Economics Definitions Flashcards
Opportunity cost
The value of the next best alternative forgone.
Production possibilities frontier (PPF)
Shows the maximum amount of two goods that can possibly be produced in an economy with a given set of resources, time and technology.
Factors of production
The inputs that are used in the production process. These include Land, Labour, Capital, and Enterprise.
Consumer goods
Goods that are consumed by individuals.
Capital goods
Goods that are used to create other goods or services.
Renewable resources
Resources that can be replenished over time.
Non-renewable resources
Resources that cannot be replenished once they are used.
Sustainability
Using resources at a rate which can be sustained over time so as not to disadvantage future generations.
Division of labour
The separation of the production process into individual tasks.
Specialisation occurs when …
A worker concentrates on performing a specific task or narrow range of tasks in the production process / A business or nation concentrates on producing a narrow range of goods or services.
Positive statement
Evidence-based and can be proven true or false.
Normative statement
A value judgment which cannot be tested.
Command economy
An economic system where resources are owned by the government and allocated by a central planning committee.
Market economy
An economic system where resources are privately owned and allocated by the price mechanism.
Mixed economy
An economic system with some private ownership and some state ownership of resources that are allocated by the price mechanism and government intervention.
Price mechanism
The interaction of supply and demand to allocate resources in a free market economy.
Consumer surplus
The difference between what a consumer was willing and able to pay and the market price.
Producer surplus
The difference between what a producer was willing and able to sell for and the market price.
Excess demand
Demand is greater than supply (QD > QS).
Excess supply
Supply is greater than demand (QS > QD).
Derived demand
The demand for one good is derived from the demand for another good (often associated with the demand for labour).
Price elasticity of demand (PED)
% change in QD / % change in P.
Elastic demand
PED > 1 (consumers are price sensitive).
Inelastic demand
PED < 1 (consumers are not price sensitive).
Unitary elastic
PED = 1.
Cross elasticity of demand (XED)
% change in QDa / % change in Pb.
Complementary goods
Goods that are consumed together (in joint demand). They have a - XED.
Substitute goods
Goods that are used in place of one another. They have a + XED.
Income elasticity of demand (YED)
% change in QD / % change in Y.
Normal good
A good with a positive YED.
Inferior good
A good with a negative YED.
Price elasticity of supply (PES)
% change in QS / % change in P.
Elastic supply
PES > 1.
Inelastic supply
PES < 1.
Indirect tax
A tax on consumption (or expenditure).
Specific tax
A tax per unit.
Ad valorem tax
A percentage tax.
Subsidy
A grant paid by the government to producers to increase supply.
National minimum wage (NMW)
The lowest legal price that can be paid to labour.
Market failure
Occurs when the free market fails to allocate resources efficiently.
Private costs
Costs experienced by two parties involved in a transaction.
External costs
Costs experienced by third parties not involved in a transaction.
Social costs
Private costs + external costs.
Negative externalities
The external costs that result from production or consumption.
Private benefits
Benefits experienced by two parties involved in a transaction.
External benefits
Benefits experienced by third parties not involved in a transaction.
Social benefits
Private benefits + external benefits.
Positive externalities
External benefits that result from production or consumption.
Public goods
Goods that are non-rival and non-excludable.
Quasi-public goods
A good that only has one characteristic of a public good (either non-rival or non-excludable but not both).
Free rider problem
Results from the use of public goods where consumers wait for someone else to pay for the good then consume for free.
Asymmetric information
Occurs when one party in a transaction has more information than the other.
Labour mobility
Refers to the ability of labour to move from one industry or geographic location to another to find work.
Occupational mobility
The ability of labour to move from one industry to another.
Geographic mobility
The ability of labour to move from one geographic location to another.
Buffer stock scheme
A program used to stabilize commodity prices in the market.
Government failure
Occurs when government intervention results in a welfare loss.
Definition of Aggregate Demand
Total amount of UK goods/services demanded at a given price level.
Definition of spare capacity
Increase in withdrawals leads to a larger decrease in aggregate demand.
Definition of MPS
The proportion of additional income that is saved.
Definition of Net Investment
Net investment = Gross investment - Depreciation.
Definition of a consumer surplus
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.
Definition of market equilibrium
The situation that occurs when the price is such that the quantity demanded by consumers is exactly balanced by the quantity supplied by firms.
Definition of the equilibrium price
The actual price at which a good or service will be sold at.
Definition of Marginal Propensity to withdraw
Extra income that is withdrawn from the circular flow.
Definition of Windfall tax
A one-off tax on windfall- if a firm experiences an unexpected rise in profits, considered a fixed cost.
Definition of a subsidy
A government payment that supports a business or market (outward shift).
Definition of producer surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.
Definition of aggregate supply
The total amount of goods and services that are produced by all UK firms at any given price level.
Definition of Consumer surplus
The difference between how much buyers are prepared to pay for a good, and how much they actually pay.
Definition of the multiplier effect
An initial injection causes a greater increase in national output.
Definition of an inferior good
One where the quantity demanded decreases in response to an increase in consumer incomes.
Definition of a trade embargo
A country’s refusal to trade with another country.
Definition of a normal good
One where the quantity demanded increases in response to an increase in consumer income.
Definition of complimentary goods
Goods which are used together are in joint demand.
Definition of the law of demand
There is an inverse relationship between quantity and the price of a good or service, ceteris paribus.
Definition of diminishing marginal utility
Where an individual gains less additional utility from consuming a product, the more of it is consumed.
Definition of investment
Spending on capital equipment, inventories, and structures, including household purchases of new housing.
Definition of the accelerator effect
The relationship between the rate of economic growth and investment.
Definition of Net Trade
The difference between a country’s exports and imports over a specific period of time, usually a year.
Definition of Government Spending
Spending by the public sector on goods and services such as education, health care and defence.
Definition of consumption
The purchase and use of goods and services by households.
Definition of market
A set of arrangements that allows transactions to take place.
Definition of capital goods
Goods used as part of the production process, such as machinery or factory buildings.
Protectionism definition
Economic policy of shielding an economy from imports.
Definition of consumer goods
Goods produced for present use.
Definition of a positive statement
An objective statement which can be justified with statistics.
Definition of a normative statement
A subjective statement containing a desire.
Definition of demand
The quantity of that good which the consumer is willing to purchase at that price.
Definition of utility
The satisfaction a consumer gains from a product.
Definition of a recession
An economic decline which leads to lower incomes. 2 consecutive quarters of negative economic growth.
Definition of a free good
A good with no opportunity cost and that is accessible to all.
Definition of division of labour
The production procedure is broken down into a sequence of stages and workers are assigned to a particular stage.
Definition of opportunity cost
The value of the best forgone alternative.
What is a PPF curve
A curve showing the maximum combination of goods or services that can be produced in a given period with available resources.
Definition of specialisation
The concentration by a worker, workers, firm, region or the whole economy on a narrow range of goods and services.
Definition of rational choice
Involves the weighing up of costs and benefits and trying to maximise surplus or benefits of cost.
Definition of APC - average propensity to consume
How much of disposable income is used.
Definition of MPC - marginal propensity to consume
How much of additional disposable income is consumed.
Inflation
A sustained increase in the general price level.
Investment
Spending by businesses and government on real assets that are productive.
LRAS
The potential output of an economy in the long term at full capacity.
Aggregate Demand
The total demand in an economy at any given price level over a given period of time.
Accelerator Theory
High economic growth leads to more confidence, therefore leading to more investments, which results in more economic growth.
Economic running at ‘full capacity’
When there is no Keynesian unemployment. NOT when there is no unemployment.
Short run growth
Increase in actual output, represented by a yearly change of real GDP.
Long-run growth
An increase in the productive capacity of the economy, represented by the average growth over a long period of time, caused by a change in the quality or quantity of FOPs.
Recession
A sustained fall in output, represented by 2 quarters of negative growth.
Productive capacity
The maximum output that an economy can produce.
Trade Cycle
Cyclical fluctuations that see actual output in the economy rise and fall relative to full capacity each year.
CPI
Consumer Price Index, measures the price of a weighted average basket of goods and services purchased by households.
RPI
Retail Price Index, measures the price of a weighted basket of goods, but doesn’t track consumer spending as closely as CPI, includes some housing costs.
CPIH
Consumer Price Index including Housing.
Hyperinflation
Inflation above 25%.
Money Illusion
Belief that an increase in nominal wages is the same as real wages.
Benign deflation
When deflation occurs due to a downwards shift in SRAS, this boosts real income of households.
Malevolent deflation
Deflation caused by falling AD and the emergence of a negative output gap. This can spiral further as consumers withhold spending due to anticipating further price drops.
Negative Real Interest Rates
When interest rates (set by central bank) are below inflation. This incentivises borrowing and spending, and discourages saving.
Wage Spiral
The process by which rising wages cause higher prices, and higher prices cause higher wages.
Appreciation/Depreciation
When the exchange rate rises (strengthens) or falls (weakens).
Effective Exchange Rate (EER)
Measures the value of the £ measured against all the currencies of the countries with which the UK trades, weighted according to the importance of that trade. It is based upon a basket of currencies, in the same way that the CPI measures what is happening to a basket of goods and services.
Competitiveness
The extent to which UK goods and services are preferable over that of other economies, thus leading to more willingness to purchase them.
Purchasing Power Parity (PPP)
An economic theory that allows for the comparison of the purchasing power of various world currencies to one another. It is the theoretical exchange rate at which you can buy the same amount of goods and services with another currency.
‘Hot Money’
Money that investors regularly move between economies and financial markets to profit from highest short-term interest rates.
Marshall-Lerner Condition
The sum of the price elasticity of demand for imports and the price elasticity of demand for exports must exceed 1. If exports get cheaper and imports more expensive consumers must change their spending patterns substantially.
Floating Exchange Rates
An exchange rate that is determined by supply and demand on the open market.
Fixed Exchanged Rates
A regime applied by a government or central bank that ties the country’s official currency exchange rate to another country’s currency or the price of gold.
Managed Exchange Rates
Essentially a hybrid between a fixed and a floating exchange rate where the currency’s value is allowed to change as market forces dictate, but that change is managed by government intervention.
