Economics Definitions

Absolute advantage

When a country's output of a product per unit of input is greater than that of any other country.

Absolute poverty

When a person does not have the income or wealth to fulfil their basic needs.

Accelerator Effect

When there is expected high economic growth in the economy, so consumers and firms will invest and consume more in order to account for the increase, but the increase in economic growth results in a greater increase than what’s expected

Aggregate Demand (AD)

The total demand/spending in an economy at a given price level over a given period of time. Made up of consumption, investment, government spending and net external demand.

Aggregate Supply (AS)

The total amount of goods and services that can be supplied in an economy at a given price level over a given period of time.

Aid

The transfer of resources from one country to another.

Allocative efficiency

Where the price of a good is equal to the price consumers are willing to pay. This occurs when all resources are allocated efficiently.

Asymmetric information

Where buyers have more information than sellers in a market, or vice versa.

Automatic stabilisers

Parts of fiscal policy that automatically react to changes in the economic cycle.

Average Cost (AC)

The cost of production per unit of output.

Average Revenue (AR)

The revenue per unit sold.

Backward vertical integration

Where a firm merges with or takes over a firm further back in the production process.

Balance of payments

A record of the international transactions of an economy.

Bank rate

The official rate of interest set by the central bank (e.g. by the Monetary Policy Committee of the Bank of England)

Barriers to entry

Potential difficulties that make it hard for firms to enter a market.

Barriers to exit

Potential difficulties that make it hard for firms to leave a market.

Black market

Economic activity that occurs without taxation and government intervention.

Budget deficit

When government spending exceeds tax revenues.

Budget surplus

When tax revenues exceed government spending.

Capital account of the balance of payments

A part of the balance of payments that shows transfers of non-monetary and fixed assets into and out of the economy.

Cartel

A group of products who collude to limit output in order to keep prices high.

Central bank

The institution responsible for issuing banknotes in an economy, acting as a lender of last resort, and implementing monetary policy.

Ceteris paribus

All other things remaining equal

Circular flow of income

The flow of national output, income and expenditure between firms and households.

Command economy

An economy where only the government determines the allocation of resources.

Comparative advantage

When the opportunity cost of producing a good or service is lower than that of any other country.

Competition policy

Government policy aimed at reducing monopoly power in order to increase efficiency and to ensure fairness for consumers.

Concentration ratio

A measure of the dominance of firms in a market.

Conglomerate integration

Where a firm merges with or takes over a firm in a completely different market.

Consumer surplus

The difference between the price a consumer pays and the price they were willing to pay.

Consumption

The purchase of goods and services.

Contestability

The degree to which new entrants find it easy to enter the market.

Cost-push inflation

Inflation caused by rising costs of production.

Creative Destruction

When the innovation and invention of new products and production methods cause the destruction of existing markets and creates new ones

Cross elasticity of demand (XED)

A measure of the responsiveness of demand of one good/service to a change in price of another good/service.

Current account of the balance of payments

A part of the balance of payments that consists of: trade in goods, trade in services, primary income and secondary income.

Cyclical unemployment

Unemployment caused by a lack of demand in the economy.

Deflation

The sustained fall in the average price of goods and services in an economy over a period of time.

Demand-pull inflation

Inflation caused by increased demand in the economy.

Demand-side policy

Government policy that aims to alter aggregate demand in the economy.

Demerger

Where a firm sells of a part/parts of its business to create separate firms.

Demerit Good

A good or service which has a greater social costs when it’s consumed than private costs. Demerit goods tend to be overconsumed

Dependency Ratio

How many people are either too young or too old to work relative to the number of people of the working age

Deregulation

Removing government legislation that could restrict competition.

Derived demand

The demand for a good or service due to its use in making another good or service.

Developed countries

Relatively rich, industrialised countries with a high GDP per capita.

Developing countries

Relatively poor countries that tend to rely on labour-intensive industries, with a low GDP per capita.

Diseconomies of scale

Where average cost rises as output rises.

Disinflation

A fall in the rate of inflation.

Disposable income

Income available for households to spend after their tax obligations are fulfilled.

Dividend

A share in a firm's profits paid to shareholders.

Divorce of ownership from control

When the owner of a firm ceases to control its day-to-day operations, which can lead to the principal-agent problem.

Dynamic efficiency

Where firms improve efficiency in the long run by investing in R&D of products, or investing in the production process.

Economic cycle

The fluctuation in actual growth rates over a period of time.

Economic development

An assessment of the standards of living and overall welfare of a country's population.

Economic growth

An increase in an economy's productive potential.

Economic integration

The process by which the economies of different countries become more closely linked.

Economically active population

The people in an economy who are old enough to and capable of working.

Economies of scale

Where average cost falls as output rises.

Emerging countries

Countries that are further along the development process than most developing countries, but are not yet fully developed.

Equilibrium

Where supply equals demand in a market or economy.

Equity

Fairness

Exchange rate

The price of one currency expressed in terms of another.

Externalities

The costs and benefits of the production and consumption of a good or service that are felt by third parties.

Factors of production

The four inputs used to produce what people want: land, labour, capital and enterprise.

Financial account of the balance of payments

A part of the balance of payments that shows the movements of financial assets.

Financial sector

Firms that provide financial services.

Fiscal policy

Government policy that determines the levels of government spending and taxation.

Fixed costs

Costs that do not vary with output in the short run.

Foreign Direct Investment (FDI)

When a firm in one country makes an investment in a different country.

Forward vertical integration

Where a firm merges with or takes over a firm further forward in the production process.

Free market

A market where there is no government intervention.

Free rider problem

Once a public good is provided, there is no way to stop people who haven't paid for the good from benefiting from it.

Free trade

International trade with no restrictions.

Frictional unemployment

The unemployment experienced by people who are between jobs.

Full employment

Where everyone who is of working age and who wants a job can get one at current wage rates.

Globalisation

The increasing integration of economies internationally.

Government failure

When a government intervention to correct a market failure results in a misallocation of resources.

Gross Domestic Product (GDP)

The total value of all the goods and services produced in an economy in a year.

Gross National Income (GNI)

The GDP of an economy, plus any income earned on investments/assets abroad, minus any income paid to foreigners on domestic investments/assets.

Gross National Product (GNP)

The total output of the citizens of a country, regardless of whether or not they are resident in that country.

Hit-and-run tactics

When a firm enters a market while supernormal profits can be made, and then leaves once prices have been driven down to normal profit levels.

Horizontal equity

Where people in identical circumstances are treated equally.

Horizontal integration

Where a firm merges with or takes over a firm that is at the same stage of production of a similar product.

Human capital

The economic value of a person's skills, experience and training.

Human Development Index

A measure of a country's economic development that takes into account health (life expectancy), education (average and expected years of schooling), and standards of living (real GNI per capita).

Imperfect information

A situation where buyers and/or sellers do not have complete information about the goods and services in a market.

Income

Money a person or firm receives for providing a good or service.

Income elasticity of demand (YED)

A measure of the responsiveness of demand to changes in real income.

Inequity

Unfairness

Inflation

The sustained rise in the average price of goods and services in an economy over a period of time.

Infrastructure

The basic facilities and services required for a country's economy to function.

Inorganic growth

A firm growing through mergers and takeovers.

Interest

The money paid to a lender by a borrower.

Investment

The increase of the capital stock of a firm or economy.

Labour immobility

When labour cannot move to new jobs, or cannot switch between occupations.

Law of diminishing returns

If a firm increases one variable factor of production while others remain fixed, the marginal returns will eventually decrease.

Liquidity

How easily an asset can be spent.

Long-Run Aggregate Supply (LRAS)

The productive potential of economy operating at full capacity.

Marginal cost

The cost of producing the final unit of output.