economics key terms

relative scarcity

The fundamental economic theory which reasons that since resources exist in forever diminishing finite amounts they should be allocated to the needs of society rather than its wants.

factors of production

• land

• labour

• capital

• enterprise

opportunity cost

refers to the value of the next best alternative that is forgone whenever a decision is made.

the law of demand

states that the quantity of a particular good or service that buyers are prepared to purchase varies inversely with changes in price. As the price increases, the total quantity demanded decreases.

 

disposable income

the total amount of income that consumers have available to spend on goods and services following the deduction of personal income tax to the government.

substitutes

a viable good or service that may be used instead of the product in question.

complimentary goods

products that are consumed in conjunction with one another.

interest rates

the cost of borrowing or the reward for lending money from/to the bank.

consumer confidence

the way in which consumers perceive current and future levels of economic prosperity.

business confidence

the general level of optimism about the future state of the economy and profitability held by business owners.

exchange rate

the value of one currency in comparison to another currency.

the law of supply

states that the quantity of a particular good or service that businesses are prepared to supply varies positively with changes in price. As the price increases, the quantity supplied increases.

costs of production

the fees that a firm must pay in order to convert economic input into economic output. 

productivity growth

refers to the efficiency of a business in terms of its ability to convert economic inputs into economic outputs.

climate conditions

the conditions which prevail over the market and influence the availability of resources.

equilibrium point

the price and quantity point at which the total quantity supplied is equal to the total quantity demanded. The market is considered to be cleared at this point.

relative prices

the price of one good or service expressed as a ratio in terms of another good or service. This ratio acts as an indicator to the opportunity cost that is forgone whenever a decision is made, and sends clear price signals to producers.

living standards

the aggregate welfare of the population; consisting of both tangible material living factors and intangible non-material living factors.

price elasticity of demand

measures the responsiveness of the total quantity demanded of a good or service to a change in price.

the degree of necessity

how important a good or service is to one's life.

availability of substitutes

the number of alternative products that may be used to replace a good or service.

proportion of income

the degree of total monetary resources that must be expended in order to obtain a good or service.

time

the length of time that consumers are granted in order to research alternative products and utility gained.

price elasticity of supply

measures the responsiveness of the total quantity supplied of a good or service to a change in price.

production period

the duration of time required to produce a particular good or service.

spare capacity

measures the extent to which an industry is operating below the maximum sustainable level of production.

durability of goods

the length of time that a product may be stored.

types of efficiency

• allocative efficiency

• inter-temporal efficiently

• dynamic efficiency

• technical (productive) efficiency

allocative efficiency

refers to a scenario whereby a nation's resources are allocated or used in combinations or applications that provide the maximum possible benefit for society.

technical (productive) efficiency

refers to a situation where a nation's resources are producing the maximum amount possible, at the lowest cost, and productive levels are at their peak.

dynamic efficiency

refers to how quickly an economy can reallocate its resources from one activity to another, in order to achieve allocative efficiency.

inter-temporal efficiency

focuses on balancing the allocation of resources between different periods of time such that wellbeing may be preserved in the future.

perfectly competitive market

 a hypothetical market structure in which there exists

• a large number of buyers and sellers

• perfectly homogenous goods

• there exists high freedom of entry into and exit out of the market

• both buyers and sellers possess perfect information.

consumer sovereignty

a situation in an economy where the desires and needs of consumers control the output of producers.

market failure

occurs when the market mechanism causes an allocation of resources achieved in the economy that is inefficient, or such that living standards and welfare are not maximised.

examples of market failure

• public goods

• asymmetric information

• common access resources

• externalities

public goods

resources that are non-rivalrous, non-depletable, and non-excludable (include free rider principle)

asymmetric information

a market transaction in which one party has access to more information than another

common access resources

resources that are not owned by anyone, do not have a market price and are therefore available to be consumed by anyone regardless of if they have paid to use them..

externalities

refer to a consequence of an industrial or commercial activity that either positively or negatively impacts a third party

government failure

describes a situation where government intervention fails to improve the allocation of resources or makes the allocation of resources less efficient when compared to free market outcomes.

government interventions

• government advertising

• subsidies

• government regulation

• indirect taxes

subsidies

the provision of cash payments or other benefits to decrease costs associated with production and increase levels of supply.

indirect taxes

a tax levied on goods and services rather than on income or profits.

government regulation

laws that place requirements on consumers or producers to participate in a certain manner.

government advertising

promoting consumers to purchase or utilise goods that have positive externalities in order to externalise the benefits throughout society.

material living standards

the ability of households to access tangible goods and services.

non-material living standards

the range of intangible factors that affect our quality of life, with the exception of those factors that are commonly measured in material terms.

circular flow model of income

shows the flow of money, resources, goods and services in an economy

leakages

refer to capital or income that is diverted away from the economy (savings, taxes and imports)

injections

refers to capital or income that is added to an economy from a source other than consumers (investment, government spending, exports)

business cycle

refers to the cyclical movement of economic activity over time, with periods of both positive (expansionary) and negative (contractionary) rates of economic growth.

peak

the height of economic expansion, when real GDP stops rising.

trough

the low point of an economic downturn, when real GDP stops decreasing.

aggregate demand

the total expenditure on Australian-made goods and services in the economy over a period of time.

AD = C + I + G1 + G2 + (X-M)

aggregate supply

the total volume of goods and services that suppliers are willing and able to produce over a period of time

the goal of low inflation (price stability)

is to achieve a sustained increase in the general level of prices between 2 and 3% as measured by changes in the Consumer Price Index, on average, over time. This serves to preserve the value of the currency and to ensure price stability.  

headline rate of inflation

the rate of inflation as captured by price movements of all goods and services contained in the consumer price index, including volatile prices prone to inflationary pressures.

underlying rate of inflation

the rate of inflation based on the consumer price index that excludes goods with highly volatile prices, such as food and energy.

demand pull inflation

occurs when the general level of prices rise as a result of aggregate demand being greater than aggregate supply within an economy.

cost push inflation

occurs when higher prices are passed on the consumer as a result of increases in the costs of production

inflation

a sustained increase in the general level of prices over time causing a fall in the purchasing power of individuals.

deflation

a sustained decrease in the general level of prices over time.

disinflation

a fall in the rate of inflation.

the goal of strong and sustainable economic growth

to achieve strongest growth rate possible, consistent with strong employment growth, without causing excessive inflationary, external or environmental pressures. This is typically quantified as 3.0% - 3.5% growth in real GDP per annum.

economic activity

Refers to the volume of expenditure, consumption, production, employment and income that takes place in an economy when goods and services are produced and sold.

economic growth

any increase in the amount or level of national production that has occurred over time.

gross domestic product (GDP)

the total value of goods produced and services provided in a country during one year.

real gross domestic product

the final market value of all goods and services in the Australian economy over a given period of time. It is adjusted to exclude inflationary impacts

nominal gross domestic product

the value of transactions calculated by multiplying the relevant prices of individual items sold by the prices paid.

the goal of full employment

a level of employment that is consistent with the goal of strong and sustainable economic growth; where cyclical unemployment ceases to exist. It is considered to be a rate of unemployment of approximately 4.25%. (Based of NAIRU)

labour force

all people aged 15 and over who are willing and able to work.

employed

those who are of 15 years or older who are working more than one hour a week in result for some measurable remuneration.

unemployed

those who are of 15 years or older without work or less than one hour per week, who are actively looking for work.

structural unemployment

unemployment that occurs when workers' skills do not match jobs that are available.

seasonal unemployment

unemployment that occurs as a result of skill's not being demanded during certain times of the year.

frictional unemployment

unemployment that occurs when people take time to find a job.

hard core unemployment

unemployment that occurs due to a person's mental, physical or other disability.

cyclical unemployment

unemployment that occurs when the economy is operating below its productive capacity due to insufficient aggregate demand.

hidden unemployed

those who are not classified as members of the labour force despite them wanting to work and willing to accept a job offer.

underemployed

those individuals who are classified as employed but who would like to work more hours.

unemployment rate

the percentage of the labour force that is unemployed.

participation rate

the percentage of the total working age population (over 15) who are members of the labour force.

underutilisation rate

the percentage of individuals who are classified as employed, however, seek to work more hours

exports

Australian-made goods and services that are purchased by foreign households, businesses, governments and other economic agents

imports

 foreign produced goods and services that are purchased by Australian households, businesses, governments and other economic agents.

balance of payments

a record of the financial transactions between residents of Australia and residents of the rest of the world. Is comprised of the Current Account and the Capital and Financial Account.

the current account

Records all receipts and payments of a current nature, as opposed to transactions of a capital nature, including:

• balance of merchandise trade

• net services

• net primary income

• net secondary income

balance of merchandise trade

Goods export receipts less goods import payments.

net services

Service export receipts less service import payments.

net primary income

Receipts of income from holding foreign assets less payments of income to service foreign liabilities.

net secondary income

One-way movement of money where nothing is expected in return.

the capital and financial account (CAFA)

The second of two accounts in the BOP, comprised of two sub-accounts:

• the capital account

• the financial account.

the capital account (part of CAFA)

A relatively insignificant account that covers capital transfers and the acquisition or disposal of non-produced, non-financial assets between residents and non-residents.

the financial account (part of CAFA)

The most important account within the CAFA that records how Australia finances the balance of the current account. it includes:

• direct investment

• portfolio investment

• financial derivatives

• other investment

• reserve assets

direct investment

The creation of new assets and liabilities in a foreign country, including the setting up of a production facility or purchasing more than 10% of a company’s shares.

portfolio investment

Transactions involving less than 10% investment in a company and sale/purchase of debt.

financial derivatives

complex financial instruments that create assets or liabilities.

other investment

the investment flows that do not fit into the other categories of the CAFA financial account

current account deficit

when the total payments (or debits) in the current account of the BOP exceed the total receipts (or credits).