Ib Economics Definitions Flashcards

Front 1

Absolute Advantage

Back 1

When a country is able to produce more output than other countries using the same input of factors of production.

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Ad valorem taxes

Back 2

An indirect tax where a given percentage is added to the price of the good or service.

Front 3

Adminastrative Barriers (trade)

Back 3

Any adminastrative requirement that might prevent or reduce the amount of imports.

Front 4

Aggregate Demand

Back 4

Total spending in an economy, made up of consumption, investment, government spending and net exports (CIG (X-M)).

Front 5

Aggregate Supply

Back 5

Total amount of domestic goods and services supplied by businesses and governments including both consumer goods and capital goods.

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Allocative Efficiency

Back 6

Occurs where the maginal social cost of producing a good equals the marginal social benefit that the good brings to society. In other words it is where the marginal cost of producing a good is equal to the price it is charged to consumers (P=MC).

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Anti-Dumping

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Legislation to protect an economy against the importing of goods below its unit costs of production.

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Appreciation

Back 8

When the value of a country's money increases under a floating exchange rate system.

Front 9

Appropriate Technology

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Where technology caters to the particular economic, social and environmental charachteristics of its users.

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Automatic Stabelizers

Back 10

Features of government fiscal policy e.g unemployment benefits and direct tax revenues that automatically counter balance fluctuations in economic activity. For example government spending in unemployment benefits automatically rise and direct taxes automatically fall when economic activity is slow.

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Balance of Payments

Back 11

The accounting record of all transactions (debits and credits) between the households, governments and firms of one country, and the rest of the world.

Front 12

Balanced Budget

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A situation that exists when planned government spending is equal to planned government revenues. Refers to a budget that has no budget deficit, but could have a budget surplus.

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Barrier to Trade

Back 13

Anything which prevents or hinders free trade between countries for example; tariffs, quotas or domestic subsidies.

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Barriers to Entry

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Obstacles that prevent a new firm from entering a market, for example; economies of scale, product differentiation and legal protection.

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Break-even Price

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The price where average revenue is equal to average total cost. Below this price the firm will shutdown in the long run as it cannot cover its variable costs (labour).

Front 16

Budget Deficit

Back 16

A situation that exists when planned government spending exceeds planned government revenue. A government may "run a budget deficit" to increase AD in the economy.

Front 17

Budget Surplus

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A situation that exists when planned government revenue exceeds planned government spending.

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Business Cycle

Back 18

A diagram showing the periodic or cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases; recovery, boom, slowdown, recession.

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Capital

Back 19

The factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment.

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Cartel

Back 20

A formal agreement among firms in a collusive oligopoly.

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Central Bank

Back 21

The governments bank. The institution that is responsible for an economys monetary policy. Not always controlled by the government (often better if not controlled by government as to avoid influence as a a result of political motives).

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Ceteris Paribus

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A latin term meaning "let all other things remain equal", term used by economists to develop economic theories/models.

Front 23

Circular flow of income model

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A simplified model of the economy to show the flow of money through an economy.

Front 24

Classical AS Model

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A model showing that the long-run aggregate supply curve is vertical at the full employment level of output.

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Collusive Oligopoly

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Where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output.

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Common Access Resources

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Also known as common pool resources or common property resources. These are resources that have propereties similar to public goods in that it is very difficult or impossible to prevent people from using or consuming the resource. Therefore, they are vulnerable to overuse or degredation.

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Common Market

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A customs union with common policies on product regulation and free movement of goods, services, capital and labour.

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Comparative Advanatge

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When a country is able to produce a good at a lower opportunity cost of resources than another country.

Front 29

Complementary Good

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Goods used in combination with each other e.g printer and printer ink or digital camers and memory cards. Complementary goods have negative cross-price elasticity.

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Constant returns to scale

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A given percent increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long-run average costs.

Front 31

Consumer Price Index

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A 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.

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Consumer Surplus

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

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Consumption

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Spending by households on consumer goods and services.

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Core Inflation

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A measure of inflation that factors out changes in prices of products that tend to experience volatile price swings e.g food and energy prices. This gives policy makers a better indication of long-term changes in price levels.

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Corporate Social Responsibility

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An approach taken by firms to produce responsibly and ethically towards the community and environment, demonstrating a positive impact on society.

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Cost push inflation

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Inflation brought on as a result of increased costs of productions for firms and thus a decrease in AS.

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Credit

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Borrowed money.

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Cross-price elasticity of demand

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A measure of the responsiveness of the quantity one good demanded in response to a change in the price of another realted good.

Equation=

(%D in Qd of Good A)/(%D in Price of Good B)

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Crowding Out

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A situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption.

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Current Account (BOP)

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A measure of the international flow of funds from trade in goods and services, plus net investment income flows (profit, interest and dividends), and net transfers of money (foreign aid, grants and remittances).

Front 41

Current Account Deficit

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Where 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.

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Current Account Surplus

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Where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows in a given year.

Front 43

Customs Union

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An agreement made between countries, where the countries agree to worktowards free trade among themselves and they also agree to adopt common external barriers against any country attempting to import into the customs union.

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Cyclical (demand deficient) Unemployment

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Unemployment that exists when there is insufficient aggregate demand in the economy and wages do not fall to compensate for this. This is usually associated with a slowdown in economic growth or negative growth.

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De-merit Goods

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Products that are considered to be harmful for people that would be over-provided or over-consumed in a purely free market economy. De-merit goods are generally considered to be products whose consumption creates negative externalities.

Front 46

Debt Cancellation

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The act of eliminating the debt owed by a developing country government in order to allow it to achieve development objectives.

Front 47

Decreasing Returns to Scale

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A given percentage increase in the quantity of all factors of production results in a smaller percentageincrease in output and thus an increase in long-run average costs (diseconomies of scale).

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Deflation

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A persistent fall in the average level of prices.

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Deflationary (recessionary) Gap

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The gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full emplyoment level of output.

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Demand

Back 50

The quantity of a product that consumers are willing and able to buy at a given price in a given time period.

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Demand Curve

Back 51

A curve, or line showing the relationship between the price of a product and quantity demanded over a range of prices.

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Demand-pull Inflation

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A persistent increase in the average price level that comes about as a result of increases in aggregate demand (AD).

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Demand-side Policies

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Also known as demand-management policies, these are policies to change the level of aggregate demand (AD) in the economy deliberately in order to achieve macroeconomic objectives.

Fiscal Policy; tax rates and government spending

Monetary Policy; manipulation of interest rates and banks reserves

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Depreciation

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A decrease in the value of a country’s currency in a floating exchange rate system.

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Deregulation

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A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour.

Front 56

Deterioration in the Terms of Trade

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Where the index of the average price of exports falls relative to the index of the average price of imports.

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Devaluation

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A decrease in the value of a country’s currency in a fixed exchange rate system.

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Development Indicators

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Statistics that may be used to assess the level of development of an economy. These may be single indicators, e.g. infant mortality rate, or composite indicators, e.g. Human Development Index)

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Direct Tax

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Taxation imposed on people’s income or wealth, and on firms’ profits.

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Diseconomies of Scale

Back 60

An increase in average costs in the long run. As a result of poor communication, co-ordination problems, loss of management efficiency.

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Disinflation

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A fall in the rate of inflation.

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Diversification

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A strategy to reduce reliance on the export of a narrow range of exports by re-allocating resources to a wider range of industries.

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Dumping

Back 63

The selling of a good in another
country at a price below its unit cost
of production.

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Economic Costs

Back 64

The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

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Economic Development

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A multidimensional concept involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

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Economic Growth

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An increase in the actual level of output of goods and services produced by an economy, i.e. an increase in real GDP over time.

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Economic Profit (Abnormal or Supernormal profit)

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Economic profit (abnormal or supernormal profit) is earned when a firm’s revenues are greater than its total opportunity costs (its economic costs).

Front 68

Economies of Scale

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A fall in average costs in the long run, as a result of improved communication, efficient management, bulk buying, specialisation and more efficient transport and packaging.

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Excess Demand

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Occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

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Excess Supply

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Occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

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Exchange Rate

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The value of one currency expressed in terms of another currency.

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Expenditure-reducing Policies

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Policies implemented by the government that attempt to reduce overall expenditure in the economy, in order to reduce expenditure on imports.

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Expenditure Switiching Policies

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Policies implemented by the government that attempt to switch the expenditure of domestic
consumers away from imports towards domestically produced goods and services.

Front 74

Export Promotion Strategies

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Strategies to encourage economic growth through increased international trade and the promotion of export industries.

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Factor Endowment

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The factors of production that a country has available to produce goods and services.

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Factors of Production

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The land, labour, capital and management (entrepreneurship) that are used in production.

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Financial Account

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A measure of the net change in foreign ownership of domestic financial assets, including foreign direct investment, portfolio investment and changes in foreign reserves, formerly called the capital account.

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Fiscal Policy

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The set of government polices concerning its taxation and expenditure. Fiscal policy may be used to manage the level of aggregate demand (AD) and may be expansionary (to raise AD) or contractionary (to lower AD).

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Fixed Costs

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Costs that do not vary with the level of output. They are fixed costs that cannot be changed in the short-run i.e capital, utilities etc.

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Fixed Exchange Rate

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An exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, (or to the average value of a selection of currencies, or to the value of some other commodity, e.g. gold).

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Floating Exchange Rate

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An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market.

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Foreign Debt

Back 82

The total debt owed by the government of one country to foreign lenders.

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Foreign Direct Investment

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Long-term investment by a multinational company in a foreign country.

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Free Trade Area

Back 84

An agreement made between countries, where the countries agree to work towards free trade among themselves, but are able to trade with countries outside the free trade area in whatever way they wish.

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Frictional Unemployment

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Unemployment that occurs when people are entering the workforce after leaving education, or people who have left one job and are searching for a new job.

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Full Employment Level of Output

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

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Game Theory

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A method of analysing the way thatthe ‘players’ in an interdependent relationship (such as oligopoly) make strategic decisions.

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GDP per Capita

Back 88

The total money value of all final goods and services produced in an economy in one year per head of the population.

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GDP

Back 89

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

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Gini Coefficient

Back 90

A coefficient (or index) that is derived from the Lorenz curve and is a numerical indicator of income equality. It is calculated by dividing the distance between the Lorenz curve and the line of absolute equality by the total area under the line of absolute equality (multiplied by 100 for the index). The higher the figure, the more
unequal the income distribution.

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GNI/GNP

Back 91

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).

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Green GDP

Back 92

A measure of the total output of an economy having taken into account the environmental consequences (externalities) involved in the production of that output.

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Homogeneous Products

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Completely identical products, as produced in perfect competition.

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Import Substitution

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Strategies to encourage the domestic production of goods in order to reduce imports and stimulate local producers. Such policies rely on the use of protectionism.

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Improvement in the terms of trade

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Where theindex of the average price of exports rises relative to the index of the average price
of imports.

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Incentive function of Price

Back 96

Prices give producers the incentive either to increase or decrease the quantity they supply. A rising price gives producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.

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Incidence of Tax

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The amount of an indirect tax paid by consumers of a good or producers of a good.

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Income Elasticity of Demand (YED)

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A measure of the responsiveness of demand for a good to a change in consumers’ income. YED = %D in D/%D in Y

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Indirect Taxes

Back 99

Taxes placed upon the expenditure on a good or service, e.g. value added tax, or goods and services tax.

Front 100

Infant Industries Arguement

Back 100

The argument that new industries should be protected from foreign competition until they are large enough to achieve economies of scale that will allow them to be competitive.

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Inferior Good

Back 101

A good whose demand falls as income rises. An inferior good has negative income elasticity. An example would be Denner Ice Tea compared to Nestea.

Front 102

Inflation

Back 102

A persistent increase in the average level of prices. Measured using the consumer price index i.e a measure of the change in price of a basket of goods bought by the average consumer.

Front 103

Inflationary Gap

Back 103

The gap that occurs when macroeconomic equilibrium occurs at a level that is above the full employment level of output.

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Infrastructure

Back 104

The large-scale capital usually provided by government that is necessary for economic activity to take place.

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Injections

Back 105

The investment, government spending and export revenues that add spending to the circular flow of income.

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Increasing Returns to Scale

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A given percentage increase in the quantity of all factors of production results in a greater percentage increase in output and thus a fall in long-run average costs (economies of scale).

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Interest Rate

Back 107

The price of credit or borrowed money.

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The International Monetary Fund (IMF)

Back 108

An organization working to foster global monetary cooperation, secure financial stability, facilitate international trade and reduce poverty.

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International (foreign) Reserves

Back 109

Foreign currencies held by governments (central banks) as a result of international trade. Reserves may be held so that the government may maintain a desired exchange rate for the country’s currencies.

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Investment

Back 110

Spending by firms on capital goods; the addition of capital stock to an economy.

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J-Curve

Back 111

Suggests that in the short term, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

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Joint Supply

Back 112

Goods which are produced together, or where the production of one good involves the production of another product, e.g. meat and leather (a by-product).

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Keynesian AS Model

Back 113

Keynesian view of aggregate suppy in the economy. In this model, with three distinct phases of aggregate supply, macroeconomic equilibrium may occur at a level of output that is less than full employment, and suggests that the economy may remain at this level of output in the absence of active intervention on the demand side by the government.

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Labour

Back 114

The work done by humans that is used in the production of goods and services.

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Labour Union or Trade Union

Back 115

An organization of workers whose goals include the improvement of working conditions and payments to workers. Unions work on behalf of workers through negotiations with management.

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Lanf

Back 116

All raw materials that are used in the prodcuction of goods and services

Front 117

Law of Demand

Back 117

As the price of a product increases, the quantity demanded decreases, ceteris paribus.

Front 118

Law of Diminishing Marginal Returns

Back 118

In the short run, as increasing units of a variable factor are added to a fixed factor, the addition to total output (MP) will eventually fall.

Front 119

Law of Supply

Back 119

As the price of a product increases, the quantity supplied increases, ceteris paribus.

Front 120

Leakages

Back 120

The savings, taxes and import spending that remove spending from the circular flow of income.

Front 121

Linear Demand Function

Back 121

An equation in the form Qd = a – bP which shows the relationship between the price and the quantity of a product demanded.

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Linear Supply Function

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An equation in the form Qs . c 1 dP which shows the relationship between the price and the quantity of a product supplied.

Front 123

Long Run

Back 123

In terms of the theory of the firm, the period of time in which all factors are variable.

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Long-run Average Cost Curve

Back 124

A graphical representation of long -run average costs. The LRAC is u-shaped due to economies and diseconomies of scale.

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Lorrenz Curve

Back 125

A curve showing what percentage of the population earns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45 degree line), the more unequal is the distribution of income.

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Macroeconomics

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The study of how the economy as a whole works.

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Management or Entrepeneurship

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The factor of production that brings together the other three factors of production with the aim of making profit. Entrepreneurship tends to involve risk taking.

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Manufactured Goods

Back 128

Goods that have been processed by workers.

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Marginal Private Benefit

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The extra benefit or utility to the consumer of consuming an additional unit of output.

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Marginal Private Cost

Back 130

The extra (private) cost to the producer of producing an additional unit of output.

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Marginal Social Benefit

Back 131

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

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Marginal Social Cost

Back 132

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Front 133

Market

Back 133

A place where buyers and sellers of a product come together to make an exchange, or a trade. A market does not need to be a physical place, e.g. a stock market or foreign exchange market, where the product is traded via computers.

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Market Equilibrium

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The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.

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Market Failure

Back 135

Occurs when the production of a good does not take place at the socially efficient level of output (allocative efficiency where MSC = MSB).

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Marshall-Lerner Condition

Back 136

States that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

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Merit Good

Back 137

Products that are considered to be beneficial for people that would be under-provided or under-consumed in a purely free market economy. Merit goods are generally considered to be products whose consumption create positive externalities of consumption.

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Micro-credit

Back 138

Loans of small amounts that given to people who use the loans to start up small-scale businesses. People who obtain micro-credit would have difficulty getting loans from the formal banking sector due to a lack of income and collateral.

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Microeconomics

Back 139

The study of the behaviour (supply and demand) of individual markets.

Front 140

Millenium Development Goals

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Eight goals adopted by international leaders in 2000, to be achieved by 2015, including goals and targets on income poverty, hunger, maternal and child mortality, disease, inadequate shelter, gender inequality, environmental degradation and the Global Partnership for Development.

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Monetary Policy

Back 141

The set of official policies concerning an economy’s official interest rate and money supply. Monetary policy may be used to manage the level of aggregate demand (AD) and may be expansionary (to raise AD) or contractionary (to lower AD).

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Monetary Union

Back 142

Where two or more countries share the same currency and have a common central bank.

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Monopolistic Competition

Back 143

A market structure charaterized by a large number of small firms, producing differentiated products, with no barriers to entry or exit.

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Monopoly

Back 144

A market structure where there is only one firm, or a dominant firm, in the industry. There are high barriers to entry.

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Multi-national Corporations (MNC's)

Back 145

Companies based in one country that set up production units, e.g. factories, farms, mines or retail outlets, in other countries.

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Multiplier

Back 146

The amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection.

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Natural Monopoly

Back 147

A situation where there are only enough economies of scale available in a market to support one firm, such that it is natural that the industry be dominated by one firm only.

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The Natural Rate of Unemployment

Back 148

The rate of unemployment that is consistent with a stable rate of inflation. It is the rate of unemployment that exists when the economy is at the full employment level of output. It is the rate where the long run Phillips curve touches
the x-axis.

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Negative Externality of Consumption

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The external costs to a third party that occur when a product is consumed. For example cigarettes.

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Negative Externality of Production

Back 150

The external costs to third party that occur when a product is produced. For example high polluting industries - third party would be health and environment.

Front 151

Non-collusive Oligopoly

Back 151

Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

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Non-Government Organisations (NGO's)

Back 152

Organizations that are not associated with a government that exist to promote economic development and/or humanitarian ideals and/or sustainable development.

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Normal Good

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A good whose demand rises as income rises. A normal good has positive income elasticity.

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Official Development Assistance (ODA)

Back 154

Aid that is provided to a country by another government or an official government agency. It may be multilateral or bilateral in nature.

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Oligopoly

Back 155

A market structure characterized by a small number of large firms dominating the industry due to high barriers to entry. There are many different theories of oligopoly.

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Overvalued Currency

Back 156

When the value of a currency is believed to be higher than what is perceived to be its market equilibrium value, based on its balance of payments position or its international purchasing power.

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Perfect Competition

Back 157

A market structure characterized by a large number of firms, producing homogeneous products, each of which is too small to influence the market. The firms are price takers because of this. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

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Phillips Curve (In the short-run)

Back 158

A curve that illustrates the view that there is a short-run inverse relationship between the inflation rate and the unemployment rate.

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Phillips Curve (In the long-run)

Back 159

A vertical line at the natural rate of unemployment that illustrates the view that there is no trade-off between the inflation rate and the unemployment rate.

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Portfolio Investment

Back 160

The purchase of financial investments such as shares and bonds in order to gain a financial return in the form of interest or dividends.

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Positive Externalities of Consumption

Back 161

The external benefits to a third party that occur when a product is consumed.

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Positive Externalities of Production

Back 162

The external benefits to a third party that occur when a product is produced.

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Poverty Trap

Back 163

Any circular chain starting and ending in poverty, meaning that poverty perpetuates itself.

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Preferential Trade Agreement

Back 164

Where a country agrees to give preferential access, e.g. reduced tariffs, to certain products from one or more trading partners.

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Price Ceiling (max. price)

Back 165

A maximum price set by the government or other authority above which the product may not be sold in order to support the consumers of the product. Examples of maximum prices include those set on essential food products or rent.

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Price Discrimination

Back 166

The act of charging different consumers of an identical product different prices, e.g. based on time of purchase, age of consumer, quantity of purchase or time of consumption.

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Price Elasticity of Demand (PED)

Back 167

A measure of the responsiveness of the quantity of a gooddemanded to a change in its price.

PED = %D in Qd/%D in price. PED = P1DQ/Q1DP

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Price Elasticity of Supply (PES)

Back 168

A measure of the responsiveness of the quantity of a good supplied to a change in its price. PES = %D in Qs/%D in price. PES = P1DQ/Q1DP

Front 169

Price Floor (min. price)

Back 169

A minimum price set by the government or other authority below which the product may not be sold in order to support the producers of a product.

Examples of minimum prices include those set on agricultutral products and wages in a labour market.

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Price Taker

Back 170

In perfect competition, each firm is a price taker, taking the equilibrium price set in the market.

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Primary Commodities

Back 171

Raw materials.

Front 172

Privatization

Back 172

A type of supply-side policy where the government sells public assets to the private sector.

Front 173

Producer Surplus

Back 173

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

Front 174

Product Differentiation

Back 174

A strategy employed by producers where they attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling or packaging. It is a form of non-price competition.

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Profit Maximizing Output

Back 175

Often assumed to be the primary goal of firms. This is where the difference between total revenue and total cost is at the maximum or where marginal cost is equal to marginal revenue (MC = MR).

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Progressive Taxation

Back 176

A system of direct taxation where tax is levied at an increasing rate for successive bands of income. The marginal tax rate is higher than the average tax rate.

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Proportional Taxation

Back 177

A system of taxation in which tax is levied at a constant rate as income rises, for example 10% of each increment of income as income rises.

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Public Good

Back 178

A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.

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Quota

Back 179

Import barriers that set limits on the quantity or value of imports that may be imported into a country.

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Regressive Taxation

Back 180

A system of taxation in which tax is levied at a decreasing average rate as income rises. This form of taxation takes a greater proportion of tax from the low-income taxpayer than from the high-income taxpayer.

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Resource Allocation

Back 181

A primary focus of the study of economics is to examine the way that scarce factors of production (land, labour and capital) are used (allocated) to meet unlimited demand.

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Retaliatory Tariffs

Back 182

Where a country responds to the imposition of a tariff by a trading partner by imposing a tariff on that country’s products.

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Revaluation

Back 183

An increase in the value of a country’s currency in a fixed exchange rate system.

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Revenue Maximization

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An alternative goal of firms (as opposed to profit maximization). This occurs when marginal revenue is equal to zero (MR = 0).

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Revenue

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The income received by a firm from selling its product.

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Satisficing

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An alternative goal of firms (as opposed to profit maximization) . This occurs when enterpreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits. It is essentially a mix of the words ‘satisfy’ and ‘suffice’.

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Seasonal Unemployment

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Unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer.

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Short Run

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In terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed.

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Short-run Average Costs (SRAC)

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A graphical representation of short-run average costs. The SRAC is u-shaped due to the law of diminishing marginal returns.

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Shutdown Price

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Below the price where average
revenue is equal to average variable cost.
Below this price, the firm will shut down in
the short run.

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Signalling Function of Price

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

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Specific Taxes

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An indirect tax where a fixed amount is added to the price of a good or service.

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Speculation (Context of Exchange Rates)

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Where foreign currency traders make a decision to buy or sell a currency based on their expectations of future exchange rate movements.

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stagflation

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The situation where an economy is facing stagnant growth, with high rates of unemployment and high rates of inflation.

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Structural Unemployment

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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.

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Subsidy (International Trade)

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An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competition.

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Subsidy

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The amount of money given to producers of a product by the government. A subsidy increases the supply of the good by effectively lowering the firms’ costs of production.

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Substitute Goods

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Goods which can be used in place of each other, e.g. Adidas running shoes and Nike running shoes. Substitute goods have positive cross-price elasticity.

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Supply Curve

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A curve or line showing the positive relationship between the price of a product and the quantity supplied over a range of prices.

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Supply

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The amount of a good or service that producers are willing and able to supply at a given price in a given time period.

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Supply Side Policies

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Policies designed to shift the long-run aggregate supply (LRAS) curve to the right, thus increasing potential output in the economy.

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Sustainability

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In economic terms, sustainability is linked to the concept of sustainable development, which is development that meets the needs of present generations without compromising the ability of future generations to meet their needs. Sustainability implies an ability to sustain the world’s resources over time.

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Tariff

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A duty (tax) that is placed upon imports to protect domestic industries from foreign competition.

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Tax Allowances or Tax Credits

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A type of supply-side policy where the government allows households or firms to reduce the amount of direct tax paid to the government.

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Terms of Trade

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An index that shows the value of a country’s average export prices relative to their average import prices.

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Tied Aid

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Grants or loans that are given to a country, but only on the condition that the funds are used to buy goods and services from the donor country.

Illegal in Britain as it seems to damage developing countries domestic industries.

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Total, average and marginal cost

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Total costs include the complete cost of producing a level of output. Average costs are costs per unit of output (AC = TP/Q). Marginal cost is the addition to total cost of producing one extra unit of output (MC = DTC/DQ)

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Total, average and marginal product

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Total product is the total output of a firm at a given level of input. Average product is the output that is produced, on average, by each unit of the variable factor. (AP = TP/V). Marginal product is the extra output that is produced by using an extra unit of a variable factor. (MP = DTP/DV)

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Total, average and marginal revenue

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Total revenue is the price of a product multiplied by the quantity sold (TR = PxQ). Average revenue is the revenue that a firm receives per unit sold (AR = TR/Q). Marginal revenue is the extra revenue that a firm gains when it sells one more unit of a product (MR = DTR/DQ).

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Trade bloc

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Any association of one or more countries where an agreement is made to reduce trade barriers.

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Trade Creation

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Occurs when the entry of a country into a customs union leads to the production of a good moving from a high-cost producer to a low-cost producer.

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Trade Diversion

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Occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer out-side the union to a high-cost producer inside the union.

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Trade

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International trade involves the exchange of goods or services between two countries.

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Transfer Payments

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A payment from the government that is received when there is no good or service exchanged, e.g. a student grant or a pension. Transfer payments are a means of redistributing income in
an economy.

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Underemployment

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Exists when workers are carrying out jobs for which they are over-qualified or when workers are employed part-time, even though they are available for full-time employment.

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Undervalued Currency

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When the value of a currency is believed to be lower than what is perceived to be its market equilibrium value, based on its balance of payments position or its international purchasing power.

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Unemployment Rate

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The number of unemployed workers expressed as a percentage of the total workforce.

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Unemployed

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The state of being without work, but willing and able to work, and actively looking for a job.

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Variable Costs

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Costs that vary directly with the level of output.

For example labour and raw materials.

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Weighted Price Index

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An approach to calculating the change in the price level by giving a weight to each item according to its importance in consumers’ budgets.

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World Bank

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An organization whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels and encouraging and safeguarding international investment.

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World Trade Organization (WTO)

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An international body that sets the rules for
global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.

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Zero Economic Profit (normal profit)

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Normal profit is earned when revenue is equal to the total opportunity costs to the firm. A firm earning normal profit (or zero economic profit) has no incentive to leave the industry.