Pre U economics

The basic economic problem

Resources are scarce but wants are infinite

Opportunity Cost

The value of the next best alternative forgone

Production Possibility Frontier

A curve that shows the maximum combinations of goods and services that can produced in a set period of time

Land

Resources and space used to provide goods and services

Labour

The workforce of the economy that make up many different skills

Capital

Resources used in production, both working and fixed

Entrepreneurship

Individuals who identify opportunities, bear risk, and organise other factors of production

Short-run economic growth

increase in real GDP (actual output)

Long-run economic growth

increase in productivity capacity of an economy

Command/Planned economy

A system where the government determines what and how much goods and services should be produced, and their prices at which they should be sold at. Feature of communism.

Free Market economy

Resource allocation is guided by market forces without intervention from the state

Mixed economy

resources are allocated partly through price signals and partly on the basis of direction by government

Transition economy

an economy moving from command to a market economy

Positive statement

A statement about what is i.e. facts

• can be proved or disproved

• can be true or false

Normative statement

a statement about what ought to be

• cannot be proven or disproven

• are ultimately opinions

Division of labour

a process whereby production is broken down into a sequences of stages, and workers are assigned particular stages. (specialisation by individuals)

Gross Domestic Product

The value of all goods and services produced in an economy over a given time period

Nominal GDP

GDP not adjusted for inflation (at constant prices)

GDP per Capita

GDP per Capita \= GDP/Population

GDP at Purchasing Power Parity (PPP)

GDP adjusted for differences in the cost of living across different countries.

Gross National Income (GNI)

GNI \= GDP + net income from abroad
A measure of the total income that is earned by a country's factors of production

Economic growth

Percentage increase in real GDP over time (represents and increase in material well-being)

Recession

at least 2 consecutive quarters of negative economic growth

Business Cycle

refers to periodic fluctuations of Real GDP around its long-run trend

Human development Index

A measure of the standard of living which brings together data on health (life expectancy), education (years of schooling) and national income (GNI per capita at PPP)

Circular flow of income

An economic model that shows the interrelationships and flows of money between households and firms

injections

Money flowing into the circular flow (Investment, Government Expenditure, Exports)

leakages

money flowing out of the circular flow (taxation, imports and savings)

Unemployment

people who are willing to work but cannot find a job despite actively looking

productive efficiency

attained when a firm operates at minimum average total cost, choosing an appropriate combination of inputs (cost efficiency) and producing the maximum output possible from those inputs (technical efficiency)

allocative efficiency

achieved when society is producing an appropriate bundle of goods relative to consumer preferences

dynamic efficiency

a view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run

Labour force

Refers to all those who economically active - either employed or unemployed

Unemployment rate

the percentage of the labour force who are unemployed (unemployment rate \= unemployment / labour force x 100%)

Claimant count

measures all those who are receiving the Job Seeker's Allowance (unemployment benefits)

International Labour Organisation (ILO) Unemployment Rate

A measure of unemployment based on the Labour Force Survey of 60,000 households that considers unemployed as all those without a job who have been looking for a job in the last 4 weeks and are willing to start work in the next 2 weeks

Frictional unemployment

Refers to people who are between jobs

Cyclical (Keynesian) unemployment

unemployment associated with a downturn in economic activity (due to a fall aggregate demand)

Structural unemployment

unemployment due to a decline in a particular sector as the nature of the economy changes

Real Wage (Classical) unemployment

Unemployment caused by trade unions or minimum wage legislation pushing up the real wage

Seasonal unemployment

Unemployment associated with a particular time of year

Underemployment

Refers to people who are in part-time work despite wanting full-time work or people who are overqualified for their current job

Demand

the quantity of a good that buyers arewilling and able to purchaseat any given price in a given time period

effective demand

both willingness and ability to pay

latent demand

may have willingness to pay but doesn’t have ability (and vice versa)

composite demand

when a particular commodity is demanded to be put to multiple uses. E.g. water - can be used for cooking, drinking, cleaning, etc

joint demand

when two or more goods are demanded in order to fulfil the same want - e.g. milk, sugar and coffee beans all being demanded to produce coffee

derived demand

when demand for one good or service occurs as a result of demand for another good or service. This is often due to the latter good being part of the production of the former.

Normal good

One where the quantity demanded increases in response to an increase in consumer incomes

Inferior good

One where the quantity demanded decreases in response to an increase in consumer incomes

Substitutes

Two goods are said to be substitutes if consumers regard them as alternatives, so that the demand for one good rising leads to the demand for the other good falling and vice versa

Complements

Two goods are said to be complements if people tend to consume them jointly, so that an increase in the price of one good causes the demand for the other good to fall

Quantity supplied (Qs)

The total amount of goods and services that a producer is willing to sell at a particular price at a particular point of time

Law of supply

States that there is a positive relationship between price (P) and quantity supplied (Qs)

Ceteris Paribus

'Other thing being equal'
Used in economics when we focus on change in one variable holding other influences constant

Market Equilibrium

where supply and demand intersect and there is no excess supply or demand

Excess demand

When quantity demanded exceeds quantity supplied at a given price level

Excess supply

Quantity supplied exceeds quantity demanded at a given price level

Consumer surplus

The difference between the equilibrium price and the price consumers are willing to pay

Producer surplus

The difference between the equilibrium price and the price producers are willing to pay

Elasticity

A measure of the sensitivity of one variable to changes in another variable.

Inelastic

when a change in one variable produces a smaller change in the other variable

Elastic

when a change in one variable produces a larger change in the other variable

Price Elasticity of Demand

A measure of the sensitivity of quantity demanded to a change in the price of a good/service.
Change%Qd / Change%P

Cross Price Elasticity of Demand

A measure of the responsiveness of the quantity demanded of good A given a change in price of good B.
Change%Qd of GoodA / Change%P of GoodB

Income Elasticity of Demand

A measure of the responsiveness of Qd given a change in income.

Price Elasticity of Supply

A measure of the responsiveness of Qs given a change in price

Demand is perfectly price inelastic

a change in price produces no change in demand

Demand is perfectly price elastic

when a change in price produces an infinitely large change in demand

Price elasticity of demand is unitary elastic

when a change in price produces an exactly proportional change in demand

Total revenue

The revenue received by a firm from its sales of a good/service.
Quantity sold x price

Total Revenue

The revenue received by a firm from its sales of a good/service. Quantity sold x price

A specific tax

Charges at a specific rate per unit, regardless of price e.g. alcohol duty.

Ad Valorem Tax

A tax based on the value of the transaction or property. E.g. stamp duty, VAT and property tax

A subsidy

Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.

Inflation

Sustained increase in the general price level over time

Deflation

Sustained decrease in the general price level

Disinflation

A decrease in the inflation rate (the price index is rising but at a slower rate)

Price Index

A number which compares the price of a representative basket of goods at any date to the base year

Consumer Price Index

An index of the prices of goods and services purchased by consumers that is used in the UK

GDP deflator

A price index that is used to convert nominal GDP figures into real GDP figures

Inflation Rate

Percentage change in the price index (usually over a year)

Bank of England Inflation Target

CPI inflation \= 2+/-1%

Menu costs

the costs incurred by a firm when it changes its prices

Shoe-leather costs

The cost of having to search for good returns from savings in order to protect real earnings against inflation

Wage-price spiral

Where an increase in inflation causes workers to demand higher wages as otherwise their real income will decrease. This causes costs to increase which causes further inflation and the cycle continues.

Lorenz Cuve

A diagrammatic illustration of how national income is distributed across households in a country

Gini Coefficient

A measure of income inequality derived from the Lorenz curve where 0 represents perfect equality and 1 represents perfect inequality

Regressive tax

as income rises, the proportion of income paid on the tax falls (e.g. excise duty on alcohol)

Progressive tax

As income rises, the proportion of income paid on the tax also rises (e.g. income tax)

Proportional Tax

As income rises, the proportion of income paid on the tax remains constant

Absolute Poverty

Where someone is living on an income below what is needed to satisfy their basic economic needs

Relative Poverty

Where someone is living on an income significantly below the national average (uk definition - households which earn below 60% of median income)

Balance of Payments

A record of payments between one country and the rest of the world

Current Account

the trade in goods and services account, the primary income account, and the secondary income account. A current account balance is surplus if overall credits exceed debits.

primary income account

A record of interest, profits and dividends coming from abroad minus the interest, profits and dividends going abroad

secondary income account

A record of movements of funds for which there is no corresponding trade in goods and services (e.g. contribution to EU budget, aid, remittances going abroad...)

Financial Account

A record of transactions in assets between one country and the rest of the world: 1) financial assets (shares and bonds), 2) direct investment and 3) reserve assets

Circular flow of income

The flow of income around an economy, involving a mixture of injections and leakages

Aggregate Demand

Total planned expenditure on all goods and services in an economy at any given price level