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Ceteris paribus
all other things are being held equal
positive economics
matters of economics that can be proven to be right or wrong by looking at the facts
normative economics
matters of economics that are based upon opinion and so are incapable of being proven to be right or wrong
scarcity
the limited availability of economic resources relative to societys unlimited demand for goods and services
land
the physical factor of production. It consists of natural resources
labour
the human factor of production. It is the physical and mental contribution of the existing work force to production
capital
the factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment
entrepreneurship
the factor of production involving organizing and risk-taking
opportunity cost
is the next best alternative foregone when an economic decision is made
free good
goods or services which are unlimited in supply and have no opportunity cost. the have unlimited supply at market price zero
economic good
a good or services which is relatively scarce and so have a price. An opportunity cost is involved if it is consumed.
utility
the satisfaction or pleasure that an individual derives from the consumption of a good or service
production possibility curve
shows the maximum combination of outputs that can be production by an economy in a given time period
actual output
the actual production of goods and services in an economy over a given time period
actual growth
occurs when previously unemployed factors are put into production. It is represented by an movement from a point within a PPC to a new point nearer to the PPC
Potential output
the possible production that would be possible in an economy if all available factors were being employed.
Potential growth
occurs when the quantity/quality of factors of production within an economy is increased. It is presented with an outward shift of the PPC.
Economic growth
the growth of real output in an economy over time. Usually measured in real GDP
economic development
a broad concept which involves improvement in standard of living, reducing in poverty, improved health and education.
sustainable development
development that meets the needs of the present without compromising the ability of future generations to meet their own needs
free market economy
an economy where the means of production are privetly held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, an for whom to produce.
planned economy
an economy where the means of production are owned by the state. The state determines how much to produce how much to produce, how/how many to produce, and for whom to produce.
Transition economy
an economy in the process of moving from a centrally planned economic system towards a more market-oriented economic system.
demand
the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period
law of demand
as a price of a good falls, quantity demanded increases
velben goods
goods that are the exceptions to the law of demand, where at high prices, as price increases, then so does the demand
giffen goods
goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand
supply
the willigness and ability of a producer to produce a good or service at a given price
law of supply
as the price of a good rises the quantity supplied rises
maximum price
a price imposed by the authority and set below the market price
minimum price
a price imposed by the authority and set above the market price
buffer stock scheme
a situation where a government intervenes in a market to stabilize prices by buying up surplus stock when prices would go too low or by supplying stock from a previously built up 'buffer stock' when prices would go too high
price elasticity of demand
a measure of responsiveness of the quantity demanded of a good or service when there is a change in its price
elastic demand
where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded
inelastic demand
where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded
cross price elasticity
measure of the responsiveness of the demand for one good or service to a change in price for another good or service
income elasticity
measure of the responsiveness of demand for a good or service to a change in income
normal goods
a good where the demand increases as income increases
inferior goods
a good where the demand for it decreases as income increases
price elasticity of supply
measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price
elastic supply
where a change in price of a good or service leads to a proportionately larger change in the quantity supplied
inelastic supply
where a change in price of a good or service leads to a proportionately smaller change in the quantity supplied
indirect tax
tax on expenditure. It is added to the selling price of a good or service
flat rate tax
an indirect tax where a specific amount is added to the selling price of each unit
ad valorem tax
an indirect tax where a percentage is added to the selling price of each unit
subsidy
an amount paid by the government to a firm per unit of output
fixed costs
costs that do not change with the level of output.
variable costs
costs that vary with the level of output
total costs
fixed costs plus variable costs
average cost
total cost/quantity produced. the ____cost of production per unit
marginal cost
additional cost of producing one more unit of output
economic cost
the total cost of production, including opportunity cost
short run
the period of time in which at least one factor of production is fixed
law of diminishing average returns
as extra units of variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish
law of diminishing marginal returns
as extra units of a marginal factor are applied to a fixed factor, the output from each extra unit of marginal factor will eventually diminish
long run
the period of time in which all factors of production are variable
economies of scale
they are a fall in long run unit average costs that come about as a result of a firm increasing its scale of production
diseconomies of scale
they are an increase in long run unit average costs that come about as a result of a firm increasing its scale of production
total revenue
the aggregate revenue gained by a firm from the sale of a particular quantity of output
average revenue
total revenue received divided by the number of units sold
marginal revenue
the extra revenue gained from selling one more unit of a good or service
normal profits
the amount of revenue needed to cover the total costs of production including opportunity cost
abnormal profits
the level of profit that is greater than the total costs of production including opportunity cost
profit maximizing level of output
the level of output where marginal revenue is equal to marginal cost
shut down price
the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run
break even price
the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run
allocative efficiency
the level of output where marginal cost is equal to average revenue.
productive efficiency
when production is achieved at lowest cost per unit of output
perfect competition
market structure where there are a very large number of small firms, homogeneous goods, price takers, no barriers and perfect knowledge
monopolistic competition
market structure where that are many buyers and sellers, producing differentiated products, no barriers
oligopoly
market structure where there are few large firms that dominate the market. Many different prices or output
collusive oligopoly
where a few firms in a oligopoly act together to avoid competition by resorting to agreements to fix prices or output
non-collusive oligopoly
where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price.
cartel
a group of firms in an industry that join together to fix prices.
monopoly
a market form where there is only one firm in the industry
natural monopoly
a situation where there are only enough economies of scale available in a market to support one firm
contestable market
a market that appears to be an oligopoly or monopoly, where the threat of potential competition forces firms to behave in a more competitive manner than theory would predict
price discrimination
it occurs when a producer charges different prices to different customers for an identical good or service
market failure
the failure of markets to produce at the socially efficient level of output
positive externalities
they are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed
negative externalities
they are the 'bad' effects that are suffered by a third party when a good or service is produced or consumed
sustainable development
development that meet the needs of the present generation without compromising the ability of future generations to meet their own needs
public good
goods and services which would not be provided at all by the market - non-rivalry and non-diminishability
merit goods
goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed
demerit goods
goods and services considered to be harmful to people that would be over-provided by the market and so over-consumed.
tradable permits
they are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable.
circular flow of income
a simplified model of the economy that shows the flow of money through the economy
real gdp
the total money value of all final goods and services produced in an economy in one year, adjusted to inflation
aggregate demand
the total spending in an economy consisting of consumption, investment, government expenditure and net exports
consumption
spending by households on consumer goods and services
investment
the addition of capital stock to the economy or expenditure by firms on capital
inflationary gap
the situation where the equilibrium level of output is greater than the full employment level of output
deflationary gap
the situation where the equilibrium level of output is less than the full employment level of output, thus causing unemployment
fiscal policy
a policy using government spending and/or direct taxation to achieve economic objectives
monetary policy
a policy using changes to money supply or interest rates to achieve economic objectives
aggregate supply
the total amount of domestic goods and services supplied by businesses and the government, including both consumer and capital goods
multiplier
the ratio of an included change in the level of national income to an original change in one or more of the injections into the circular flow of income
accelerator
the relationship between the level o induced investment and the rate of change of national income
crowding out
a situation where the government spends more than it receives and needs to borrow money, forcing up interest rates and pushing private investment and private consumption.
unemployment
the number of people without a job, who are actively seeking work
