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Microeconomics

the study of the behaviour of individual consumers, firms,

and industries and the determination of market prices and quantities of good,

services, and factors of production.

Macroeconomics

the study of aggregate economic activity. It investigates

how the economy as a whole works

Ceteris paribus

all other things 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 proved to be right or wrong.

Scarcity

the limited availability of economic resources relative to society's unlimited demand for goods and services

Land

the physical factor of production. It consists of natural resources, some of which are renewable (e.g. wheat) and some of which are nonrenewable (e.g. iron ore).

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 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).

Entrepeneurship

the factor of production involving organising and risktaking.

Opportunity Cost

it 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 are free goods. A free good has an unlimited supply at market price zero.

Economic Good

a good or service which is relatively scarce and so has 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 possibilities curve*

it shows the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Actual output

the actual production of goods and services in an economy

in a given time period.

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

Potential Output

the possible production that would be possible in an economy if all available factors were being employed

Potential Growth

this occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC.

Economic Growth

the growth of real output in an economy over time.

Usually measured as growth in real GDP.

Economic Development

it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)

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 (market economy)

an economy where the means of production are privately held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, and for whom to produce.

Planned economy (command economy)

an economy where the means of production are collectively owned (except labour). The state determines 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 the price of a good falls, the quantity demanded will normally increase.

Supply

it is the willingness and ability of a producer to produce a quantity of a good or service at a given price (in a given time period).

Law of Supply

as the price of a good rises, the quantity supplied will

normally rise.

Equilibrium price

it is the market-clearing price. It is set where D = S.

Maximum price

a price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Minimum price

a price imposed by an authority and set above the market price. Prices cannot fall below this price.

Buffer stock scheme

a situation where a government intervenes in a market to stabilise 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 the 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 greater than proportional change in the quantity demanded of the good or service. (PED would be greater than one.)

Inelastic demand

where a change in the price of a good or service leads to a less than proportional change in the quantity demanded of the good or service. (PED would be less than one.)

Cross price elasticity

it is a measure of the responsiveness of the demand for one good or service to a change in the price of another good or service.

Income elasticity

it is a measure of the responsiveness of the demand for a

good or service to a change in income.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

A good where the demand for it decreases as in come increases and more superior goods are purchased.

Price elasticity of supply

a 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 the price of a good or service leads to a

greater than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Inelastic supply

where a change in the price of a good or service leads to a

less than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Indirect tax

a tax on expenditure. It is added to the selling price of a good

or service.

Flat rate tax (specific tax)

an indirect tax where a specific amount, e.g. $1, is added to the selling price of each unit.

Ad valorem tax

an indirect tax where a percentage, e.g. 20%, is added to the selling price of each unit.

Subsidy

an amount of money paid by the government to a firm, per unit of output.

Market failure

the failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

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

it is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.

Public goods

goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-diminishability, e.g. flood barriers.

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 or 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. Firms may trade these permits for money

Circular flow of income

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

Gross national product

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).

Net national product

GNP [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)] minus depreciation (capital consumption).

Nominal GDP

the total money value of all final goods and services produced in an economy in one year, not adjusted for inflation. Real GDP - the total money value of all final goods and services produced in an economy in one year, adjusted for inflation.

Per capita GDP

the total money value of all final goods and services produced in an economy in one year per head of the population.

Human development index [HDI]

a composite index that brings together measurements of health, education, and living standards in order to attempt to measure relative development. (Elements are life expectancy at birth, literacy rate, school enrolment rate, and GDP per capita [PPP US$])

Aggregate demand

An explanation that aggregate demand is the total

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

Consumption

An explanation that it is spending by households on consumer goods and services over a period of time.

Investment

An explanation that it is the addition of capital stock to the economy or expenditure by firms on capital.

Inflationary gap

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

Deflationary gap

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

Business cycle* (trade cycle)

it shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages, depression (slump), recovery, boom, and recession.

Demand-side policy

any government policy designed to influence the aggregate demand in the economy, thus affecting the average price level and real national output.

Fiscal policy

a demand-side policy using changes in government spending

and/or direct taxation to achieve economic objectives relating to inflation and unemployment.

Monetary policy

a demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to inflation and unemployment.

Aggregate Supply

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

Short run aggregate supply (SRAS)

aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.

Long run aggregate supply (LRAS)

aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.

Supply-side policy

government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy.

Unemployment

An explanation that it is the number of people without a job, who are actively seeking work.

Full employment

exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work.

Underemployment

exists when workers are carrying out jobs for which they are over-qualified, i.e. they are not using their full skills and abilities or when workers are employed part-time, even though they are available for full time employment or when workers in a planned economy are undertaking jobs that would not exist in a free market.