Econ definitions

Absolute poverty

Absolute poverty is measured in terms of the basic need for survival. It is the amount of income a person needs to have in order to stay alive.

Actual growth

This occurs when previously unemployed factors of production are brought in to use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC.

Adverse selection

This occurs when a buyer and seller do not have the same information, causing a transaction to take place based upon uneven terms.

Aggregate demand

The total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Aggregate demand curve

A curve showing the relationship between the average price level and real GDP.

Aggregate supply (AS)

The total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

Allocative efficiency

The level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it. The socially optimum level of output.

Allocative inefficiency

This occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is not equal to the price that is charged to consumers.

Anchoring

Anchors are mental reference points, relating to ideas or values, which are used to make decisions. Value is often set by anchors or imprints in our minds that we then use as mental reference points when making decisions. When an idea or a value is firmly anchored in a person's mind, it can lead to automatic decisions and behaviours.

Anti-monopoly regulation

Policies that are intended to regulate the market share of an individual company in order to enforce competition

Appropriate technology

Technology that caters to the particular economic, social, and environmental characteristics of its users.

Asymmetric information

This is where one party in an economic transaction has access to more or better information than the other party.

Automatic stabilizers

The features of government fiscal policy (for example, unemployment benefits and direct tax revenues) that automatically counter-balance fluctuations in economic activity. For example, government spending on unemployment benefits automatically rise and direct tax revenues automatically fall when economy activity is slow.

Average tax rate

The proportion of a person's income that is paid in tax, usually expressed as a percentage.

Balance of payments

It is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.

Behavioural economics

This is a branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors. It challenges the assumption that actors will always make rational choices with the aim of maximising utility.

Bounded rationality

This suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.

Bounded self-control

In reality, consumers are often not rational in their self-control and do not stop consuming, even when it is sensible to stop. They consume even though the price of the good or service is greater than the marginal utility they gain from consumption.

Bounded selfishness

Concern for the well-being of others.

Budget deficit

A situation that exists when planned government spending exceeds planned government revenue. A government may "run a budget deficit" in order to increase aggregate demand in the economy.

Business confidence

An economic indicator that measures the degree of optimism that business managers feel about the state of the economy and the prospects of their companies/ organizations.

Business cycle

A diagram showing the periodic/cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases: recovery, boom, slowdown, recession.

Capital

The factor of production that comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).

Carbon (emissions) taxes

Taxes levied on the carbon contents of fuel.

Central bank

The government's bank. The institution that is responsible for an economy's monetary policy.

Ceteris paribus

A Latin expression meaning "other things being equal".

Choice architecture

Choice architecture suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Circular flow of income

A simplified model of the economy that shows the flow of money through the economy.

Coase theorem

This theorem states that when an externality is created and there is a conflict due to assigned property rights, the two parties can bargain with each other to reach an efficient outcome regardless of who actually has the initial property rights. In this theorem, it is assumed that there are no costs associated with the bargaining that takes place between the two parties.

Collusive oligopoly

This is where a few firms act together to avoid competition by resorting to agreements to fix prices or output in an oligopoly.

Common access resources

Common access resources are natural resources over which there is no established private ownership—they are non-excludable, but rivalrous.

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods are used in combination with each other. For example, digital cameras and memory cards.

Consumer confidence

An economic indicator that measures the degree of optimism that consumers feel about the state of the economy and their own personal financial situation.

Consumer nudges

Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers.

Consumer price index (CPI)

A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the "average" consumer.

Consumer surplus

The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Consumption (C)

Spending by households on consumer goods and services over a period of time.

Corporate social responsibility

An approach taken by firms where they attempt to produce responsibly/ ethically towards the community and environment, demonstrating a positive impact on society.

Cost-push inflation

Inflation that is caused by an increase in the costs of production in an economy, i.e. a shift of the SRAS curve to the left.

Credit creation

The ability of commercial banks to expand the deposits of money that they receive by lending multiples of the amount, thus increasing the overall money supply.

Crowding out

A situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption.

Cyclical (demand- deficient) unemployment

Disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this.

Default choices

This is when consumers are automatically enrolled in a system, so that the consumer will "make" this choice if he/she takes no action.

Deflation

A persistent fall in the average level of prices in an economy.

Deflationary/recessionary gap

The situation where total spending (aggregate demand) is less than the full employment level of output, thus causing unemployment.

Demand

The willingness and ability of consumers to purchase a quantity of a good or service.

Demand curve

This shows the relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.

Demand management

A (Keynesian) policy emphasising the importance of government intervention in managing the level of aggregate demand in the economy, through fiscal and monetary policies.

Demand-pull inflation

Inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.

Demerit goods

Goods or services considered to be harmful to people that would be over- provided by the market and so over-consumed.

Depreciation

A fall in the value of one currency in terms of another currency in a floating exchange rate system.

Deregulation

A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour of firms.

Devaluation

A decrease in the value of a currency in a fixed exchange rate system.

Disinflation

A fall in the rate of inflation.

Disposable income

The remaining income available for an individual to spend or save, after taxation.

Dumping

It is the selling of a good in another country at a price below its unit cost of production.

Economic development

A broad concept involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

Economic growth

The growth of the real value of output in an economy over time. Usually measured as growth in real GDP.

Economic well-being

A multi-dimensional concept relating to the level of prosperity and quality of living standards in a country.

Economics

"Economics is the science that studies human behaviour as a relationship between ends and scarce resources which have alternative uses". Lionel Robbins (1932)

Economies of scale

Unit cost advantages that a business may experience as an outcome of increasing its scale of operations.

Efficiency

Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Elasticity of demand for exports

A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.

Elasticity of demand for imports

A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.

Engel curve

A curve showing the relationship between income and quantity demanded.

Entrepreneurship

The factor of production involving organising and risk-taking.

Equilibrium

A state of rest, self-perpetuating in the absence of any outside disturbance.

Equity

The concept or idea of fairness.

Excess demand

This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

Excess supply

This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

Expenditure reducing

Policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports.

Expenditure switching

Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.

Exports

Goods and services produced in one country and purchased by consumers in another country.

Externalities

External costs or benefits to a third party, when a good or service is produced or consumed.

Factors of production

The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship (management).

Financial account

A measure of the net change in foreign ownership of domestic financial assets.

Firms

Firms represent the productive units in the economy that turn the factors of production into goods and services.

Framing

This is the way that choices are described and presented. Changing the framing of a choice may affect tastes and preferences.

Free goods

The few things, such as air and salt water, that are not limited in supply (relatively scarce) and so do not have an opportunity cost.

Free market economy

An economy where the means of production are privately held by individuals and firms. Demand and supply (market forces) determine what/how much to produce, how to produce, and for whom to produce.

Free rider problem

This occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, which results in overconsumption.

Frictional unemployment

Equilibrium unemployment that exists when people have left a job and are in the process of searching for another job.

Full employment level of output

The level of output that is produced by the economy when there is only natural unemployment.

Gini coefficient (index)

A coefficient (index) that measures the ratio of the area between a Lorenz curve and the line of absolute equality to the total area under the line of equality. The higher the figure, the more unequal is the distribution.

Government (national) debt

The total outstanding borrowing of a government, made up of internal debt (owing to national creditors) and external debt (owing to foreign creditors).

Government spending (G)

Spending by governments on goods and services.

Gross domestic product (GDP)

The total money value of all final goods and services produced in an economy in a given time period, usually one year.

Gross national income (GNI)

The total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

Growth in production possibilities

This occurs when the PPC curve shifts outwards, caused by an increase in the quantity and/or quality of factors of production.

Happiness Index

An index which is used to measure the collective happiness and well-being of a population.

Happy Planet Index

An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes, and ecological footprint

Households

Households represent the groups of individuals in the economy who perform two functions. They are the consumers of goods and services and they are the owners and providers of the factors of production that are used to make the goods and services.

Human Development Index (HDI)

A composite index that brings together three variables that reflect the three basic goals of development, a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).

Human Opportunity Index (HOI)

This index measures how individual circumstances, such as place of residence, gender, and education of the household head, can affect a child's access to basic opportunities such as water, education, electricity and sanitation. It is created by the World Bank.

Imperfect competition

A market structure showing some, but not all, features of perfect competition.

Imperfect information

This exists where some stakeholders in an economic transaction have more access to knowledge than others.

Imports

Goods and services purchased by consumers in one country that have been produced in another country