econ definitions

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.

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.

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.

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.

Common access resources

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

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.

Contractionary monetary policy

A monetary policy designed to decrease aggregate demand and thus the level of economic activity.

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.

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.

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-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.

Disposable income

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

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.

Economies of scale

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

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.

Expansionary monetary policy

A monetary policy designed to increase aggregate demand and thus the level of economic activity.

Externalities

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

Fiscal policy

A demand-side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment.

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).

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.

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.

Import substitution

Strategies to encourage the domestic production of goods, rather than importing them. It should mean that industries producing the goods domestically should grow, as will the economy, and then should be competitive on world markets in the future. The strategies encourage protectionism.

Imports

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

Income effect

When a decrease in the price of a good or service that is being consumed means that consumers experience an increase in real income, usually allowing them to purchase more of the product. The income effect may be negative.

Income elasticity of demand (YED)

A measure of the responsiveness of the demand for a good or service to a change in income.

Indirect taxes

These are taxes on expenditure. They are added to the selling price of a good or service.

Inferior goods

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

Inflation

A sustained increase in the general or average level of prices and a fall in the value of money.

Inflation rate

The percentage change of a price index over a certain time period.

Inflationary gap

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

Informal market

The part of an economy that is neither taxed nor monitored by the government. The activities of the informal economy are not included in a country's national income figures.

Interest rate

The price of credit/borrowed money.

Keynesian multiplier

The ratio of an induced change in the level of national income to an original change in one or more of the injections into the circular flow of income (i.e. investment, government spending, or export revenue).

Leakages

The savings, taxes and import expenditure that remove spending from the circular flow of income.

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.

Long-run Phillips curve

A curve showing the monetarist view that there is no trade-off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.

Lorenz curve

A curve showing what percentage of the population owns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45-degree line), the more unequal is the distribution of income.

Marginal costs

Marginal costs are the additional costs of producing one more unit of output.

Marginal propensity to consume (MPC)

The proportion of each extra amount of income that is spent by households on domestically produced goods and services, (consumption), expressed as a decimal.

Marginal propensity to import (MPM)

The proportion of each extra amount of income that is spent by households on imported goods and services, expressed as a decimal.

Marginal propensity to save (MPS)

The proportion of each extra amount of income that is saved by households, expressed as a decimal.

Marginal propensity to tax (MPT)

The proportion of each extra amount of income that is taken in tax, expressed as a decimal.

Marginal social benefit (MSB)

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

Marginal social cost (MSC)

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Marginal tax rate

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

Marginal utility

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

Market failure

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

Market power

The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition.

Merit goods

Goods or services considered to be beneficial for people that would be under- provided by the market and so under-consumed.

Minimum reserve requirements

A requirement by the central bank that sets the minimum amount of reserves that commercial banks must maintain to back their loans.

Monetary policy

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

Money supply

The total value of monetary assets available in an economy at a specific time.

Monopolistic competition

A market structure where there are many buyers and sellers, producing differentiated products, with no barriers to entry or exit.

Monopoly

A market structure where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.

Natural rate of unemployment

The rate of unemployment that is consistent with a stable rate of inflation. It is the rate where the long run Phillips curve touches the x-axis.

Nominal gross domestic product

The total money value of all final goods and services produced in an economy in a given time period, usually one year, at current values (not adjusted for inflation).

Nominal interest rates

Interest rates that have not been adjusted for inflation.

Nudge theory

This is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society.

Oligopoly

A market structure where there are a few large firms that dominate the market.

Open market operations

The buying or selling of government securities in the open market in order to increase or decrease the amount of money in the economy.

Perfect competition

A market structure where there are a very large number of small firms, producing identical products that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

Perfect information

This exists where all stakeholders in an economic transaction have access to the same knowledge.

Phillips curve

A curve showing the relationship between the rate of unemployment and the rate of inflation.

Pigouvian taxes

An indirect tax that is imposed to eliminate the external costs of negative externalities.

Positive externalities of consumption

The beneficial effects that are enjoyed by a third party when a good or service is consumed.

Positive externalities of production

The beneficial effects that are enjoyed by a third party when a good or service is produced.

Price ceiling (maximum price)

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

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service when there is a change in its price.

Price elasticity of supply (PES)

A measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.

Price floor (minimum price)

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

Production possibility curve (PPC)

A curve showing 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.

Profit maximisation

Profit maximisation is producing at the level of output where profits are greatest: where marginal revenue equals marginal cost.

Proportional tax

A system of taxation in which tax is levied at a constant rate as income rises.

Public goods

Goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-excludability, for example, flood barriers.

Real GDP

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

Real GDP per person (per capita)

Real GDP divided by the population of the country.

Real GNI per person (per capita)

Real GNI divided by the population of the country.

Real interest rates

Interest rates that have been adjusted for inflation.

Rules of thumb

Rules of thumb are mental shortcuts (heuristics) for decision-making to help people make a quick, satisfactory, but often not perfect, decision to a complex choice.

Seasonal unemployment

Equilibrium unemployment that exists when people are out of work because their usual job is out of season, for example, a ski instructor in the summer.