Economics Key terms (WIP)

Economics - the study of human behaviour under scarcity

Scarcity - Describes any situation in which factors of production are finite, whereas wants are infinite

Ceteris Paribus -latin expression meaning "other things equal"  the assumption that all other things remain constant

Consumers - those who demand goods and services

Producers - those who supply goods and services

Government - those who tax and distribute certain goods and services to both consumers and producers

Demand - the quantity of goods consumer are willing to buy at a given price - an inverse relationship

Supply - the quantity of goods producers are willing to sell at a given price - a direct relationship

Equilibrium price - the price at which there is no tendency to change because planned purchases (demand) are equal to planned sales (supply)

Income effect - as prices fall, consumers can purchase more - even with a fixed income

Substitution effect - as the price of one good rises, consumers find substitute goods more attractive

Law of diminishing marginal utility - For quantity demanded to increase, prices must fall given that marginal units generate less utility

What causes movement along the demand curve? - When there is a change in quantity demanded due to an increase or decrease in price while all other factors remain constant

What causes a shift in the demand curve? - PASIFICS

- Producers, Advertising, Substitution, Income levels, Fashions/Trends, Interest rates, Complementary goods, Speculation.

What is GDP? - Gross domestic product - the total value of new output within an economy in a given year/period.

Recession - Two consecutive quarters of negative GDP growth

What are the limitations of GDP

• Per capital - population growth leads to an increase in GDP due to greater spending/earning/output. However individuals may be ported if the rate of population growth is greater than the rate of economic growth

• Hidden economy - Unpaid work isn't captured in official figures, such as: caring responsibilities; subsistence farming; black markets; hobbies

• Inequality - Rising GDP could result from the richest getting richer, rather than everyone, or even the average becoming better off.

• Environmental degradation - Critics have argued that GDP fails to consider whether economic activity is sustainable.

• Comparisons - Different estimation techniques and purchasing power make it difficult to make comparisons.

• Happiness - In 2010 the ONS started measuring well-being alongside economic growth. This measures health, relationships, education and skills, as well as personal finances and the environment.

Easterlin Paradox - Increases in a country's per capita income does not necessarily lead to an increase in happiness. There is little direct relationship within countries. Other factors are more important determinants such as social connections

Working age population - all those between the ages of 16-64

Labour force - All working age individuals willing to, able to and actively seeking work.

Employment - The proportion of the working-age population that is working.

Unemployment - The proportion of the working-age population that is actively seeking work but not working

Underemployment - Employed but not seeking more hours, or making full use of their skills and abilities.

Ways to measure unemployment - Labour force survey (ILO -international labour organisation), claimant count

Claimant count  -

 the amount of individuals currently claiming jobseekers allowance, or any other unemployment-related benefits.

Positives: Easy and cheap to collect data

Negatives: May be susceptible to political manipulation

   Excludes people actively seeking work but not claiming

   Fraud can lead to overestimated population

ILO - International Labour Organisation - Surveys and estimated number of people who are without a job

     Actively seeking work and able to start work within two  weeks

Positives: More accurate

 Based on international standards

Negatives: More costly to compile

   Only need to work for 1 hour a week to be counted as employed

Inflation - Measure by both CPI and RPI, an increase in the general price level

Index - A statistical measure of relative change

Real - when a figure has been adjusted for inflation, e.g. real GDP

Nominal - when a figure has not been adjusted for inflation

Disinflation - A fall in the rate of inflation - prices increasing at a lower rate

Deflation - A  decrease in the general price level

Hyperinflation - A rapid, significant and uncontrollable increase in the general price level

Issues that come with inflation - Eroding of the value of money, savings and wages

Uncertainty leads to lower consumer and business confidence (could affect GDP)

Worsening of inequality - worse for those who spend high proportions of their income on necessities

Issues that lie with deflation - A sign of an economic slowdown

   Discourages consumer spending: downward spiral

   Debt value increases in real terms; those who borrow are worse off

Incentive of profit - As prices increase, firms have a larger incentive to produce more/enter the market

Crowding out of fixed factors - As firms produce more, marginal cost (cost per additional unit) increases. Firms must set higher prices to cover increased costs.

What causes a movement along a supply curve? - Changes in price

What causes a shift in the supply curve? - PINTS WC

Productivity

Indirect tax

Number of firms

Technology

Subsidies

Weather

Cost of production

Positive statements - Statements that can be tested to be true or false

Normative statements - Statements that cannot be tested (subjective) as they are based on value judgements

Opportunity cost - The foregone value of the next best alternative, that which must be sacrificed when faced with a trade-off.

Theory of supply - A direct relationship between price and quantity, the profit incentive and crowding out of fixed factors

Theory of demand - An inverse relationship between quantity and price, income effect, substitution effect, law of diminishing marginal utility

What is market clearing price? Where there is no excess demand or supply

Excess demand - Occurs when demand is greater than supply

Excess supply - Occurs when supply is greater than demand

Price mechanism functions - Signalling, incentive, rationing

Signalling - Price changes signal important information to consumer and producers

Incentive - Price changes encourage firms to produce more/less

Rationing - Price increases will limit consumption to those who value it more/can pay for it.

How does excess supply come about? - when prices are above market equilibrium, it leads to excess supply as firms are unable to sell their stock at this price. It is in the best interest of the firms to reduce their prices in order to sell stock

How does excess demand come about? - When prices are below market equilibrium, consumers are unable to find the goods and services they want as very few suppliers are willing to supply at this price. It is in the best interest of consumers and producers to increase market price

What happens when there is an increase (rightwards shift) in demand? - Price increases, quantity increases

What happens when there is an increase (rightwards shift) in supply? - Prices decrease and quantity increases.

What happens when there is a decrease (leftwards shift) in demand? - Price decreases and quantity decreases

What happens when there is a decrease (leftwards shift) in supply? - Price increases and quantity decreases

What happens in the event of increasing demand and increasing supply? - Price remains the same but there is an increase in quantity.

What happens in the event of increasing demand but decreasing supply? - Price increases but quantity stays the same

What happens in the event of decreasing demand but increasing supply? - Price decreases but quantity stays the same

What happens in the event of decreasing demand and supply? - price stays the same but quantity decreases

Consumer surplus - the difference between the price buyers are willing to pay vs what they actually pay

Producer surplus - the difference between the price sellers are willing to sell at vs what they actually sell at

TOTAL surplus - Consumer surplus + Producer surplus

Capital - Price: Profit - Assets, Technology, Machinery, Business finances used towards the production of goods and services.

Enterprise - Price: Salary - The risks or ideas an entrepreneur is willing to take to push the firm forward.

Labour - Price: Wages - The workers that work towards producing the goods and services.

Land - Price: Rent - Natural resources, or company building, used for production.

CPI - Consumer Price index - Survey, calculate price change of many goods and services - find average basket of goods - time-series index - Update basket based on trends and fashion.

Limitations: Not fully representative (only covers the median, think single person household vs four-child household)

      Basket of goods is too inconsistently updated

     Fails to take into account: quality of life, quantity: shrinkflation

      Data handling issues

Causes of inflation - Rising property prices, rising global oil prices, Depreciation of the GBP, a cut in interest rates, a decrease in Value added tax, workers expecting future inflation

Types of unemployment - Frictional, Structural, Cyclical, Seasonal, Real wage inflexibility, Geographical

Seasonal unemployment - Mismatch of worker supply and demand, can occur in; Tourism, Construction, farming

Frictional unemployment - Mismatch of information and time, short term period of transition, job search.

Geographical unemployment - Mismatch of location, inability to travel based on costs and distance.

Structural unemployment - Mismatch of skill, globalisation leads to cheaper employment else where, specialising individuals left with no work.

Real wage inflexibility: Mismatch in regards to wages, high NMW, Strong trade union and deflation.

Cyclical unemployment: Mismatch of worker supply and demand, economic booms and busts causing mass unemployment or people under employing.

Impact of unemployment on individual workers - Loss of income (SOL)

 - Fall in standards of living

 - Psychological and social costs

 - + possible forced retraining and increases in competitiveness.

Impact of unemployment on firms - Fall in demand for goods and services

     Decrease in profits

     Redundancy - Downsizing costs

     + Larger surplus in available labour pool

     + Less pressure to increase wages

     + reduced risk of strike action

Impact of unemployment on government - Increases in welfare costs (jobseekers allowance)

• Fall in tax revenues

• Political pressure (Workers demanding employment)

Impact of unemployment on the economy - Loss in GDP

         - Underutilisation of factor inputs

         - Hysteresis (when a deep recession not only damages actual growth but potential growth

         + Creative destruction (Joseph Schumpeter)

Specialisation - the process of concentrating on a particular area

Division of labour - the assignment of different tasks to different workers to improve productivity

Advantages:   Workers become more productive

Increases in production and profits

Specialised workers tend to get higher pay

More motivation from job satisfaction

      Disadvantages: -Greater cost of training workers

-Demotivated workers due to repetitiveness

-More expensive workers

-Depletion of raw materials and environmental degradation

-Overspecialisation - overreliance on each worker.

Productivity - output/input

Money - anything that fulfils the four "functions of money"

Normal goods - Goods that have a positive YED. Consumption tracks income so when income increases, quantity demanded increases

Inferior goods - Goods that have a negative YED. Consumption and income are counter-cyclical

Investment - total value of all newly produced capital goods

Physical investment - Investment in factories, machinery, offices etc.

Intangible investment - Investment into software or education and training of workers, something non physical

Depreciation - The amount by which an asset's value falls in a given period

Gross investment - total additional capital stock

Net investment - Gross investment - depreciation of assets

Average propensity to save - The percentage of income that is saved (saving/income)

Marginal propensity to save - The fraction of a change in disposable income that households save (Change in savings/change in disposable income)

Savings and investment - in the long run savings is equal to investment

Factors that influence investment - The rate of economic growth

  - Business expectations and confidence

  - Keynes and 'animal spirits'

  - Demand for exports

  - Interest rates

  - Access to credit

  - the influence of government and regulations

The main influences on government expenditure - The trade cycle

   - Fiscal policy (tax and subsidy)

Fiscal policy - Relating to government tax revenue and spending

G - government spending on publicly provided goods and services

T - government tax revenue from direct or indirect taxation

Automatic stabilisers - Fiscal instruments that happen to counter the boom and bust cycle

Deficit - how much more government spends than it receives In tax revenue in the financial year

Debt - total amount governments owe - borrowings over time

Budget deficit - Government spending > Government Tax revenue, government spends more than it takes in.

Budget surplus - Government spending < Government Tax revenue, government takes in more than it spends.

Influences on government spending - Business cycle (automatic stabilisers)

Economic growth

Unemployment

Inflation

Tax revenue

Debt levels: previous spending and borrowing

Politics

PPP - Purchasing Power Parity - a measure of the price specific goods in different countries and is used to compare the power of one currency against another

Circular flow of income - A model of the economy which shows the flow of goods, services, factors of production and their payments

National income - Total value of money earned within an economy or GDP

Withdrawal / Leakage - money that leaves the circular flow of income - reducing the value/size of the economy

S - Savings - money put aside for future spending

T - Taxation - money paid to the government

M - Imports - money spent on foreign goods

Injections - Money that enters the circular flow of income, increasing the value/size of the economy.

I - Investment - capital spending by firms

G - Government spending

X - Exports - foreign consumers buying domestic goods

Aggregate demand - The total of new demand/expenditure/spending within an economy

  C + I + G + (X - M) = AD

Influences on consumer spending - Interest rates - Consumer confidence - wealth effect

Wealth effect - Suggests that people spend more as the value of their assets rise. They are made to feel more confident, even if their income has not changed.

Interest rates -  The cost of borrowing and the reward for saving

Factors influencing consumption - Income, inflation, unemployment, consumer confidence, natural disasters, taxes, trends/seasons, interest rates, wealth effect.