ZNotes A2 Level Economics Definitions

A set of 192 English vocabulary flashcards covering key microeconomic and macroeconomic terms from the lecture.

Economic efficiency

Where scarce resources are used in the most efficient way to produce maximum output.

Productive efficiency

When a firm is producing at the lowest possible cost.

Allocative efficiency

Where price equals marginal cost; firms produce goods and services most wanted by consumers.

Pareto optimality

A situation where it is impossible to make someone better off without making someone else worse off.

Externality

When actions of producers or consumers give rise to side effects on third parties not involved in the action.

Negative externality

Side effects that have a negative impact and impose costs on third parties.

Positive externality

Side effects that have a positive impact and provide benefits to third parties.

Social costs

The total costs of a particular action.

Private costs

Costs incurred by an individual who produces a good or service.

External costs

Costs incurred and paid for by third parties not involved in the action.

Social benefits

The total benefits arising from a particular action.

Private benefits

Benefits that accrue to individuals who produce or consume a particular good.

External benefits

Benefits received by third parties not involved in the action.

Cost benefit analysis (CBA)

A method for assessing the desirability of a project by comparing its costs and benefits.

Shadow price

A price applied where there is no recognised market price available.

Utility

The satisfaction received from consumption.

Total utility

The total satisfaction received from consumption.

Marginal utility

The utility derived from consuming one additional unit of a good or service.

Diminishing marginal utility

The fall in marginal utility as consumption increases.

Equimarginal principle

Consumers maximise utility where their marginal valuation for each product consumed is the same.

Budget line

The combinations of two products obtainable with given income and prices.

Substitution effect

Following a price change, a consumer substitutes the relatively cheaper product for the relatively more expensive one.

Income effect

Following a price change, a consumer’s real income changes, altering the quantity purchased.

Indifference curve

Shows different combinations of two goods that give a consumer equal satisfaction.

Marginal rate of substitution

The rate at which a consumer is willing to substitute one good for another.

Isoquant

A curve showing a particular level of output.

Production function

Shows the maximum possible output from a given set of factor inputs.

Marginal product

The change in output arising from the use of one more unit of a factor of production.

Diminishing returns

When output from an additional unit of input leads to a fall in the marginal product.

Firm

Any business that hires factors of production to produce goods and services.

Profit maximization

A firm’s objective where the difference between total revenue and total cost is at a maximum.

Fixed costs

Costs independent of output in the short run.

Variable costs

Costs that vary directly with output; all costs are variable in the long run.

Increasing returns to scale

Output increases at a proportionately faster rate than the increase in factor inputs.

Decreasing returns to scale

Factor inputs increase at a proportionately faster rate than the increase in output.

Economies of scale

Benefits gained from falling long-run average costs as the scale of output increases.

Diseconomies of scale

Long-run average costs increase as the scale of output increases.

External economies of scale

Cost savings accruing to all firms in an industry as its overall scale increases.

Minimum efficient scale

The lowest level of output at which costs are minimised.

Normal profit

A cost of production sufficient to keep a firm operating in a particular industry.

Abnormal profit

Profit earned above the level of normal profit.

Industry

All firms making the same product or in the same line of business.

Multinational corporations (MNCs)

Firms that operate in different countries.

Small and medium enterprises (SMEs)

Firms with fewer than 250 employees; small firms have fewer than 50 employees.

Market structure

The organisation of a market in terms of number of firms and barriers to entry.

Barriers to entry

Restrictions that prevent new firms from entering an industry.

Perfect competition

Market structure with many buyers and sellers, homogeneous products, and no barriers to entry.

Monopoly

A single firm in an industry with very high barriers to entry.

Monopolistic competition

A market structure with many firms, differentiated products, and few barriers to entry.

Oligopoly

A market structure with few firms and high barriers to entry.

Imperfect competition

Any market structure except perfect competition.

Natural monopoly

A market where a single supplier has substantial cost advantages and duplication would be inefficient.

Barrier to exit

Restrictions that prevent a firm from leaving a market.

Limit pricing

Firms deliberately lower prices, forgoing profit maximisation, to deter entry.

Horizontal integration

A firm grows through a merger or acquisition of another firm in the same sector.

Price leadership

A firm has power to change prices and competitors follow its lead.

Cartel

A formal agreement between firms to limit competition by restricting output or fixing prices.

Contestable market

A market structure where the threat of entry keeps prices competitive.

X-inefficiency

Higher costs than would exist in a more competitive market.

Economies of scope

Reduction in average total cost by producing a wider variety of goods.

Diversification

A firm grows by producing or selling a wide range of different products.

Vertical integration

A firm expands by moving backward or forward along its supply chain.

Horizontal integration

A firm merges with or acquires another in the same line of business.

Sales revenue maximisation

A firm’s objective to maximise turnover.

Sales maximisation

A firm’s objective to maximise the volume of sales.

Satisficing

A firm seeks a satisfactory rather than maximum profit.

Game theory

Analysis of interdependent behaviour among competing firms.

Kinked demand curve

Model explaining price rigidity in oligopoly without collusion.

Deadweight loss

Welfare loss when market failure prevents desirable production or consumption.

Regulations

Legal and other requirements imposed by governments or organisations.

Pollution permits

Licences allowing firms to pollute up to a specified level.

Property rights

Rights of owners to determine how their assets are used.

Privatisation

Transfer of ownership from the public to the private sector.

Equity

Fairness in the distribution of income or wealth.

Wealth

An accumulated stock of assets.

Lorenz curve

Graphical representation of income or wealth inequality.

Gini coefficient

Numerical measure of inequality derived from the Lorenz curve.

Progressive tax

Tax whose rate rises more than proportionately with income.

Regressive tax

Tax whose ratio to income falls as income rises.

Means-tested benefits

Benefits paid only to those whose incomes fall below a specified level.

Poverty trap

Situation where individuals are better off on benefits than working.

Universal benefits

Benefits available to all regardless of income or wealth.

Negative income tax

Unified tax and benefit system where taxes or benefits depend on one set of rules.

Intergenerational equity

Government responsibility to ensure fair distribution across future generations.

Derived demand

Demand for a good or service arising from the demand for what it produces.

Marginal revenue product

Extra revenue generated by employing one additional unit of labour.

Transfer earnings

Income a factor of production could earn in its next best alternative use.

Economic rent

Payment to a factor above what is required to keep it in its current use.

Monopsony

A market with a single buyer.

Government failure

Government intervention that generates more inefficiencies than it corrects.

Economic growth

Short-run increase in output and long-run rise in productive potential.

Economic development

Increase in welfare and quality of life.

Sustainable development

Meeting present needs without compromising future generations.

Actual economic growth

Increase in real GDP.

Potential economic growth

Increase in an economy’s productive capacity.

Output gap

Difference between actual and potential output.

Negative output gap

Actual output below potential output.

Positive output gap

Actual output above potential output.

Trade cycle

Fluctuations in economic activity over time.

National income

Total income earned within an economy.