important economics terms

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Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Abnormalprofit

Theprofitoverandabovenormalprofit(i.e.theprofitoverandabovetheopportunitycostoftheresourcesusedinproductionbythefirm).

Absoluteadvantage

Existswhenacountryisabletoproduceagoodmorecheaplyinabsolutetermsthananyothercountry.

Adveloremtax

Ataxthatisleviedasapercentageofthepriceofthegood(e.g.,17.5%VAT)

Allocativeefficiency

Occurswhennobodycanbemadebetteroffbytransferringresourcesfromoneindustrytoanotherwithoutmakingsomebodyworseoff.

Averagecost

Theaveragecostofproductionperunit.Itiscalculatedbydividingthetotalcostbythequantityproduced.Itisequaltothetotalvariablecost+thetotalfixedcost.

Averagefixedcost

Theaveragefixedcostofproductionperunit.Itiscalculatedbydividingthetotalfixedcostbythequantityproduced.Itfallsasquantityproducedrises.

Averageproduct

Thequantityofoutputperunitofinput.

Averagerevenue

Iscalculatedbydividingtotalrevenuebythequantityproduced.Itisequaltothepricepaidforthegood(solongasthepriceisthesameforallconsumers).

Averagevariablecost

Theaveragevariablecostofproductionperunit.Itiscalculatedbydividingthetotalvariablecostbythequantityproduced.

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Barrierstoentry

Factorswhichmakeitdifficultorimpossibleforafirmtoenteraparticularmarketandcompetewithexistingfirms.

Barrierstoexit

Thesecanoccuriftherearehighsunkcoststhatcannotberecoveredifthefirmleavestheindustry.

Capital

Oneofthefactorsofproduction.Itincludesallbuildingsandmachinery.

Cartels

Agroupofproducersthatattempttoincreasethepriceoftheirgoodbylimitingoutputoragreeinguponapricetoselltheirgoodsat.

Ceterisparibus

Allotherthingsremainingequal.

Choices

Economicchoiceshavetobemaderegardingtheuseofscareeconomicresources

Collectivebargaining

Bargainingbetweenagroupofmanagersandaunionforthepurposeofagreeinguponnewconditions/contractsetc.forthestaff.

Commandeconomy

Aneconomicsystemwherethegovernmentcontrolsallofthefactorsofproduction.

Comparativeadvantage

Thisadvantageismeasuredintermsofothergoodsanationcouldproduce.

Complementarygoods

Agoodwhichisusuallypurchasedwithanother(e.g.,breadandbutter).

Compositedemand

Agoodthatisdemandedfortwoormoredistinctchoices(e.g.,oilisusedforpetrolandtheproductionofchemicals).

Consumersurplus

Thedifferencebetweenwhatconsumerarepreparedtopayforagoodandwhattheyactuallyhavetopayforagood.

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Costbenefitanalysis

Itisamethodofappraisinganinvestmentproject.Itinvolvesplacingafinancialvalueonaspectssuchasleisureandpollution.

Crosselasticityofdemand

Measurestheresponsivenessofdemandofonegoodtoachangeinthepriceofanothergood.

Demand

Thequantitypurchasedatanygivenprice.

Demandcurve

Showstheeffectivedemandatanygivenpricelevel.

Demeritgood

Agoodthatisdeemedtobesociallyunacceptableandisoverprovidedbythemarketmechanism(e.g.,cigarettes)

Deriveddemand

Thedemandforonegoodresults(isderived)fromanothergood(e.g.,thedemandforsteelwillincreaseifthedemandforcarsincreases).

Diminishingreturns

Ifincreasingquantitiesofavariableinput(e.g.,labour)arecombinedwithafixedinput(e.g.,capital)eventuallythemarginalproductandthentheaverageproductwillfall.

Diseconomiesofscale

Ariseinthelongrunaveragecostsasproductionrises.

Divisionoflabour

Happenswhenspecialisationtakesplace(e.g.,onaproductionline).

Economicefficiency

Theuseofresourcesthatleadstothehighestpossiblevalueofoutput.

Economicgoods

Thesegoodsarescareandtheyhaveanopportunitycost

Economicproblem

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Resourcesarescarce,howeverwantsareinfinite.

Economicresources

Thesearetheinputsnecessaryforproductiontotakeplaceland,labour,capitalandenterprise(entrepreneurialactivity).

Economiesofscale

Afallinthelongrunaveragecostsasproductionrises.

Effectivedemand

Awantforagoodorservicethatisbackedupbythemoneytopurchaseit.

Elastic

Apercentagechangeinavariableleadstoalargerpercentagechangeinthequantitydemandedorsupplied(anelasticband!).

Enterprise

Oneofthefactorsofproductionthatiscarriedoutbyanentrepreneur.

Entrepreneur

Isthepersonwhothinksofabusinessidea,raisesthecapitalandthenorganisestheotherthreefactorofproduction.

Equilibrium

Asituationofrestwherethereisnodesiretomovefromthecurrentposition.

Equilibriumpriceandquantity

Thepriceandquantityatwhichthereisnotendencytochangeasdemandisequaltosupply.

EuropeanUnion

AcustomsunionofEuropeannationsformedin1991bytheMaastrichtTreaty.Itaimstopromotetradeandmovementofresourceswithoutanybarriers.

Excessdemand

Wheredemandisgreaterthansupply

Excesssupply

Wheresupplyisgreaterthandemand.

Exciseduties

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Taxesonaspecificproduct(e.g.,onbeer).

Externaleconomiesofscale

Arisewhenthereisanincreaseinthesizeoftheindustrythefirmoperatesin.

Externalities

Occurwhentheactionsofafirmleadtoavarietyofeffectsthattheydonotchargefor.Theycanbepositiveexternalities(e.g.,extrahealthcareisbetterforthecommunityasawhole)ornegativeexternalities(e.g.,pollution).

Factorsofproduction

Thesearetheinputsnecessaryforproductiontotakeplaceland,labour,capitalandenterprise(entrepreneurialactivity).

Financialeconomiesofscale

Largefirmsareabletoborrowmoneycheaperthansmallones,astheyaremorelikelytobeabletorepaytheloan(lesschanceofbankruptcy).

Fixedcapital

Isthecapitalthatwillnotbeconvertedintothefinalproduct(e.g.,factoriesandmachinery).

Fixedcosts

Thesearecoststhatdonotvarywiththelevelofoutput(e.g.,rent,advertisingcampaignsandutilitystandingcharges).

Freegoods

Thesearegodsthatareunlimitedinsupplyandhavenoopportunitycost(e.g.,air).

Immobilityoflabour

Whenworkersareunabletomovetoadifferentareatotakenewjobs.Thismightbeduetopersonalreasonsornotbeingabletosellaproperty.

Imperfectcompetition

Amarketstructurewherethereareseveralfirmsintheindustry,eachofwhichhassomeabilitytocontrolthepricetheysetfortheirproduct.

Incidenceoftax

Measurestheburdenoftaxonthetaxpayer.

Incomeelasticityofdemand

Showshowthequantitydemandedwillchangeinresponsetofluctuationsinincome.

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Indirecttax

Isataxleviedongoodsorservices(e.g.,VATorexciseduties).

Inelastic

Apercentagechangeinavariableleadstoasmallerpercentagechangeinthequantitydemandedorsupplied(aninelasticband!).

Inferiorgood

Demandforthegoodfallswhenincomes,i.e.,ithasanegativeincomeelasticity(e.g.,margarineornofrillsgoods).

Interest

Itisthecostofobtainingcreditorthereturnpaidtoownersofcapital.

Internaleconomiesofscale

Areeconomiesofscalethatariseduetoanincreaseinthescaleofproductionofafirm.

JointSupply

Twoormoregoodsareproducedtogether,soachangeinthequantitysuppliedofonegoodwillleadtoachangeinthesupplyofanothergood(e.g.,anincreaseinthesupplyofbeefwillleadtoanincreaseinthesupplyofleather).

Labour

Oneofthefactorsofproduction,itistheworkforce.

Land

Oneofthefactorsofproduction,itincludesallrawmaterialsaswellastheland.

Longrun

Theperiodoftimewhereallthefactorsofproductioncanbevaried.Onlytheleveloftechnologycannotbechanged

Macroeconomics

Looksattheeconomyasawhole.

Marginalcost

Thisisthecostofproducingoneextraunitofoutput.

Marginalrevenue

Thisistheextrarevenuegainedfromsellinganextraunitofoutput.

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Marginalutility

Thesatisfactiongainedfromconsumingoneextraunitofagoodorservice.

Market

Anywaythatbuyersandsellersareabletocommunicateandexchangegoodsandservices(e.g.,shop,mailorderandtelephone).

Marketeconomy

Aneconomicsystemwhichaimstoresolvethebasiceconomicproblemviatheworkingsofthemarketmechanism(pricesaresetthroughtheinteractionsofbuyersandsellers).

Marketfailure

Whereresourcesareallocatedinefficiently.

Marketingeconomies

Asoutputgrowsadvertisingperpoundofsaleswillbereduced.

Meritgoods

Agoodthatisdeemedtobesociallyacceptableandisunderprovidedbythemarketmechanism(e.g.,healthandeducation)

Microeconomics

Dealswiththeeconomicbehaviourorindividualsorgroupswithintheeconomy.

Mixedeconomy

Aneconomywhereboththefreemarketmechanismandthegovernmentplanningprocessallocateresources(e.g.,UK)

Mobilityoflabour

Theeasetowhichlabourisabletomoveregionsorcountries.

Monopoliesandmergerscommission

Investigatespotentialmonopolysituations(e.g.,BritishGassholdoverthegasmarket).

Monopolisticcompetition

Amarketstructurewherealargenumberofsmallfirmsproduceanonhomogeneousproductandtherearenobarrierstoentryorexit

Monopoly

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Amarketstructurewhereonefirmsuppliesalloutputintheindustrywithoutfacingcompetitionduetothehighbarrierstoentrythatexist.

Nationalisation

Takingafirmintopublicownership(e.g.,thegovernmentbuyingRollsRoycein1971).

Needs

Theminimumitemthatapersonneedsforsurvival

Nonexcludability

Onceagoodisprovided,nopersoncanbeexcludedfromusingit(e.g.,streetlightinganddefence).

Nonpricecompetition

Anyotherwayofsellingmoreofagoodapartfromloweringtheprice(e.g.,advertisingandfreegifts).

Nonrivalness

Consumptionofagoodbyonepersondoesnotreducetheamountavailableforconsumptionbyanotherperson(e.g.,streetlightinganddefence).

Normalgood

Demandforthesegoodsincreasewhenincomerises,i.e.,ithasapositiveincomeelasticity.

Normalprofit

Theprofitthatafirmcouldmakebyputtingitsresourcesintheirnextbestuse.

Occupationalmobility

Theeasebywhichaworkercanchangejobs.

OfficeofFairTraining(OFT)

Investigatespotentialoractualabuseofmonopolypower(e.g.,theOFTsinvestigationoftheproposedtakeoverofManchesterUnitedbySkytelevision).

Opportunitycost

Thebenefitsforegoneofthenextbestalternative.

Optimumoutput

Thelevelofoutputwherelongrunaveragecostsarelowest(minimumefficientscale).

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Optimumresourceallocation

Occurswhenresourcesareefficientlyusedinsuchawayastomaximisethewelfareorutilityofconsumers.

Perfectcompetition

Amarketstructurewheretherearemanybuyersandsellers,wherethereisfreedomofentryandexit,wherethereisperfectknowledgeandwhereallfirmsproduceahomogeneousproduct.

Perfectlypriceelastic

Buyersarepreparedtobuyanyamountatagivenprice,butdemandfallstozeroifthepricerises.

Perfectlypriceinelastic

Thequantitydemandeddoesnotchangeinresponsetopricechanges.

Plannedeconomy

Aneconomicsystemwherethegovernmentcontrolsallofthefactorsofproduction.

Pricediscrimination

Chargingadifferentpriceforthesamegoodorserviceindifferentmarkets(e.g.,railtravellerbeingchargedhigherpriceswhentravellinginthemorning).

Priceelasticityofdemand

Showshowthequantitydemandedwillchangeinresponsetomovementinprice.

Priceelasticityofsupply

Showshowthequantitysuppliedwillchangeinresponsetomovementinprice.

Pricetaker

Afirmisforcedtoaccepttheprevailingmarketpriceforthesaleofitsproduct.

Privategoods

Goodsthatcanonlybeconsumedbyonepersonatatime.Theprinciplesofnonexcludabilityandnonrivalrydonotapply

Privatisation

Thesaleofgovernmentowned(nationalised)industriestotheprivatesector(e.g.,saleofBritishTelecomin1984).

Productionpossibilitycurve

Thisshowsthemaximumpotentiallevelofoutputforgoodswithinaneconomy.

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Productiveefficiency

Isachievedwhenproductionisatitslowestcost.

Profit

Thedifferencebetweentotalrevenueandtotalcost.

Profitmaximisation

OccurswhereMC=MR

Publicgoods

Agoodwhereconsumptionbyonepersondoesnotreducetheamountavailableforconsumptionbyanotherpersonandwhereonceprovided,allindividualsbenefitorsufferwhethertheywishtoornot(e.g.,streetlightinganddefence).

Rationing

Thedistributionofrestrictedsuppliesbythegovernment.Ittriestoeffectafairdistributionofthelimitedsuppliesofbasicnecessities(e.g.,duringwartime).

Rectangularhyperbola

Ademandcurvethatdisplaysunitaryelasticityalongitslength.

Rent

Thepaymentreceivedforland.

Salesmaximisation

Amanagerialtheoryofthefirmthatsuggestsfirmswillaimtomaximisetheirlevelofsalesasthiswilloftenleadtohighersalariesfortheworkers.Thiscansometimesleadtolossesforthefirmasthepriceiscontinuallyloweredtoencouragesales.

Salesrevenuemaximisation

AmanagerialtheorywherethelevelofproductionoccurswhereMR=0.

Satisficingprofits

Amanagerialtheorythatsuggestsmanagerswillonlymakesufficientprofitstosatisfythedemandsoftheshareholders.

Scarcity

Referstothefactthatresourcesarelimitedintheirsupply

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Services

Thingsthatarepurchasedbyconsumersthatdonothavephysicalcharacteristics(e.g.,doctorsandhousecleaners).

Shortrun

Aperiodoftimewhereatleastonefactorofproductionmustbefixed(itisusuallycapital).

Specialisation

Economicunits(individuals,firms,nationsetc.)concentrateonproducingcertaingoodsandservices.

Specifictax

Ataxleviedonavolumeofgoods(e.g.,2.35onapackofcigarettes).

Subsidy

Thisismoneygiventofirmswhichlowersthepriceofagood.

Substitutegoods

Agoodthatcanreplacedbyanother(e.g.,amarsbarcanbereplacedbyasnickers)

Supply

Thequantityofgoodsthatsuppliersarewillingtosellatanygivenpriceoveraspecifiedperiodoftime.

Supplycurve

Showsthelevelofsupplyatanygivenprice.

Technicaleconomies

Arisebecauselargerfactoriescanbeproductivelymoreefficientorpurchaselargeexpensivepiecesofequipment.

Termsoftrade

Theratioofexportpricestoimportprices.

Totalrevenue

Thetotalamountreceivedfromthesalesofaproduct.

Totalutility

Thetotalsatisfactiongainedfromconsuminganamountofagoodorservice.

Tradeunions

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Organisationsofworkersthatseektoimprovethewelfareoftheworkforce.

Unitarypriceelasticityofdemand

Elasticityequalsone.Apercentagechangeinpriceleadstoanexactandoppositechangeinquantitydemanded.

Utility

Thesatisfactiongainedfromconsumingagoodorservice.Itisoftenexpressedasutils.

Variablecosts

Coststhatvarydirectlywiththelevelofoutput(e.g.,rawmaterials).

Verylongrun

Thetimeperiodduringwhichallfactorsofproductionandleveloftechnologycanbevaried.

Wages

Paymentreceivedforlabour.

Wants

Thedesiredpurchasesofgoodsandservicesbyconsumers.

Workingcapital

Stocksofrawmaterials,semimanufacturedandfinishedgoods.

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