Economics

Scarcity

Unlimited wants but finite resources, creating the need for choice.

Output gap

The difference between an economy’s actual output (real GDP) and its potential output.

Resource crowding out

When increased government spending uses scarce factors of production, leaving fewer resources available for the private sector, which reduces private sector output or investment.

Financial crowding out

When government borrowing to finance higher spending increases interest rates, reducing private sector borrowing and investment.

Geographical Immobility of Labour

The inability or unwillingness of workers to move to different regions for employment.

Opportunity Cost

The value of the next best alternative forgone when making a decision.

Occupational Immobility of Labour

The inability or unwillingness of workers to switch between jobs or industries due to a lack of transferable skills or qualifications.

Positive Statement

An objective, testable statement based on facts.

Normative Statement

A subjective statement based on value judgements.

Production Possibility Frontier (PPF)

A curve showing maximum possible output combinations given current resources.

Specialisation

When individuals or countries focus on producing a narrow range of goods based on their resources.

Division of Labour

Breaking production into specialised tasks to increase productivity.

Demand

The willingness and ability to buy a good at different prices.

Supply

The willingness and ability of producers to sell a good at different prices.

Market Equilibrium

Where quantity demanded equals quantity supplied.

Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to a change in price.

Income Elasticity of Demand (YED)

Responsiveness of quantity demanded to a change in income.

Cross Elasticity of Demand (XED)

Responsiveness of demand for one good to a change in price of another good.

Consumer Surplus

Difference between the price consumers are able and willing to pay and the market price.

Producer Surplus

Difference between market price and cost of production.

Market Failure

When the free market fails to allocate resources efficiently.

Externality

A cost or benefit affecting third parties not reflected in market prices.

Negative Externality

External cost to society from production or consumption.

Positive Externality

External benefit to society from production or consumption.

Marginal Social Cost (MSC)

Total cost to society of producing one extra unit.

Marginal Social Benefit (MSB)

Total benefit to society of consuming one extra unit.

Public Good

A good that is non-rivalrous and non-excludable.

Free-Rider Problem

When people benefit without paying, reducing provision of goods.

Indirect Tax

A tax on expenditure on goods and services which is usually charged to producers but passed on to consumers through higher prices (alcohol/tobacco duties).

Subsidy

A government payment to producers to lower costs or prices.

Minimum Price

A legal price floor set above equilibrium.

Maximum Price

A legal price ceiling set below equilibrium.

Government Failure

When government intervention leads to inefficient outcomes.

Gross Domestic Product (GDP)

Total value of goods and services produced within a country.

Real GDP

GDP adjusted for inflation.

Consumer Prices Index (CPI)

A measure of inflation tracking price changes of a weighted basket of goods.

Inflation

A sustained increase in the general price level.

Deflation

A sustained fall in the general price level.

Aggregate Demand (AD)

Total demand in an economy: C + I + G + (X − M).

Aggregate Supply (AS)

Total output firms are willing to produce at different price levels.

Short-Run Aggregate Supply (SRAS)

AS when costs such as wages are fixed.

Long-Run Aggregate Supply (LRAS)

Maximum productive capacity of the economy.

Multiplier Effect

Process by which an initial increase in spending leads to a larger final increase in income.

Fiscal Policy

Use of government spending and taxation to influence AD.

Monetary Policy

Use of interest rates and money supply to influence AD.

Quantitative Easing (QE)

Central bank creation of money to buy government bonds and increase liquidity.

Supply-Side Policy

Policies aimed at increasing productive capacity and LRAS.

Absolute Advantage

Ability to produce more using fewer resources.

Comparative Advantage

Ability to produce at lower opportunity cost.

Protectionism

Policies that restrict free trade, such as tariffs or quotas.

Exchange Rate

The price of one currency in terms of another.

Depreciation

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

Marshall–Lerner Condition

A depreciation improves the current account if PEDx + PEDm > 1.

Income Inequality

Uneven distribution of income across a population.

Allocative Efficiency

Resources are allocated to the production of goods most wanted by consumers, where P = MC.

Productive Efficiency

Goods are produced at the lowest possible cost, where average cost is minimised.

Dynamic Efficiency

Efficiency achieved through innovation, investment, and technological progress over time.

X-inefficiency

When firms operate inefficiently due to lack of competitive pressure, often in monopolies.

Regressive Tax

A tax that takes a higher proportion of income from low-income earners than high-income earners.

Current Account

A component of the balance of payments recording trade in goods and services, income, and transfers.

Under-employment

When workers are employed but want more hours or are overqualified for their jobs.

Economic Growth

An increase in real GDP over time.

Terms of Trade

The ratio of export prices to import prices, indicating a country’s trading position.

Labour Market Flexibility

The ability of wages and employment conditions to adjust to changes in demand and supply.

Free Market Economy

A system which allocates resources through the price mechanism.

Mixed Economy

A system which combines market forces and government intervention to allocate resources.

Command Economy

A system which allocates resources strictly through state planning.

Disinflation

A fall in the rate of inflation, meaning prices rise more slowly.

Cost-push inflation

Inflation caused by rising costs of production, shifting SRAS left.

Demand-pull inflation

Inflation caused by excess aggregate demand in the economy.

Unemployment

People who are willing and able to work but cannot find a job.

Structural unemployment

Unemployment caused by a mismatch of skills or location with job vacancies.

Cyclical unemployment

Unemployment caused by low aggregate demand during economic downturns.

Frictional unemployment

Short-term unemployment caused by people moving between jobs.

Globalisation

The increasing integration and interdependence of national economies.

Containerisation

The use of standardised containers to transport goods efficiently, reducing costs.

Free Trade Area (FTA)

A trading bloc where internal tariffs are removed, but members keep their own external tariffs.

Customs Union

A trading bloc with free internal trade and a common external tariff.

Common Market

A customs union allowing free trade and free movement labour, and capital.

Monetary Union

A group of countries sharing a common currency and monetary policy.

Floating Exchange Rate

An exchange rate determined by supply and demand in currency markets.

Fixed Exchange Rate

An exchange rate pegged to another currency or value by the government.

Devaluation

A deliberate reduction in the value of a currency under a fixed exchange rate system.

Revaluation

A deliberate increase in the value of a currency under a fixed exchange rate system.

Appreciation

A rise in the value of a currency under a floating exchange rate system.

Absolute Poverty

Lack of basic necessities required for survival.

Relative Poverty

Poverty measured relative to average living standards in a society.

Human Development Index (HDI)

A measure of development based on income, education, and life expectancy.

Short Run

A period where at least one factor of production is fixed.

Long Run

A period where all factors of production are variable.

Derived Demand for Labour

Demand for labour depends on demand for the goods produced.

Foreign Direct Investment (FDI)

Investment by a firm in production facilities abroad.

Financial Account

Records investment flows such as FDI and portfolio investment.

Capital Account

Records capital transfers and non-produced assets.

Balance of Payments

A record of a country’s financial transactions with the rest of the world.

Fiscal Surplus

When tax revenue exceeds government spending.

Fiscal Deficit

When government spending exceeds tax revenue.

Marginal Propensity to Withdraw (MPW)

The proportion of income withdrawn via savings, taxes, and imports.

Marginal Propensity to Consume (MPC)

The proportion of additional income that is spent.

Withdrawals

Spending leaving the circular flow (savings, taxes, imports).