Linked to specialisation and occupational immobility. Providing skills/training in areas that are experiencing high demand will reduce this type of unemployment.
Cyclical unemployment – also known as demand deficient unemployment. Unemployment that is due to a lack of AD
Frictional unemployment – unemployment that occurs as workers move between jobs. Providing better job information will reduce this type of unemployment.
Seasonal unemployment - unemployment caused due to reduced demand for labour over a seasonal period
Real wage unemployment - unemployment caused by a wage disequilibrium resulting in surplus labour. Unemployment as a result of the NMW being set above the natural equilibrium.
Real wage inflexibility
where the labour market is inflexible to wage changes
IMMOBILITY
Occupational immobility – where workers do not have the desired skills to find a job.
Geographical immobility – where workers cannot find a job in different areas due to the cost of moving (due to house prices or high transport costs).
GOVT ACCOUNTS DEFINITIONS
Balance of payments - a total record of the inflow and outflow of income from an economy. Payments must balance between the current and the capital account.
Current account - consists of 4 parts : 1) a country’s visible and 2) invisible trade balance (X-M) plus 3) net income (remittances - wages from abroad) and 4) net transfers (payments to and from other countries e.g. foreign aid, debt repayments).
Current account deficit – where import expenditure is greater than export expenditure.
INTERNATIONAL COMPETITIVENESS
the extent to which an economy is able to produce goods and services at a more efficient and cheaper rate than other countries.
WEALTH EFFECT
the gain in consumer confidence as a result of increasing asset prices owned by households.
Keynes and ‘animal spirits
Keynes used this term to describe the instinct and emotions that influence and guide human behaviour.
AD COMPONENETS DEFINITIONS
INVESTMENT - spending on capital goods by firms.
Consumption – planned expenditure by households.
Exports – an injection into the circular flow of income, a component of AD - income coming in goods going out to other countries.
Imports – leakage from the circular flow of income - income going out from goods coming in from other countries.
Government expenditure - an injection into the circular flow of income based on current spendinG
Accelerator theory
this is where a change in demand for goods and services, beyond current capacity, will lead to an even greater percentage change in investment. Can be negative as well as positive.
SHORT AND LRAS
Short-run aggregate supply - The total supply of goods and services in an economy that are determined by costs (mainly raw materials and wages).
SPARE AND FULL CAPACITY
Full capacity – Where the factors of production are fully employed
Spare capacity – Where the factors of production are unemployed.
Circular flow of income
Circular flow of income – a simplified model of income/money flows into/out of and around a country between firms, households, governments and other countries.
circular flow of income sub categories
Income - a flow of money, the return on the ownership of the factors of production.
Wealth - a stock of money, often held by households in the ownership of assets.
Injections – income and money that flows into an economy. Investment, government spending and exports. These injections will create a multiplier effect.
Leakages – income and money that flows out of an economy. Taxes, saving and imports. These leakages will reduce the strength of the multiplier effect.
MULTIPLIER EFFECT
Multiplier effect – Where one person’s spending is another person’s income, where an injection of AD leads to an even greater final increase in real GDP.
MULTIPLIER RATIO
Multiplier ratio - the ratio of the final change in income to the initial change in an injection. It can be calculated as - 1/1-MPC or 1/(MPS+MPT+MPM) or 1/MPW
MPC/MPS/MPI EQUATIONS
MPC = 1 - (MPM + MPT + MPS)
OUTPUT GAPS
Output gap – where actual GDP is different to potential GDP.
Negative output gap - where actual GDP is less than potential GDP - the economy may be experiencing higher rates of unemployment and low rates of economic growth. (DIAGRAM)
Positive output gap - where actual GDP is less than actual GDP - the economy may be overheating, experiencing higher rates of inflation.
TRADE CYCLE DEFS
Trade (business) cycle - a model that demonstrates the fluctuations in actual growth in comparison to potential growth.
Recession - two consecutive quaters of negative economic growth.
Boom - a positive output gap, where an economy is overheating, experiencing high rates of inflation.
POVERTY AND INCOME INEQUALITY
Income inequality – a consequence of economic growth, where there is a widening income gap between the rich and the poor. Linked closely to relative poverty.
Absolute poverty – where households/individuals cannot afford their basic needs.
Relative poverty – where households/individuals live below the national income average.
MEASURES OF INFLATION
Consumer Price Index – An price index that measures inflation using a basket of 650 goods.
Retail price index – measurement of inflation in the UK that is calculated in a similar way to CPI, except it includes house prices and mortgage interest repayments.
BASE RATE
Base rate – the rate of interest the Bank of England sets from which commercial banks borrow.
VAT
an indirect tax on goods and services. Currently at 17.5% for non-essential items.
STRUCTURAL DEFICIT
where governments run a budget deficit during high rates of economic growth.
Corporation tax
a tax on firms profit.
NMW
NMW – a minimum wage law that improves the income of the lowest paid. If raised, it may increase the opportunity cost of staying out of work - thus stimulating employment. It may also create real wage unemployment if it is set above the equilibrium. Reducing the NMW will reduce costs for firms also benefiting the supply side.
SUPPLY SIDE POLICIES
Supply side policy – any policy that seeks to improve competitiveness, productivity and efficiency of labour and product markets
Human Development Index
a composite measure of economic development that includes health, education and income indicators.
Short-run Phillips curve
This simple statistical model demonstrates a trade off between inflation and unemployment.
Standard of living
income per head (GDP/capita) or material living standards
exchange rate
the value of one currency in terms of another
functions of price
Prices perform a signalling function – they
adjust to demonstrate where resources are
required.
Prices act as an incentive function – for
consumers and/or suppliers
Prices perform a rationing function.
oppurtunity cost definition
refers to the cost of the next best alternative when making a decision
what is base year
the year with which all other values in a series are compared
what is the index of any base year
100
index number equation
raw number / base year raw number x 100
define purchasing power parities
comparison between different countries, taking into account different cost of living
what is an index number
a figure reflecting price or quantity compared with a base value.
