Definitions

The basic economic problem

1. Wants- desires for goods and services

2. Resources- factors used to produce goods and services

3. The economic problem - unlimited wants exceeding finite resources

4. Scarcity- a situation where there is not enough to satisfy everyone's wants

5. Economic good - a product which requires resources to produce it and therefore has an
opportunity cost

6. Free good- a product which does not require any resources to make it and so does not have an
opportunity cost

7. Capital/Capital goods- human-made goods used in production

8. Consumer goods- goods and services purchased by households for their own satisfaction

9. Entrepreneur- a person who bears the risks and makes the key decisions in a business

10. Occupationally mobile - capable of changing use

11. Geographically mobile - capable of moving from one location to another location

12. Mobility of labour- the ability of labour to change where it works or in which occupation

13. Mobility of capital-the ability to change where capital is used or in which occupation

14. Mobility of enterprise- the ability to change where enterprise is used or in which occupation

15. Labour force- people in work and those actively seeking work

16. Productivity- the output per factor of production in an hour

17. Output- goods and services produced by the factors of production

18. Investment-spending on capital goods

19. Gross investment- total spending on capital goods

20. Depreciation (capital consumption) - the value of capital goods that have worn out or become
obsolete

21. Net investment- gross investment minus depreciation

22. Negative net investment- a reduction in the number of capital goods caused by some obsolete
and worn-out capital goods not being replaced

23. Opportunity cost - the next best alternative forgone while making an economic decision

24. Production possibility curve- a curve that shows the maximum output of two types of products
and combination of those products that can be produced with existing resources and technology
The allocation of resources

1. Microeconomics- the study of the behaviour and decisions of household and firms, and the
performance of individual markets.

2. Macroeconomics- the study of the whole economy

3. Market- an arrangement which brings buyers into contact with sellers

4. Economic agents- those people who undertake economic activities and make economic
decisions

5. Economic systems- the institutions, organisations and mechanisms that influence economic
behaviour and determine how resources are allocated

6. Planned economic system- an economic system where the government makes the crucial
decisions, land and capital are state-owned and resources are allocated by directives

7. Mixed economic system- an economy in which both the private and public sectors play an
important role

8. Market economic system- an economic system where consumers determine what is produced,
resources are allocated by the price mechanism and land and capital are privately owned

9. Price mechanism- the way the decisions made by households and firms interact to decide the
allocation of resources

10. Capital- intensive- the use of a high proportion of capital relative to labour

11. Labour-intensive- the use of a high proportion of labour relative to capital

12. Market equilibrium- a situation where demand and supply are equal at the current price

13. Market disequilibrium- a situation where demand and supply are not equal at the current price

14. Demand- the willingness and ability to buy a product

15. Market demand - total demand for a product

16. Aggregation - the addition of individual components to arrive at a total amount

17. Extension in demand- a rise in the quantity demanded caused by a fall in the price of the
product itself.

18. Contraction in demand- a fall in the quantity demanded caused by a rise in the price of the
product itself.

19. Changes in demand- shifts in the demand curve

20. increase in demand- a rise in demand at any given price, causing the demand curve to shift to
the right

21. Decrease in demand - a fall in demand at any given price, causing the demand curve to shift to
the left

22. Normal goods- a product whose demand increases when income increases and decreases when
income falls
23. Inferior goods- a product whose demand decreases when income increases and increases when
income falls

24. Substitute- a product that can be used in place of another

25. Complement- a product that is used together with another product

26. Ageing population- an increase in the average age of the population

27. Birth rate- the number of live births per thousand of the population in a year

28. Supply- the willingness and ability to sell a product

29. Market supply- total supply of a product

30. Extension in supply- a rise in the quantity supplied caused by a rise in the price of the product
itself.

31. Contraction in supply- a fall in the quantity supplied caused by a fall in the price of the product
itself.

32. Changes in supply- changes in supply conditions causing shifts in the supply curve

33. Increase in supply- a rise in supply at any given price, causing the supply curve to shift to the
right

34. Decrease in supply- a fall in supply at any given price, causing the supply curve to shift to the left

35. Unit cost- the average cost of production. It is found by dividing total cost by output

36. Improvements in technology- advances in the quality of capital goods and methods of
production

37. Direct taxes- taxes on the income and wealth of individuals and firms

38. Indirect taxes- taxes on goods and services

39. Tax- a payment to the government

40. Subsidy- a payment by the government to encourage the production or consumption of a

41. Equilibrium price- the price where demand and supply are equal

42. Disequilibrium - a situation where demand and supply are not equal

43. Excess supply- the amount by which supply is greater than demand

44. Excess demand- the amount by which demand is greater than supply

45. Price elasticity of demand (PED) - a measure of the responsiveness of the quantity demanded to
a change in price

46. Elastic demand - when the quantity demanded changes by a greater percentage than the
change in price

47. Inelastic demand - when the quantity demanded changes by a smaller percentage than the
change in price
48. Perfectly elastic demand- when a change in price causes a complete change in the quantity
demanded

49. Perfectly inelastic demand - when a change in price has no effect on the quantity demanded

50. Unit elasticity of demand - when a change in price causes an equal change in the quantity
demanded, leaving total revenue unchanged.

51. Price elasticity of supply (PES) - a measure of the responsiveness of the quantity supplied to a
change in price

52. Elastic supply- when the quantity supplied changes by a greater percentage than the change in
price

53. Inelastic supply - when the quantity supplied changes by a smaller percentage than the change
in price

54. Perfectly elastic supply - when a change in price causes a complete change in the quantity
supplied

55. Perfectly inelastic supply- when a change in price has no effect on the quantity supplied

56. Unit elasticity of supply- when a change in price causes an equal change in the quantity supplied

57. Public sector- the part of the economy controlled by the government

58. State-owned enterprises (SOEs) - organisations owned by the government which sell products

59. Privatisation - the sale of public assets to the private sector

60. Price mechanism- the system by which the market forces of demand and supply determine
prices

61. Market failure- market resources resulting in an inefficient allocation of resources

62. Free rider- someone who consumes a good or service without paying it

63. Allocative efficiency- when resources are allocated to produce the right products in the right
quantities

64. Productively efficient- when products are produced at the lowest possible cost and making full
use of resources

65. Dynamic efficiency - efficiency occurring over time as a result of investment and innovation

66. Third parties- those not directly involved in producing or consuming a product

67. Social benefits- the total benefits to a society of an economic activity

68. Social costs- the total costs to a society of an economic activity

69. Private benefits- benefits received by those directly consuming or producing a product

70. Private costs- costs bome by those directly consuming or producing a product

71. External benefits- benefits enjoyed by those who are not involved in the consumption and
production activities of others directly
 72. External costs- costs imposed on those who are not involved in the consumption and production
activities of others directly

73. Socially optimum output- the level of output where social cost equals social benefit and society's
welfare is maximised

74. Merit goods- products which the government considers consumers do not fully appreciate how
beneficial they are and so they will be under-consumed if left to market forces. Such goods
generate positive externalities.

75. Demerit goods- products which the government considers consumers do not fully appreciate
how harmful they are and so they will be over-consumed if left to market forces. Such goods
generate negative externalities

76. Public good - a product which is non-rival and non-excludable hence needs to be financed by
taxation.

77. Private goods- a product which is both rival and excludable

78. Monopoly- a single seller

79. Price fixing- when two or more firms agree to sell a product at the same price

80. Mixed economic system- an economy in which both the private and public sectors play an
important role

81. Rationing- a limit on the amount that can be consumed

82. Lottery- the drawing of tickets to decide who will get the products

83. Nationalisation- moving the ownership and control of an industry from the private sector to the
government

84. Public corporation- a business organisation owned by the government which is designed to act
in the public interest

Microeconomic decision makers

1. Money- an item which is generally acceptable as a means of payment

2. Commercial banks- banks which aim to make a profit by providing a range of banking services to
households and firms

3. Central bank- a government-owned bank which provides banking services to the government
and commercial banks and operates monetary policy

4. Liquidity - being able to turn an asset into cash quickly without a loss

5. Disposable income- income left after income tax has been deducted and state benefits received

6. Wealth- a stock of assets including money held in bank accounts, shares in companies,
government bonds, cars and property

7. Rate of interest- a charge for borrowing money and a payment for lending money
8. Average propensity to consume (APC) - the proportion of household disposable income which is
spent

9. Consumption- expenditure by households on consumer goods and income

10. Savings ratio- the proportion of household disposable income that is saved

11. Average propensity to save (APS)- the proportion of household disposable income that is saved

12. Mortgage- a loan to help buy a house

13. Earnings- the total pay received by a worker

14. Wage rate- a payment which an employer contracts to pay a worker. It is the basic wage a
worker receives per unit of time or unit of output

15. National minimum wage (NMW) - a minimum rate of wage for an hour's work, fixed by the
government for the whole economy

16. Elasticity of demand for labour- a measure of the responsiveness of demand for labour to a
change in the wage rate

17. Elasticity of supply of labour- a measure of the responsiveness of supply of labour to a change in
the wage rate

18. Specialisation - the concentration on particular products or tasks

19. Division of labour- workers specialising in particular tasks

20. Trade union- an association which represents the interests of a group of workers

21. Collective bargaining- representatives of workers negotiating with employers' associations

22. Industrial action- when workers disrupt production to put pressure on employers to agree to
their demands

23. Industry- a group of firms producing the same product

24. Primary sector- covers industries which extract natural resources

25. Secondary sector- covers manufacturing and construction industries

26. Tertiary sector- covers industries which provide services

27. Quatemary sector- covers service industries that are knowledge based

28. internal growth- an increase in the size of a firm resulting from it enlarging existing plants or
opening new ones

29. External growth- an increase in the size of a firm resulting from it merging or taking over
another firm

30. Horizontal merger- the merger of firms producing the same product and at the same stage of
production

31. Vertical merger- the merger of firms producing the same product, but at a different stage of
production
 32. Vertical merger backwards- a merger with a firm at an earlier stage of the supply chain

33. Vertical merger forwards- a merger with a firm at a later stage of the supply chain

34. Conglomerate merger- a merger between firms producing different products

35. Internal economies of scale - lower long run average costs resulting from a firm growing in size

36. External economies of scale - lower long run average costs resulting from an industry growing in
size

37. Internal diseconomies of scale - higher long run average costs arising from a firm growing too
large

38. External diseconomies of scale - higher long run average costs arising from an industry growing
too large

39. Total cost- the total amount that has to be spent on the factors of production used to produce a
product

40. Average total cost - total cost divided by output

41. Fixed costs- cost which do not change with output in the short run

42. Average fixed cost- total fixed cost divided by output

43. Variable cost- costs that change with output

44. Average variable cost- total variable cost divided by output

45. Price- the amount of money that has to be given to obtain a product

46. Total revenue- the total amount of money received from selling a product

47. Average revenue- the total revenue divided by the quantity sold

48. Profit satisficing - sacrificing some profit to achieve some goals

49. Profit maximisation - making as much profit as possible

50. Market structure- the conditions which exist in a market including the number of firms

51. Competitive market- a market with a number of firms that compete with each other

52. Monopoly- a market with a single supplier

53. Barrier to entry- anything that makes it difficult for a firm to start producing the product

54. Barrier to exit- anything that makes it difficult for a firm to stop producing the product

55. Scale of production- the size of production units and the methods of production used

Government and the macroeconomy

1. Local government- a government organisation with the authority to administer a range of

2. Natural monopoly- an industry where a single firm can produce at a lower average cost than two
or more firms because of the existence of significant economies of scale
3. Strategic industries- industries are important for the economic development and safety of the
country

4. National champions- industries that are, or have the potential to be, world leaders

5. Trade blocs- a regional group of countries that remove trade restrictions between them

6. Free international trade- the exchange of goods and services between countries without
restriction

7. Economic growth- an increase in the output of an economy in the long run, an increase in the
economy's productive potential

8. Actual economic growth- an increase in the output of an economy

9. Potential economic growth- an increase in an economy's productive capacity

10. Aggregate demand - the total demand for a country's product at a given price level. It consists of
consumer expenditure, investment, government spending and net exports (exports-imports)

11. Aggregate supply- the total amount of goods and services that domestic firms are willing to
supply at a given price level

12. Full employment- the lowest level of unemployment possible

13. Economically active- being a member of the labour force

14. Unemployment rate- the percentage of the labour force who are willing and able to work but
are without jobs

15. Price stability- the price level in the economy not changing significantly over time

16. Inflation rate- the percentage rise in the price level of goods and services over time

17. Balance of payments- the record of a country's economic transactions with other countries

18. Budget- the relationship between government revenue and government spending

19. Budget deficit- government spending is higher than government revenue

20. Budget surplus- government revenue is higher than government spending

21. National debt- the total amount the goverment has borrowed over time

22. Multiplier effect- the final impact on aggregate demand being greater than initial change

23. Direct taxes- taxes on income and wealth

24. Indirect taxes- taxes on expenditure

25. Progressive tax- one which takes a larger percentage of the income or wealth of the rich

26. Proportional tax- one which takes the same percentage of income or wealth of all taxpayers

27. Regressive tax- one which takes a larger percentage of the income or wealth of the poor

28. Automatic stabilisers- forms of government expenditure and taxations that reduce fluctuations
in economic activity, without any change in government policy
29. Inflation- the rise in the price level of goods and services over time

30. Informal economy- that part of the economy that is not regulated, protected or taxed by the
government

31. Flat taxes- taxes with a single rate

32. Fiscal policy- decisions on government spending and taxation designed to influence aggregate
demand

33. Expansionary fiscal policy- rises in government expenditure and/or cuts in taxation designed to
increase aggregate demand

34. Contractionary fiscal policy - cuts in government expenditure and/or rises in taxation designed
to reduce aggregate demand

35. Monetary policy- decisions on the money supply, the rate of interest and the exchange rate
taken to influence aggregate demand

36. Foreign exchange rate- the price of one currency in terms of anther currency or currencies

37. Expansionary monetary policy- increases in the money supply and/or the reduction in the rate of
interest designed to increase aggregate demand

38. Contractionary monetary policy- cuts in the money supply or growth of money supply and/or
rises in the rate of interest designed to reduce aggregate demand

39. Supply-side policy- measures designed to increase aggregate supply

40. Deregulation- the removal of rules and regulations

41. Gross domestic product (GDP)- the total output of a country

42. Circular flow of income- the movement of expenditure, income and output around the economy

43. Value added- the difference between the sales revenue received and the cost of raw materials
used.

44. Transfer payments- transfers of income from one group to another not in return for providing a
good or service

45. Nominal GDP- GDP at current market prices and so, not adjusted for inflation

46. Real GDP- GDP at constant prices and so, adjusted for inflation

47. Subsistence agriculture - the output agricultural goods for farmers' personal use

48. Recession - a reduction in real GDP over a period of six months or more

49. Sustainable economic growth- economic growth that does not endanger the country's ability to
grow in the future

50. Employment- being involved in a productive activity for which a payment is received

51. Unemployment - being without a job while willing and able to work
 52. Claimant count- a measure of unemployment which counts as unemployed these in receipt of
unemployment benefits

53. Labour force survey (ILO) Measure - a measure of unemployment which counts as unemployed
people who identify as such in a survey

54. Frictional unemployment- temporary unemployment arising from workers being in between
jobs

55. Structural unemployment - unemployment caused by long-term changes in the pattern of

56. Cyclical unemployment - unemployment caused by a lack of aggregate demand

57. Search unemployment - unemployment arising from workers who have lost their jobs, looking
for a job they are willing to accept

58. Casual unemployment- unemployment arising from workers regularly being between periods of
employment

59. Seasonal unemployment- unemployment caused by a fall in demand at particular times of the
year

60. Regional unemployment- unemployment caused by a decline in job opportunities in a particular

61. Technological unemployment- unemployment caused by workers being replaced by capital

62. Deflation- a sustained fall in the prices of goods and services

63. Disinflation- a fall in the rate of inflation

64. Cost-push inflation- rises in the price level caused by higher costs of production

65. Demand-pull inflation- rises in the price level caused by excess demand

66. Wage-price spiral- wage rises leading to higher prices, in turn, lead to further wage claims and
price rises

67. Monetary inflation- rises in the price level caused by an excessive growth of the money supply

68. Hyperinflation- a very rapid and large rise in the price level

69. Index-linking- changing payments in line with changes in the inflation rate

70. Menu costs- costs involved in having to change prices as a result of inflation

71. Shoe-leather costs- costs involved in moving money around to gain higher interest rates

Economic development

1. Purchasing power parity- an exchange rate based on the ratio of the price of a basket of a
products in different countries

2. Human development index (HDI) - a measure of living standards which takes into account
income, education and life expectancy
 3. Absolute poverty- a condition where people's income is too low to enable them to meet their
basic needs

4. Relative poverty - a condition where people are poor in comparison to others in the country.
Their income is too low to enable them to enjoy the average standard of living in their country

5. Vicious circle of poverty - a situation where people become trapped in poverty

6. Emigration- the act of leaving the country to live in another country

7. Birth rate- the number of births in a year per 1000 population in a year

8. Death rate- the number of deaths in a year per 1000 population in a year

9. Infant mortality rate- the number of deaths per 1000 live births in a year

10. Population pyramid- a diagram showing the age and gender structure of a country's population

11. Optimum population- the size of population which maximizes the country’s output per head

12. Economic development- an improvement in economic welfare

International trade and globalisation

1. Globalisation- the process by which the world is becoming increasingly interconnected through
trade and other links

2. Quota- a limit placed on imports and exports

3. Embargo- a ban placed on imports and exports

4. Exchange control- a limit on the amount of foreign currency that can be obtained

5. Infant industries- new industries with relatively low output and high cost

6. Declining industries- old industries which are going out of business

7. Strategic industries- industries that are considered important for the survival or development of
the country

8. Foreign exchange rate- the price of one currency in terms of another currency or currencies

9. Fixed exchange rate - an exchange rate whose value is set at a particular value in terms of
another currency or currencies

10. Devaluation- a fall in the value of a fixed exchange rate

11. Revaluation- a rise in the value of a fixed exchange rate

12. Floating exchange rate - an exchange rate which can change frequently as it determined by
market forces

13. Appreciation- a rise in the value of a floating exchange rate

14. Depreciation- a fall in the value of a floating exchange rate

15. Trade in goods- the value of exported goods and imported goods

16. Trade in goods deficit- expenditure on imported goods exceeding revenue from exported goods
17. Trade in goods surplus - revenue from exported goods exceeding expenditure on imported
goods

18. Trade in services- the value of exported services and imported services

19. Trade in services deficit- expenditure on imported services exceeding revenue from exported
services

20. Trade in goods surplus - revenue from exported services exceeding expenditure on imported
services

21. Primary income - income earned by people working in different countries and investment
income which comes into and goes out of the country

22. Secondary income - transfers between residents and non-residents of money, goods or services,
not in return for anything else

23. Current account balance- a record of the income received and the expenditure made by a
country in its dealings with other countries