economics

in a free and competitive market

the price of good adjusts to make quantity demanded equal to quantity supplied, the equilibrium quantity reflects the optimal allocation of resources for the production of that good. this is known as allocative efficiency, which is achieved when marginal benefit equals marginal cost, social surplus is therefore maximised.

common pool resources

rivalrous (consumption by one person reduces its availability for someone else) and non excludable (no price or any means of excluding users from the resource, and anyone can use without payment or restriction)

tragedy of the commons

individuals have open access to shared resources but act in their own short term self interest and end up of overusing, depleting it and ruining it for everyone

sustainable production

production that uses resources sustainably by not degrading or depleting it, in ways that do not result in fewer and lower quality resources for future generations

renewable resources

it is reproduced over relatively short periods of time by natural processes. idea of sustainable resource use applies mainly to renewable resources, given appropriate management can be made to last forever. but if mismanagement can be depleted and degraded

subsidies

assistance by the government to individuals or groups of individuals such as firms, consumers, industries or sectors of an economy. may take the form of direct cash payments or low interest and interest free loans

PPC production possibilities curve

represents all combinations of maximum amounts of two goods that can be produced by an economy, given its resources and technology. 1. employment of resources 2. efficiency in production

outward shift of entire ppc

increase in quantity of resources (FOP)

increase in quality of resources such as improvements in education

technological improvements

—> expansion in economy’s capacity to produce goods and services

unemployment still needs to be low and inefficiency reduced to ensure output grows along with ppc: eg availability of labour but you need to utilise it

externality

occurs when actions of producers or consumers give rise to negative or positive side effects on other people who are not part of these actions, and whose interests are not taken into consideration

collective self governance

the use of common pool resources where users take control of the resources and use them in a sustainable way. it is the approach to manage resources undertaken by communities of resource users because they realise that its in their best interest to work collectively for preservation of resources that are vital to their livelihoods

GDP

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

GNI

the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit)

inferior goods

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

merit goods

goods or services considered to be beneficial for the people that would be underprovided by the market and so underconsumed

monetary policy

demand side policy using changes in the money supply or interest rates to achieve macroeconomic objectives relating to inflation and unemployment

multidimensional poverty index

an international measure of acute poverty covering over 100 economically least developed countries. it complements traditional income-based poverty measures by capturing the deprivations that each person faces at the same time with respect to education, health and living standards.

natural unemployment

the rate of unemployment that is consistent with a stable rate of inflation.

non excludable

impossible to prevent a person, or persons from consuming a good or service.

pigouvian tax

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

poverty

the scarcity or the lack of a certain amount of material possessions or money

poverty trap/cycle

any circular chain of events starting and ending in poverty, such as low income means low savings means low investment means low growth means low incomes.

price ceiling

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

price controls

price imposed by an authority, set above or below the equilibrium market price

PED

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

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

a price imposed by an authority and set above the market price. prices cannot fall below this price

price mechanism

the system where the forces of demand and supply determine the prices of products, also known as the market mechanism.

producer surplus

the additional benefit received by producers by receiving a price that is higher than the price they were willing to receive

profit maximisation

producing at the level of output where profits are greatest: where marginal revenue equals marginal cost

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, lighthouse, flood barriers.

PPP

the exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. (amount of country’s currency that is needed to buy same quantity of goods and services that can be bought with one US dollar)

RGDP

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

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

SRAS

aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of FOP

signalling effect

prices giv signal to both producers and consumers. a rising price gives a signal to producers that they should increase quantity supplied, and signals to consumers that they should decrease the quantity demanded and vice versa.

standard of living

the level of wealth, comfort, material goods, and necessity goods available to a certain socioeconomic class in a country.

structural unemployment

equilibrium unemployment that exists when in the long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. there is a mismatch between skills and the jobs available.

supply side policies

government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy

tradable permits

permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. firms may trade these permits for 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 in the circular flow of income like investment, government spending or export revenue)

yed

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

happy planet index

an index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives

happiness index

an index which is used to measure the collective happiness and wellbeing of a population

full employment level of output

the level of output that is produced by the economy when there is only natural unemployment

frictional unemployment

equilibrium unemployment that exists when people have left a job and are in the process of searching for another job

free rider problem

this occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, resulting in overconsumption

fiscal policy

a demand side policy using changes in government spending and or direct taxation to achieve macroeconomic objectives relating to inflation and unemployment

externalities

external costs or benefits to a third party that is not involved in the economic transaction, when a good or service is produced or consumed

disposable income

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

economic growth

the growth of real value of output in an economy over time, usually measured as growth in RGDP

demerit goods

goods or services considered to be harmful to people that would be overprovided by the market and so overconsumed

demand pull inflation

inflation that is caused by increasing AD in an economy, ie a shift of the AD curve to the right

cyclical unemployment

disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this

current account deficit

revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year

cost push inflation

inflation that is caused by an increase in the costs of production in an economy, a shift of SRAS curve to the left

consumer surplus

additional benefit or utility received by consumers by paying a price that is lower than they are willing to pay

consumer price index

measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the average consumer

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

capital

the factor of production that comes from investment in physical capital and human capital. physical capital is the stock of manufacture resources like factories roads and tools and human capital is the value of the workforce improved through education or better health care.

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