Economics Definitions

Scarcity

When the resources available are insufficient to satisfy infinite human wants and needs

Opportunity Cost

The value of the next best alternative foregone when an economic decision or choice is made

FoP

resources used to produce goods and services

Ceteris Paribus

“all other things being equal”

Demand

The quantity of a good or service that consumers are willing and able to purchase at different price levels

Law of Demand

As price rises, quantity demanded falls

Supply

The quantity of a good that producers are willing and able to offer for sale at different prices

Market Equilibrium

The state where the quantity demanded equals the quantity supplied

Consumer Surplus

The difference between the consumer’s maximum price and the price they actually pay

Producer Surplus

The difference between the producer’s minimum price and the price they actually receive

Allocative Efficiency

When resources are allocated in the most socially optimal way

PED

The responsiveness of the quantity demanded of a good to a change in its price

YED

The responsiveness of the quantity demanded of a good to a change in consumer income

PES

The responsiveness of the quantity supplied of a good to a change in its price

Indirect tax

A tax levied on expenditure or goods, rather than on income or profits

Subsidy

A payment made by the government to firms per unit of output to lower production costs and increase supply

Price Ceiling

A legally set maximum price above which a good cannot be legally sold

Price Floor

A legally set minimum price below which a good cannot be legally sold

Market Failure

When the free market mechanism fails to allocate scarce resources efficiently, leading to net welfare loss

Externality

A spillover effect that impacts a third party who is not directly involved in the economic activity

Public Good

Goods that are non-excludable and non-rivalrous, leading to the free-rider problem

Gross Domestic Product (GDP)

The total market value of all final goods produced within a country over time

Gross National Income (GNI)

The total income earned by a country's factors of production over time

AD

The total spending on an economy's goods at a given price level over time

AS

The total quantity of real output that firms in an economy are willing and able to produce at a given price level over time

Unemployment rate

The percentage of the total labor force that is actively seeking employment but currently unemployed

Inflation

A sustained increase in the average price level of an economy over time

Deflation

A sustained decrease in the average price level of an economy over time

Economic Growth

An increase in the Real GDP produced by an economy over time

Monetary Policy

A demand-management policy executed by the central bank involving changes in interest rates/money supply

Stakeholder

Any individual or group involved in economic activities

Expansion

When economy is growing, sustained increase in Real GDP + employment + consumer demand

Peak

Highest point of economic activity in the cycle, lowest unemployment + high inflation

Interest rates

The cost of borrowing money and/or the reward for saving money

Substitutes

Goods that are in competitive demand because they satisfy the same consumer need/want

Complementary goods

Goods that are in joint demand because they are consumed together

Merit goods

Goods that create positive externalitie when consumed, typically under-provided and under-consumed

Demerit goods

Goods that create negative externalities when consumed, typically over-provided and over-consumed

Expansionary Monetary Policy

Reducing interest rates, increasing money supply

Contractionary Monetary Policy

Increasing interest rates, decreasing money supply