Economics A Level Definitions

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Utility

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satisfaction derived from consuming a good.

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Normal Profit

Back 2

profit that the firm could make by using its resources in their next best use (opportunity cost)

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Supernormal profit

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profit above normal profit.

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Adaptive Expectations

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where decisions are based upon past information.

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Rational Expectations

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where decisions are based on current information and anticipated future events.

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Positive

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scientific or objective study of the allocation of resources

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Normative

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study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated. (subjective approach to economics)

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Free Good

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goods which are unlimited in supply and which therefore have no opportunity cost.

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Economic Good

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goods which are scarce because their use has an opportunity cost.

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Scarcity

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economic agents (firms, governments,…) can only obtain a limited amount of resources at any moment in time.

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Choice

Back 11

economic choices involve the alternative uses of scarce resources.

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Opportunity cost

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economic cost of production, benefit lost from the next best alternative.

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Production possibility frontier

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curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy.

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Short Run

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period of time when at least one factor input cannot be varied.

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Long Run

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period of time when all factor inputs can be varied, but the state of tech. remains constant.

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Very Long Run

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the period of time when the state of technology may change.

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Factors of Production

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Land, Labour, Capital, Entrepreneurship

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Market

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occurs whenever buyers and sellers are in contact with each other.

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Ceteris Paribus

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‘all other things remaining the same’, the assumption that all other variables within an economic model remain constant whilst one change is being considered.

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Externalities

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when the consumption/production of a product has an effect on a third party

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Merit Good

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good which is under-provided by the market mechanism. // has positive externalities.

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Public Good

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good where consumption by one person does not reduce the amount available for consumption by another person, (non-excluding / non-rivalrous) leads to the concept of the free rider.

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Private Good

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Goods which are excludable, rivalrous.

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Centrally Planned Economy

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economic system where the government, through a planning process, allocates resources in society.

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Free Market Economy

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economic system which resolves the basic economic problem through the market mechanism.

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Normal Good

Back 26

good where demand increases when income increases (YED > 0)

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Inferior Good

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good where demand falls when income increases (YED > 0)

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Giffen Good

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special type of inferior good where demand increases when price increases.

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Veblen Good

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(snob goods) goods bought in order to gain status, often sell better at high prices.

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Speculative goods

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a fall in price will discourage people from buying (sometimes) b/c they are afraid of further falls in price.

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Substitution Effect

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if price rises, demand will switch to substitute products.

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Income Effect

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if prices rises, real income will diminish, and demand will change according to whether the good is normal or inferior.

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Law of Diminishing Returns

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if increasing quantities of a variable input are combined with a fixed input, eventually the marginal product and the average product of that variable input will decline.

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Returns to scale

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when the change of percentage output is the same as the percentage change in input.

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Economies of Scale

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a fall in the long run average costs of production as output rises.

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Monopolistic Competition

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market structure where a large number of small firms produces non-homogeneous products and where there are no barriers to entry or exit.

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Oligopoly

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market structure where there is a small number of firms in the industry and where each firm is interdependent with other firms.

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Monopoly

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market structure where one firm supplies all output in the industry without facing competition because of high barriers to entry to the industry.

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Natural Monopoly

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where economies of scale are so large relative to demand that the dominant producer in the industry will always enjoy lower costs of production than any other potential competitor.

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Perfect Competition

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market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, perfect knowledge, and where all firms produce a homogeneous product.

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Imperfect Competition

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market structure where there are several firms in industry, each of which has some ability to control the price they set for their product.

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Horizontal Merger

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merger between two firms in the same industry at the same stage of production.

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Vertical Merger

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merger between two firms at different production stages in the same industry.

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Consumer Sovereignty

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when resources are allocated according to the wishes of consumers (i.e.

Front 45

Profit Maximization

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MC = MR

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Maximum Revenue

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MR = 0

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Optimal Allocation

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when there are no externalities (MSB=MSC)

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Productive Efficiency

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production is at lowest cost (MC = AC)

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Allocative Efficiency

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occurs when no one can be made better off by transferring resources from one industry to another without making someone else worse off. (Price = MC) // this is the social optimum

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Market failure

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where resources are inefficiently allocated due to imperfections in the working of the market mechanism.

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Private cost and benefit

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cost or benefit to an individual economic unit such as a consumer or a firm.

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Social cost and benefit

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cost or benefit to society as a whole.

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Gross

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Amount paid (or due) before any deductions, like tax, have been taken

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Net

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Amount left after deductions like tax have been taken

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Domestic Income

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excludes the values of incomes generated by assets owned overseas and domestic assets owned by foreigners.

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National Income

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sum total of all final goods and services produced in an economy over a period of time

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Factor Cost

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rent (land), wages (labour) interest (capital) profits (entrepreneurship)

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Nominal

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values unadjusted for the effects of inflation / values at current prices

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Real

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values adjusted for inflation

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Macroeconomic Policy Objectives

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Economic Growth, Full employment, Low inflation, Exteernal Equilibrium

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GDP

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measure of national income before property income from abroad and depreciation have been accounted for.

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GDP (factor cost)

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GDP (market prices) - Taxes (indirect) + Subsidies

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GNP

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a measure of national income including net property income from abroad but before depreciation.

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Multiplier

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figure used to multiply a change in autonomous expenditure, such as investment, to find the final change in income / ratio of the final change in income to the initial change in autonomous expenditure.

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Absolute advantage

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when a country is able to produce a good more cheaply in absolute terms than another country.

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Comparative advantage

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when a country is able to produce a good more cheaply relative to other goods produced domestically than another country.

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Free Trade Areas

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group of countries between which there is free trade in goods and services but which allows member counties to set their own level of tariffs against non-member countries.

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Customs unions

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a regional economic association where tarriffs and quotas have been eliminated and common external tarriffs and quotas have been applied to member countries.

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Common markets

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group of countries between which there is free trade in products and factors of production, and which imposes a common external tariff on imported goods from outside the market.

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Current Account

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pare of Balance of payments where payments for the purchase and sale of goods and services are recorded.

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Capital Account

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part of the B.o.P. where flows of savings, investment and currency are recorded.

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Current Balance

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difference between total exports and total imports.

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Terms of Trade

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The amount of export goods needed to purchase a given amount of imported goods./ A weighted index showing how the price of imports have changed in terms of exports.

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Economic Growth

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increase in GDP in the short-run or increasing the supply ability of the economy in the long-run (i.e. shifting LRAS to the right and the PPF outwards)

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Economic Development

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A measure of well-being not just in monetary terms but also in terms of other indicators i.e.) education, health, life expectancy

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Human Development Index (HDI)

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compares countries on the basis of real GDP per capita at PPP, life expectancy, education (literacy and school enrolment)

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Human Suffering Index (HSI)

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takes into account factors such as access to clean water, adequate food, and education.

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Valuing Natural Resources

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takes into account growth without the destruction of natural capita.

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Measure of Economic Welfare (MEW)

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allows for leisure, non-marketed goods, public amenities, as well as economic "bads" like pollution or "regrettables" like defense spending.

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Net Social Product (NSP)

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adjusts for positive and negative externalities to calculate social benefits and social costs, including pollution, divorce, crime and suicide rates.

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Geographical Immobility

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Barriers to movement of workers between different areas.

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Occupational Immobility

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Barriers to workers changing occupations.

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Dependency ratio

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The proportion of the population which is out of work (due to illness or old/young age) and so is reliant on the proportion of the population which is still in the workforce.

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Marginal Revenue Product

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the change in a firm's revenue resulting from employing one extra unit of labour.

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Flexible Labour Market

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One that can adjust quickly and smoothly to changes in the demand for the supply of labour.

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Income Effect

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The effect on the supply of labour caused by the changes in the ability to buy leisure.

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Substitution Effect

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The effect on the supply of labour caused by a change in the opportunity cost of leisure.

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Wage Elasticity of Supply

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the responsiveness of supply of labour to a change in the wage rate.

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Economic Rent

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A surplus paid to a factor of production over and above what is needed to keep it in its current occupation.

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Transfer Earnings

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The amount a factor of production could earn in its next best alternative occupation.