Economics Theme 1

Key Definitions

Added value

the difference between the price of a good or service and the cost of its inputs

Bank loan

a fixed sum of money borrowed from a bank and repaid with regular monthly repayments plus interest over a fixed period

Cash flow

the movement of cash into (cash inflow) and out of (cash outflow) a business

Cash flow forecast

projects expected flows of cash income and expenditure month-by-month

Ceteris paribus

‘all other things being equal’

Creditor

When firms are owed money

Inferior goods

qd increases when y decreases, negative income elasticity of demand

Normal goods

qd increases when y increases, positive income elasticity of demand

Opportunity cost

represents the cost in terms of an alternative good to the item chosen

Over-consumption

when social costs are greater than private costs due to negative externalities

Product differentiation

giving each product specific design features which distinguishes it from competing products e.g., branding

Public sector

industries/services provided or funded by the government and not owned by private individuals

Specialisation

the way in which firms and economies concentrate on specific economic activities because they have some advantage

Structural change

when patterns of demand change, some industries will grow whilst others shrink and some firms will exit the market

Competitive advantage

any feature of a business which allows it to compete effectively, can be price or non-price

opportunity cost

value of the next best alternative foregone

trade-off

having more of one thing leads to having less of another (think PPF)

Profit max.

MR=MC

sales max.

AC=AR

Satisficing

making the minimum acceptable level of profit to satisfy shareholders and maintain confidence in business management

stakeholder

anyone with an interest in how a business is run e.g., employees, local community etc.

shareholder

part-owners of the business, buy shares in exchange for dividends when a firm makes profit

CSR

self-regulation of firms e.g., consideration for the environment when manufacturing goods

creative destruction

product/process innovation through R&D which makes old methods/products obsolete (structural change)

specialisation

when organisations concentrate on specific economic activities for comparative advantage

division of labour

occurs after specialisation; individuals specialise in one type of activity within the production process → productive efficiency but makes firms less dynamic

interest rates

cost of borrowing money or reward for saving, set by MPC every 6 weeks

exchange rate

one currency expressed in terms of another

direct tax

tax on wealth and incomes e.g., inheritance tax, can be progressive to redistribute wealth and income

indirect tax

tax on spending e.g., VAT, considered regressive because those on lower incomes spend a greater proportion of their income on it than high earners

unemployment

number of people able and willing to work but out of work (ILO LFS>claimant count which is anyone on JSA)

mass markets

market for goods produced in large quantities, firms may achieve EofS, homogenous goods

niche markets

small, specialised market, highly-differentiated goods

market segmentation

diving prospective buyers into groups based on their specific needs/characteristics

competitive advantage

factors that allow firms to produce products/services at a lower cost than rivals

unlimited liability

sole traders have unlimited liability, means if the firm goes bankrupt, the owner is liable to pay its debts

limited liability

PLC, owners and shareholders are not personally responsible for a firm’s debt if the firm goes bankrupt

externalities

impacts upon third parties of producing or consuming a good who are neither the producer nor the consumer

social costs

MPC+external cost

social benefits

MPB+external benefit

over/under consumption/production

free market misallocated resources, can be due to asymmetric information

subsidies

a form of government support to reduce cost of production, sum of money granted directly to firms (ev. gov has to know where to allocate subsidy → opportunity cost or gov failure)

direct provision

goods and services provided directly by gov to solve market failure and increase consumption of merit goods to social optimum

gov failure

when gov intervention causes an inefficient allocation of resources (unintended consequences)

regulatory capture

a form of government failure where those bodies regulating industries become sympathetic to the businesses they are supposed to be regulating