CIE IGCSE Economics (0455) Key Terms and Definitions

Comprehensive vocabulary flashcards covering key definitions, formulas, and concepts from the CIE IGCSE Economics (0455) curriculum guide.

Microeconomics

The study of the decision making of individuals, households and firms.

Macroeconomics

The study of the whole economy. An example of a macroeconomic topic is unemployment.

Industry

Firms that produce the same product.

Free/market system

An economic system in which goods and services are freely exchanged through a market without the need for government intervention.

Mixed economy

An economy in which there is both a private sector (in which resources are allocated by the price mechanism) and a public sector (in which resources are allocated by the state/government).

Planned economy

An economic system in which decisions are made centrally, by government.

State-owned enterprise

A firm owned by the government in the public sector.

Demand

The willingness and ability to buy a product.

Supply

The amount of a product which suppliers will offer to the market at any given price at a particular time.

Equilibrium

Where the demand and supply curve intersect. The market point is set where the quantity demanded is equal to the quantity supplied, and there is no pressure for price to change (there is balance).

Excess supply

Occurs when price is set above the equilibrium price. There is a contraction of demand and an extension of supply; therefore, supply is greater than demand.

Excess demand

Occurs when price is set below the equilibrium price. There is a contraction of supply and an extension of demand; therefore, demand is greater than supply.

Price elasticity of demand (PED)

Measures the responsiveness of demand to a change in price. Formula: $\frac{\text{\% change in Quantity Demanded}}{\text{\% change in Price}}$

Perfectly inelastic demand

When a percentage change in price leads to no change in quantity demanded ($\text{PED} = 0$).

Inelastic demand

When a percentage change in price leads to a smaller percentage change in quantity demanded ($\text{PED} < 1$).

Unitary elastic demand

When a percentage change in price leads to the same percentage change in quantity demanded ($\text{PED} = 1$).

Elastic demand

When a percentage change in price leads to a greater percentage change in quantity demanded ($\text{PED} > 1$).

Perfectly elastic demand

When a percentage change in price leads to an infinite change in quantity demanded ($\text{PED} = \infty$).

Price elasticity of supply (PES)

Measures the sensitivity of supply to a change in price. Formula: $\frac{\text{\% change in Quantity Supplied}}{\text{\% change in Price}}$

Perfectly inelastic supply

When a percentage change in price leads to no change in quantity supplied ($\text{PES} = 0$).

Inelastic supply

When a percentage change in price leads to a smaller change in quantity supplied ($\text{PES} < 1$).

Unitary elastic supply

When a percentage change in price leads to the same percentage change in quantity supplied ($\text{PES} = 1$).

Elastic supply

When a percentage change in price leads to a greater percentage change in quantity supplied ($\text{PES} > 1$).

Perfectly elastic supply

When a percentage change in price leads to an infinite change in quantity supplied ($\text{PES} = \infty$).

Merit good

Goods about which there is a lack of information about how beneficial they are for the consumer, leading to them being underconsumed (consumed below the social optimum).

Demerit goods

Goods about which there is a lack of information as to how harmful they are for the consumer, which leads to them being overconsumed.

Externalities

Something that results from a business' activity that is felt by the community or environment; they can be either costs or benefits.

Private costs

The costs a firm pays, such as the cost of land, labour, and capital involved in the production of a product.

Private benefits

The sales revenue received by a firm from selling its products.

External costs

Harmful effects on third parties ($\text{External costs} = \text{Social costs} - \text{Private costs}$).

External benefits

Benefits enjoyed by third parties who are neither involved in the production nor consumption of goods and services (e.g., training employees).

Social costs

The total cost to society of an economic activity: $\text{Private costs} + \text{external costs} = \text{social costs}$.

Social benefits

The total benefit to society of an economic activity: $\text{Private benefits} + \text{external benefits} = \text{social benefits}$.

Market Failure

Occurs when the market mechanism (demand and supply) does not lead to an efficient allocation of resources, resulting in an under- or over-production/consumption of a good.

Indirect Tax

A regressive tax on expenditure paid by the consumer indirectly, which increases the cost of goods and services (e.g., VAT or GST).

Subsidy

Money given by the government to firms in order to lower their cost of production so that they can charge a lower price and increase output.

Regulations

The imposition of government rules backed by penalties that are intended to modify the behavior of individuals or firms.

Privatisation

The sale of state-owned assets to the private sector.

Nationalisation

Government transfer of private sector organisations into the public sector.

Maximum price

A price ceiling set by the government above which producers cannot charge.

Money

Anything that is generally accepted as a means of payment for goods and services.

Central Banks

Banks that in most countries are owned by the government but run independently of the government.

Commercial Banks

Financial institutions that offer services to people/households and firms; they are profit-orientated and usually located in the private sector (e.g., HSBC).

Minimum wage

An amount of pay set by the government below which an employer cannot pay an employee.

Specialisation

A process by which individuals, firms, regions, and economies concentrate on producing those goods and services in which they have an advantage.

Specialisation of labour (division of labour)

Occurs when a task is broken up into many smaller tasks where one person specialises in each smaller repetitive task, thereby increasing productivity.

Trade Union

An organisation that workers join which represents them in negotiations with company managers (collective bargaining) so they have strength in numbers.

Collective bargaining

A process of negotiation over pay and conditions between a trade union, representing workers, and employers.

Industrial action

An action taken by trade unions to try to force an employer to give in to their demands.

Primary sector

Firms involved in the growing and extraction of raw materials.

Secondary sector

Firms in manufacturing and construction.

Tertiary sector

Firms involved in the provision of services.

Private sector firms

Firms run and owned by individuals whose main objective is to make a profit.

Public sector organisations

Organisations owned by the people of a country (the public) and run by the government whose main objective is to provide a good service.

Chain of production

The stages a product goes through from raw material to finished good ready for sale.

Horizontal integration

A merger or takeover between two firms from the same stage of the same chain of production.

Backward vertical integration

A merger or takeover between one firm and another firm from further back in the same chain of production.

Forward vertical integration

A merger or takeover between one firm and another firm from further forward in the same chain of production.

Conglomerate Integration

A merger or takeover between two firms in completely different chains of production.

Internal economies of scale

Factors that lead to a decrease in unit cost for one firm as more is produced (managerial, marketing, purchasing, financial, technical, and risk spreading).

Diseconomies of scale

Factors that lead to an increase in the unit cost of production as output increases past a certain point (e.g., bureaucracy, labour relations, and control & coordination).

External diseconomies of scale

Factors that lead to a higher unit cost for all firms in the same industry or region (e.g., congestion, increased competition for resources).

Labour intensive production

A production process that employs mostly labour rather than capital to complete tasks (e.g., making clothes).

Capital intensive production

A production process that employs mostly capital (machinery) rather than labour to complete tasks (e.g., car production).

Productivity

The amount of outputs (goods or services) that can be produced from a given amount of inputs (factors of production) over a given period of time.

Production

The total output over a period of time (e.g., per week).

Wage

A payment/reward to labour/workers.

Saving

Income minus spending; putting money in the bank for future use.

Profit

$$\text{Sales revenue} - \text{total costs}$$

Total sales revenue

$$\text{Selling price} \times \text{quantity sold}$$

Fixed costs

Costs that do not change as the quantity of output changes (e.g., rent, insurance, and salaries).

Variable costs

Costs that change as output changes (e.g., labour and raw materials).

Break even

The amount of units that need to be sold in order for a firm not to make a loss; at breakeven a firm neither makes a profit nor a loss.

Total costs

$$\text{Fixed cost} + \text{variable costs} = \text{Total costs}$$

Total revenue

The total income from a firm's sales, calculated as price multiplied by quantity sold.

Average revenue

$$\frac{\text{Sales revenue}}{\text{quantity sold}}$$

Average costs

$$\frac{\text{Total costs}}{\text{quantity}}$$

Average fixed costs

$$\frac{\text{Fixed costs}}{\text{amount produced}}$$

Average variable cost

$$\frac{\text{Variable costs}}{\text{quantity}}$$

Profit maximisation

When a firm produces at the level of output which makes the highest profit, where the gap between total revenue and total cost is greatest.

Competitive markets

Markets where a large number of firms compete with each other to satisfy customers.

Monopoly

A firm with $100\%$ of the market (only one seller).

Living standards

The economic well-being and quality of life of members of a country's population.

Balance of payments

A record of the flow of money into and out of a country.

Current Account

A component of the balance of payments in which the inflows and outflows of money from trade in goods and services and income flows are recorded.

Trade deficit

When imports of goods and services are greater than exports.

Trade surplus

When exports of goods and services are greater than imports.

Infrastructure

Facilities that are essential for an economy to function, such as roads, rail, ports, communications networks, electricity, etc.

Welfare services

Financial support provided by the government to those in need, such as pensions for the elderly and unemployment benefits for the unemployed.

Public goods

Goods that are non-excludable (impossible to stop non-payers from consuming them) and non-rivalrous (consumption by one person does not prevent consumption by another).

Public services

Services provided by the government for the general public that are considered essential for modern society to function effectively (e.g., police force, rubbish collection, fire service).

Economic Growth

Increase in a country's real GDP over time.

Gross Domestic Product (GDP)

Measures the total output/income/expenditure of a country/economy.

Real GDP

The total value of all goods and services produced by an economy in a year, adjusted for inflation.

Money (nominal GDP)

The total value of all goods and services produced by an economy in a year, not adjusted for inflation.

Final goods and services

Goods and services that are ready to be used by the end consumer (both households and firms) when they are purchased (e.g., TVs, machinery).

Recession

A fall in GDP in $2$ consecutive quarters ($6\,\text{months}$).

Aggregate supply

All the individual supply curves of all producers in an economy added together, showing total output of goods and services as the general price level changes.

Consumer confidence

The extent to which consumers feel optimistic about the future.

Business confidence

The extent to which businesses feel optimistic about the future.