Economics Key Words

A-level Economics: Micro
Microeconomics
Key Term Glossary
Ability to pay Where taxes should be set according to how well a person can afford to pay
Abnormal Profit Any profit in excess of Normal Profit – also known as supernormal profit
Adam Smith One of the founding fathers of modern economics. His most famous work was
the Wealth of Nations (1776) -‐ a study of the progress of nations where
people act according to their own self-‐interest -‐ which improves the public
good. Smith's discussion of the advantages of division of labour remains a potent
idea
Adverse selection Where the expected value of a transaction is known more accurately by the
buyer or the seller due to an asymmetry of information; e.g. health insurance
Air passenger duty APD is a charge on air travel from UK airports. The level of APD depends on
the country to which an airline passenger is flying.
Alcohol duties Excise duties on alcohol are a form of indirect tax and are chargeable on beer,
wine and spirits according to their volume and/or alcoholic content
Alienation A sociological term to describe the estrangement many workers feel from
their work, which may reduce their motivation and productivity. It is
sometimes argued that alienation is a result of the division of labour because
workers are not involved with the satisfaction of producing a finished product,
and do not feel part of a team.
Allocative efficiency Allocative efficiency occurs when the value that consumers place on a good or
service (reflected in the price they are willing and able to pay) equals the cost
of the resources used up in production (technical definition: price equals
marginal cost). Scarce resources are allocated optimally.
Anti-competitive Business strategies designed deliberately to limit the degree of competition
behaviour inside a market
Asking price The price at which a security, commodity or currency is offered for sale on the
market -‐ generally the lowest price the seller will accept
Asymmetric When somebody knows more than somebody else in the market. Such
information asymmetric information can make it difficult for the two people to do business
together
Automation Production technique that uses capital machinery / technology to replace or
enhance human labour and bring about a rise in productivity
Average Total Cost Total cost divided by the number of units of the commodity produced
Average fixed cost Average fixed costs are total fixed costs divided by the number of units of
output, that is, fixed cost per unit of output
Barriers to entry Factors making it expensive for new firms to enter a market. Examples include
the effect of patents; brand loyalty among consumers; the high costs of buying
capital equipment and the need to win licences to operate in certain markets
Barter The practice of exchanging one good or service for another, without using
money
Basic problem There are infinite wants but finite (scarce) resources with which to satisfy
them
Behavioural Branch of economics that studies the impact of psychological and social factors
economics on economic decision making
Black market An illegal market in which the market price is higher than a legally imposed
price ceiling. Black markets can develop where there is excess demand for a
A-level Economics:
Microeconomics
Key Term Glossary
commodity
Bottlenecks Any factor that causes production to be delayed or stopped – this may reduce
the price elasticity of supply of a product
Break even the volume of output of goods or services that have to be sold in order for
the business to make neither a loss nor a Profit. The break even price is when
price=Average Total Cost
Break even output Occurs when AR = ATC
Buffer stock Buffer stock schemes seek to stabilize the market price of agricultural
products by buying up supplies of the product when harvests are plentiful and
selling stocks of the product onto the market when supplies are low
Bulk-buying The purchase by one organization of large quantities of a product or raw
material, which often results in a lower price because of their market power
and because it is cheaper to deal with one customer and the deliveries can be
on a larger scale.
Business ethics Concerned with the social responsibility of management towards the firm’s
major stakeholders, the environment and society in general
Buyer’s market A market that favours buyers because supply is plentiful relative to demand
and therefore prices are relatively low. The opposite of a seller's market
By-‐product Something produced as a consequence of producing another good or service
Capacity utilisation The extent to which a business is making full use of existing factor resources
e.g. 80% capacity utilisation means that 20% of capacity is not being used
(spare)
Capital goods Producer or capital goods such as plant (factories) and machinery and
equipment are useful not in themselves but for the goods and services they
can help produce in the future.
Capital-intensive A production technique which uses a high proportion of capital to labour
Capitalist economy Economic system organised along capitalist lines uses market prices to guide
our choices about the production and distribution of goods. One key role for
the state is to maintain the rule of law and protect private property
Carbon capture and The process of trapping and storing carbon dioxide produced by burning
storage fossil fuels
Carbon credits An allowance to a business to generate a specific level of emissions – may be
traded in a carbon market
Cartel A cartel is a formal agreement among firms. Cartel members may agree on
prices, total industry output, market shares, allocation of customers,
allocation of territories, bid rigging, establishment of common sales agencies,
and the division of profits or combination of these. Cartels are illegal under
UK and European competition laws
Ceteris paribus To simplify analysis, economists isolate the relationship between two variables
by assuming ceteris paribus -‐ all other influencing factors are held constant
Cigarette duties UK taxes on cigarettes = 16.5% retail price + £154.95 per thousand
cigarettes.
A-level Economics:
Microeconomics
Key Term Glossary
Collective Unions might seek to exercise their collective bargaining power with
Bargaining employers to achieve a mark-up on wages compared to those on offer to
non-union members
Collusion Collusion is any agreement between suppliers in a market to avoid
competition. The main aim is to reduce market uncertainty and achieve a
level of joint profits similar to that which might be achieved by a pure
monopolist
Collusive oligopoly When several large firms in an industry act to restrict price or output
Command and Laws and regulation backed up by inspection and penalties for non-‐
control compliance e.g. regulations on carbon emissions
Command Economic system where resources are allocated by the government
economy
Common resources Goods or services that have characteristics of rivalry in consumption and
non-‐ excludability -‐ grazing land or fish stocks are examples. The over-‐
exploitation of common resources can lead to the “tragedy of the commons”
Competition policy Government policy directed at encouraging competition in the private sector:
e.g. the investigation of takeovers or restrictive practices
Competitive market A market where no single firm has a dominant position and where the
consumer has plenty of choice. There are few barriers to the entry of new
firms
Competitive supply Alternative products a firm could make with its resources. E.g. a farmer can
plant potatoes or carrots. An electronics factory can produce VCRs or DVDs
Complements Two complements are said to be in joint demand
Composite demand Where goods or services have more than one use so that an increase in the
demand for one product leads to a fall in supply of the other. E.g. milk which
can be used for cheese, yoghurts, cream, butter. If more milk is used for
manufacturing cheese, ceteris paribus there is less available for butter
Concentration ratio Measure of the proportion of an industry’s output or employment accounted
for by for example the top 4 or 8 firms in that industry
Congestion A direct charge for use of roads in a defined zone e.g. central London
charging
Conspicuous Conspicuous consumption is consumption designed to impress others rather

consumption than something that is wanted for its own sake
Constant returns to A long run production concept where a doubling of all factor inputs exactly
scale doubles the amount of output
Constraints Limits to what we can afford to consume – we have to operate within
budgets, and make choices from those sets that are feasible/affordable
Consumer durable A good such as a washing machine or a digital camera that lasts a period of
time, during which the consumer can continue getting utility from it
Consumer Consumer sovereignty exists when the economic system allows scarce
sovereignty resources to be allocated to producing goods and services that reflect the
wishes of consumers.
Sovereignty can be distorted by the effects of persuasive advertising
A-level Economics:
Microeconomics
Key Term Glossary
Consumer surplus Consumer surplus is the difference between the total amount that consumers
are willing and able to pay for a good or service (indicated by the demand
curve) and the total amount that they actually pay (the market price)
Consumption The act of buying and using goods and services to satisfy wants
Contestable market Market with no entry barriers -‐ firms can enter or leave without significant
cost
Cost Benefit CBA is a decision making tool which compares the social costs and social
Analysis benefits of a project, over time, to establish a net present value
Costs Costs faced by a business when producing a good or service for a market
Cross price Responsiveness of demand for good X following a change in the price of good
elasticity of demand Y (a related good). With cross price elasticity we make a distinction between
substitute products and complementary goods and services
Cyclical demand Demand that change in a regular way over time depending on the part of the
economic (business) cycle that a country is in or the time of year
Deadweight loss The loss in producer and consumer surplus due to an inefficient level of
production perhaps resulting from market failure or government failure
Demand Quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period
Demand curve A demand curve shows the relationship between the price of an item and the
quantity demanded over a period of time. For normal goods, more of a
product will be demanded as the price falls
Demerit goods The consumption of demerit goods can lead to negative externalities which
causes a fall in social welfare. The government normally seeks to reduce
consumption of demerit goods. Consumers may be unaware of the negative
externalities that these goods create because they have imperfect information
Deregulation The removal of legally enforced rules that restrict or ban specified activities
Derived demand Derived demand occurs when the demand for a particular product depends
on the demand for another product or activity
Diminishing returns As more of a variable factor (e.g. labour) is added to a fixed factor (e.g.
capital) a firm will reach a point where it has a disproportionate quantity of
labour to capital and so the marginal product of labour will fall, thus raising
marginal costs
Diseconomies of Disadvantages to the firm, in the form of higher long-‐run unit costs, from
scale increasing their size of operation
Disequilibrium A situation where there is a state of imbalance and so a tendency for change
Disposable income This is gross income net of taxes payments and state welfare benefits
Diversification The reduction of risk achieved by replacing a single risk with a larger number
of smaller unrelated risks
Division of labour The specialization of labour in specific tasks, intended to increase productivity
A-level Economics:
Microeconomics
Key Term Glossary
Dominant market A firm is said to have this when it can operate within the market without
position having to taking account of the reaction of its competitors
Dominant A firm with 40% or higher market share
monopoly
Duopoly Any market that is dominated by two firms
Duopsony Any market that is dominated by two buyers
Dynamic efficiency Dynamic efficiency occurs over time. It focuses on changes in the consumer
choice available in a market together with the quality/performance of goods
and services that we buy
Economic agents Decision makers e.g. consumers and producers
Economic efficiency Economic efficiency is about making the best or optimum use of scarce
resources among competing ends so that economic and social welfare is
5aximized over time
Economic growth An increase in the productive potential of the country – shown by an
outward shift of the production possibility frontier
Economy of scale Benefits, in the form of lower unit costs, from increasing the size of
operation.
Economy of scope Economies of scope occur where it is cheaper to produce a range of
products
Effective demand Demand in economics must be effective. Only when a consumers’ desire to
buy a product is backed up by an ability to pay for it do we speak of demand
Elastic demand Demand for which price elasticity is greater than 1
Elastic supply Where the price elasticity of supply is greater than +1
Elasticity of supply Price elasticity of supply measures the relationship between change in quantity
supplied and a change in price
Elasticity of labour Elasticity of labour demand measures the responsiveness of demand for
demand labour when there is a change in the ruling market wage rate
Elasticity of labour The elasticity of labour supply to an occupation measures the extent to which
supply labour supply responds to a change in the wage rate in a given time period
Emission tax A charge made to firms that pollute the environment based on the quantity of
pollution they emit i.e. the volume of CO2 emissions
Emissions trading Emission trading is another form of pollution control that uses the market
mechanism to change relative prices and the incentives of producers and
consumers.
Entrepreneur An individual who seeks to supply products to a market for a rate of return
(i.e. a profit). Entrepreneurs will usually invest their own financial capital in a
business and take on the risks associated with a business investment.
Equal Pay Act Introduced in 1970 sought to provide legal protection for female workers and
encouraged employers to bring pay for males and females into line
A-level Economics:
Microeconomics
Key Term Glossary
Equilibrium Equilibrium means ‘at rest’ or ‘a state of balance’ -‐ i.e. a situation where
there is no tendency for change. The concept is used in microeconomics (e.g.
equilibrium prices) and in macroeconomics (e.g. national income or GDP)
Equilibrium wage The equilibrium price of labour (market wage rate) in a given market is
determined by the interaction of the supply and demand for labour
Equity Fairness; a view on the ‘rightness’ of an issue based on opinion rather than
fact -‐ requires a value judgement
Excess Capacity The difference between the current output of a business and the total amount
it could produce in the current time period. Often in a recession or
slowdown, there is a rise in excess capacity (= to a fall in capacity utilisation)
due to a fall in demand. The effect can be to increase the average fixed costs
of production
Excess demand The difference between the quantity supplied and the higher quantity
demanded when price is set below the equilibrium price. This will result in
queuing and an upward pressure on price
Excess supply When supply is greater than demand and there are unsold goods in the
market. Surpluses put downward pressure on the market price
Excise duties Excise duties are indirect taxes levied on our spending on goods and services
such as cigarettes, fuel and alcohol. There are also duties on air travel, car
insurance
Excludability The property of a good whereby a person can be prevented from using it
Explicit collusion The aim collusion between firms is to maximise joint profits and act as if the
market was a pure monopoly
External benefits Positive externalities lead to social benefits exceeding private benefits
External costs Negative spillover effects of production or consumption for which no

compensation is paid. Externalities occur where the actions of firms and
individuals have an effect on people other than themselves. With negative
externalities, the social cost of production exceeds the private cost
External economies External economies of scale exist when the long-term expansion of an
of scale industry leads to the development of ancillary services which benefit all or the
majority of suppliers in the industry.
Externalities Externalities are third party effects arising from production and consumption
of goods and services for which no appropriate compensation is paid
Extreme poverty A severe and persistent deprivation of basic human needs
Factor incomes Factor incomes are the rewards to factors of production. Labour receives
wages and salaries, land earns rent, capital earns interest and enterprise earns
profit
Finite resources There are only a finite number of workers, machines, acres of land and
reserves of oil and other natural resources. By producing more for an ever-‐
increasing population, we may destroy the natural resources of the planet
Firm An organisation that hires and organises resources to make products
First mover The first company to introduce a new product to market, has the opportunity
advantage to extract the greatest long term benefit from the product introduction
A-level Economics:
Microeconomics
Key Term Glossary
Fixed costs Costs that do not vary directly with the level of output. Examples of fixed
costs include: rent and business rates, the depreciation in the value of capital
equipment (plant and machinery) due to age and marketing and advertising
costs
Flexible pricing A firm varies price by customer to maximise revenue.
Flexible working A workforce that is multi-‐skilled and able to work variable hours in
response to changing demand
Free market In a free market, the forces of supply and demand alone determine price and
output without any government intervention. Free markets are totally
unregulated
Free rider problem If a public good is supplied, it will be available to them just as it would be to
anyone else because pure public goods are non-excludable. This is the
essence of the “free rider problem”: the incentive which consumers have to
avoid contributing to financing public goods in proportion to their valuation of
such good.
Freemium A business model, especially on the Internet, whereby basic services are
provided free of charge while more advanced (premium) features must be
paid for
Game Theory A game occurs when there are two or more interacting decision-takers
(players) and each decision or combination of decisions involves a particular
outcome (pay-off)
Geographical People may also experience geographical immobility – meaning that there are
immobility barriers to them moving from one area to another to find work
Gini Coefficient The Gini coefficient measures the extent to which the distribution of income
(or consumption expenditures) among individuals or households within an
economy deviates from a perfectly equal distribution. The coefficient ranges
from 0 meaning perfect equality to 1meaning complete inequality
Globalisation A process by which economies and cultures have been drawn together
through a global network of trade, investment, capital flows, and rapid spread
of technology
Goods Tangible, physical products e.g. cars and computers
Government failure Policies that cause a deeper market failure. Government failure may range
from the trivial, when intervention is merely ineffective, to cases where
intervention produces new and more serious problems that did not exist
before
Government Government spending is by central and local government on goods and
spending services
Health rationing Health rationing occurs when the demand for health care services outstrips
the available resources leading to waiting lists and delays for health treatment
Hedging The process of protecting oneself against risk. For example, a company who
owes money to an overseas company may want to hedge against the risk that
the exchange rate moves against them. They could do this by taking out a
future contract for the purchase of foreign exchange at a fixed future rate
Horizontal equity Horizontal equity requires equals to be treated equally e.g. people in the
same income group should be taxed at the same percentage rate
A-level Economics:
Microeconomics
Key Term Glossary
Horizontal Where two firms join at the same stage of production in one industry. For
integration example, two car manufacturers may decide to merge
Imperfect Covers market structures between perfect competition and pure monopoly,
competition i.e. an industry with barriers to entry and differentiated products - examples
include oligopoly and duopoly
Incentives Incentives matter! For competitive markets to work efficiently economic
agents (i.e. consumers and producers) must respond to price signals in the
market
Incidence of a tax How the final burden of a tax is shared out. If demand for a good is elastic
and a tax is imposed then the tax will fall mainly on the producer as they will
be unable to put prices up without losing a lot of demand
Income Income represents a flow of earnings from using factors of production to
generate an output of goods and services. For example wages and salaries.
Income elasticity of Measures the relationship between a change in quantity demanded and a
demand change in real income. The formula for income elasticity is: percentage change
in quantity demanded divided by the percentage change in income
Income gap A measure of the gap between the incomes of various groups shown by
plotting the average incomes of the between the lowest and highest decile
(10% grouping)
Incumbent firm An incumbent is a business already operating in and established in a market
Independent goods Two products that have no price-‐quantity demanded relationship: XED=0
Indirect tax An indirect tax is imposed on producers (suppliers) by the government.

Examples include excise duties on cigarettes, alcohol and fuel and also value
added tax
Inefficiency When the best use of resources is not being made
Inelastic demand When the co-‐efficient of price elasticity of demand is less than 1
Inelastic supply When the co-‐efficient of price elasticity of supply is less than +1
Inequality The extent to which income and wealth between the inhabitants of a country
is dispersed
Inferior good When demand for a product falls as real incomes increases
Information failure Information failure occurs when people have inaccurate, incomplete,
uncertain or misunderstood data and so make potentially ‘wrong’ choices
Infrastructure The stock of capital used to support the economic system
Innovation The commercial development of exploiting new or improved products
Inputs Labour, capital and other resources used in production

A-level Economics:
Microeconomics
Key Term Glossary
Intellectual Legal property rights over creations of the mind, both artistic and
property commercial, and the corresponding fields of law. Common types of
intellectual property include copyrights, trademarks, patents, and trade
secrets
Interdependence Interdependence exists when the actions of one firm has an effect on its
competitors in the market. Interdependence is a common feature of an
oligopoly
Internalised Internalising is where any spill-‐over effects from economic activity are
absorbed by the consumer or firm themselves. This may arise for example,
where a pollution tax has been charged on the good that makes them pay the
external costs themselves
Internal growth Internal growth occurs when a business gets larger by increasing the scale of
its own operations rather than relying on integration with other businesses
Inventories Unsold products, finished & unfinished, and raw materials used to make them
Invisible hand Adam Smith described how the invisible or hidden hand of the market
operated in a competitive market through the pursuit of self-‐interest to
allocate resources in society’s best interest
Joint supply Joint supply describes a situation where an increase or decrease in the supply
of one good leads to an increase or decrease in supply of another by-‐
product e.g. a contraction in supply of lamb will reduce the supply of wool
Just in time Production that produces goods to order and where businesses hold few
stocks
Kinked demand The kinked demand curve model assumes that a business might face a dual
curve demand curve for its product based on the likely reactions of other firms in
the market to a change in its price or another variable
Land Quantity and quality of natural resources available in an economy
Latent demand Latent demand exists when there is willingness to purchase a good or service,
but where the consumer lacks the purchasing power to afford the product
Law of demand The law of demand is that there is an inverse relationship between the price
of a good and demand
Law of unintended The law of unintended consequences is that actions of consumer and
consequences producers — and especially of government—always have effects that are
unanticipated or "unintended." Particularly when economic agents do not
always act in the way that the economics textbooks would predict
Limit pricing When a firm sets price just low enough to discourage possible new entrants
Living Wage The living wage is an hourly rate of pay set annually by reference to the basic
cost of living in the UK and London. Unlike the National Minimum Wage,
employers may choose to pay the living wage on a voluntary basis.
Local monopoly A monopoly limited to a specific geographical area
Long run The time period when firms can adjust all factors used in production
Manufacturing Manufacturing is the use of machines, tools and labour to make things for use
or sale. The term may refer to a range of human activity, from handicraft to
A-level Economics:
Microeconomics
Key Term Glossary
high tech, but is most commonly applied to industrial production, in which
raw materials are transformed into finished goods on a large scale
Marginal benefit Additional benefits received by those consuming or producing one extra
product
Marginal cost Marginal cost is defined as the change in total costs resulting from increasing
output by one unit. Marginal costs relate to variable costs only
Marginal revenue The increase in revenue resulting from an additional unit of output
Marginal revenue Marginal Revenue Product (MRPL) measures the change in total revenue for a
product firm from selling the output produced by additional workers employed
Market equilibrium Equilibrium means a state of equality between demand and supply. Without a
shift in demand and/or supply there will be no change in market price. Prices
where demand and supply are out of balance are termed points of
disequilibrium
Market failure Market failure exists when the competitive outcome of markets is not
efficient from the point of view of the economy as a whole. This is usually
because the benefits that the market confers on individuals or firms carrying
out a particular activity diverge from the benefits to society as a whole
Market incentives Market signals that motivate economic actors to change their behaviour
(perhaps in the direction of greater economic efficiency)
Market power Market power refers to the ability of a firm to influence or control the terms
and condition on which goods are bought and sold. Monopolies can influence
price by varying their output because consumers have limited choice of rival
products
Market shortage Where demand exceeds supply at a given price
Market supply Market supply is the total amount of an item producers are willing and able to
sell at different prices, over a given period of time egg one month. Industry, a
market supply curve is the horizontal summation of all each individual firm’s
supply curves
Maximum price A legally-‐imposed maximum price in a market that suppliers cannot exceed.
To be effective a maximum price has to be set below the free market price
Merit good A product that society values and judges that everyone should have
regardless of whether an individual wants them. In this sense, the government
(or state) is acting paternally in providing merit goods and services
Minimum efficient The minimum efficient scale (MES) is the scale of production where the
scale internal economies of scale have been fully exploited. It corresponds to the
lowest point on the long run average cost curve
Minimum price A legally imposed price floor below which the normal market price cannot
fall. To be effective the minimum price has to be set above the normal
equilibrium price. A good example of this is minimum wage
Minimum wage The National Minimum Wage was introduced in the UK with effect from 1st
April 1999. It is a legally guaranteed wage rate for workers aged 18 years or
older
Mixed economy Where resources are partly allocated by the market and partly by the
government
A-level Economics:
Microeconomics
Key Term Glossary
Mixed goods Products that have the characteristics of both private and public goods
Monopoly A single seller of a product in a given market or industry
Monopsony As a firm grows in size it can purchase its factor inputs in bulk at negotiated
discounted prices. This is particularly the case when a firm has monopsony
(buying) power in the market
Monopsony The National Minimum Wage was introduced in the UK with effect from 1st
employer April 1999. It is a legally guaranteed wage rate for workers aged 18 years or
older
Moral hazard When people take actions that increase social costs because they are insured
against private loss: sometimes it is called hidden action due to the agent’s
actions being hidden from the principal
Nash equilibrium An idea important to game theory which describes any situation where all of
the participants in a game are pursuing their best possible strategy given the
strategies of all of the other participants
Nationalisation The transfer of ownership of a firm from the private to public sector
Needs Humans have many different types of wants and needs e.g.: economic, social
and psychological. A need is essential for survival e.g. food satisfies hungry
people. A want is something desirable but not essential to survival e.g. cola
quenches thirst
Negative externality Negative externalities occur when production and/or consumption impose
external costs on third parties outside of the market for which no
appropriate compensation is paid. This causes social costs to exceed private
costs
Niche market A specialist section of a larger market e.g. handmade chocolates
Non price Competing not on the basis of price but by other means, such as the quality
competition of the product, packaging, customer service
Non-renewable Non-renewable resources are resources which are finite and cannot be
resources replaced. Minerals, fossil fuels and so on are all non-renewable resources
Non-rival Non-rivalry means that the consumption of a good by one person does not
consumption reduce the amount available for others
Normal goods Normal goods have a positive income elasticity of demand. Necessities have
an income elasticity of demand of between 0 and +1. Luxuries have income
elasticity > +1 demand rises more than proportionate to a change in income
Normal profit Normal profit is the minimum level of profit required to keep the factors of
production in their current use in the long run
Normative Normative statements express an opinion about what ought to be. They are
statements subjective statements i.e. they carry value judgments
Objectives A specific target an organisation sets itself to achieve through its activity
Office of Fair A government agency responsible UK competition policy i.e. making markets
Trading work well for consumers
A-level Economics:
Microeconomics
Key Term Glossary
Off-peak pricing Charging lower prices outside periods of intensive use
Oligopoly A market dominated by a few large suppliers. Market concentration is high

with typically the leading five firms taking over sixty per cent of total market
sales
Operating costs Another term for variable costs
Opportunity cost The cost of any choice in terms of the next best alternative foregone.
Optimum output An efficient level of output which delivers both productive and allocative
efficiency
Ostentatious Some goods are luxurious items where satisfaction comes from knowing both
consumption the price of the good and being able to flaunt consumption of it to other
people
Out-sourcing Subcontracting a process, such as design or manufacturing, to another
company
Overhead costs Business costs–such as rent and utilities–that don't directly relate to the
production or sale of goods and services
Pareto efficiency In neoclassical economics, an action done in an economy that harms no one
and helps at least one person. A situation is Pareto efficient if the only way to
make one person better off is to make another person worse off
Pareto efficiency When resources cannot be reallocated without making someone else worse
off
Paywall Where access is restricted to users who have paid to subscribe to a website
Peak pricing When a business raises prices at a time when demand is strongest
Penetration pricing Where a firm choose to set a low price to gain market share / brand
recognition
Perfect price With perfect price discrimination, the firm separates the whole market into
discrimination each individual consumer and charges them the price they are willing and able
to pay
Persuasive Manipulating consumer preferences and cause a change in demand
advertising
Perverse demand A demand curve which slopes upwards from left to right. An increase in price
curve leads to an increase in demand. This may happen where goods are strongly
affected by price expectations or in the case of Giffen goods
Planned economy In a planned economy, decisions about what to produce, how much to
produce and for whom are decided by central planners rather than using the
price mechanism
Polluter pays The government may choose to intervene in a market to ensure that the
principle firms and consumers who create negative externalities include them when
making decisions
Positional goods Goods which are at least in part demanded because their possession or
consumption implies social or other status of those acquiring them
A-level Economics:
Microeconomics
Key Term Glossary
Positive Positive externalities exist when third parties benefit from the spill-‐over
externalities effects of production/consumption e.g. the social returns from investment in
education & training or the positive benefits from health care and medical
research
Positive statement Objective statements that can be tested or rejected by referring to the
available evidence. Positive economics deals with objective explanation
Poverty trap The poverty trap affects people on low incomes. It creates a disincentive to
look for work or work longer hours because of the effects of the tax and
benefits system
Predatory Pricing When a business deliberately reduces price in the short run so as to force
competitors out of the industry. Predatory pricing is illegal under current UK
and EU competition law
Preferences Our tastes, likes, rankings reflected in the choices that people make in
markets
Price discrimination Price discrimination occurs when a firm charges a different price to different
groups of consumers for an identical good or service, for reasons not
associated with costs
Price fixing Price fixing represents an attempt by suppliers to control supply and fix price
at a level close to the level we would expect from a monopoly
Price leadership Price leadership occurs when one firm has a clear dominant position in the
market and the firms with lower market shares follow the pricing changes
prompted by the dominant firm
Price elasticity of Responsiveness of demand for a product following a change in its own price.
demand Also called own price elasticity of demand.
Price elasticity of Relationship between change in quantity supplied and a change in the price of
supply a product
Price mechanism The means by which decisions of consumers and businesses interact to
determine the allocation of resources between different goods and services
Price rigidity Situation where the price of a product rarely changes
Price signals Changes in price act as a signal about how resources should be allocated. A
rise in price encourages producers to switch into making that good but
encourages consumers to use an alternative substitute product (therefore
rationing the product)
Private benefit The rewards to individuals, firms or consumers from consuming or producing
goods and services. Also known as internal benefits
Private cost Costs of an economic activity to individuals and firms. Also known as internal
costs
Private goods Products which are both rival and excludable
Privatisation Privatisation is where state owned firms are sold to the private sector
Producer surplus The difference between what producers are willing and able to supply a good
for and the price they actually receive
Product Product differentiation occurs when a business seeks to distinguish what are
differentiation essentially the same products from one another by real or illusory means.
A-level Economics:
Microeconomics
Key Term Glossary
This means that the assumption of homogeneous products made under
conditions of perfect competition no longer applies
Product line pricing It is frequently observed that a producer may manufacture many related
products. They may choose to charge one low price for the core product
(accepting a lower mark-up or profit on cost) as a means of attracting
customers to the components / accessories that have a much higher mark-up
or profit margin.
Product markets Product markets are where businesses and consumers meet to buy and sell
the output of goods and services produced by an economy
Production function Relationship between a firm’s output and the quantities of factor inputs it
employs
Production A boundary that shows the combinations of two or more goods and services
possibility frontier that can be produced using all available factor resources efficiently
Productive The output of productive efficiency occurs when a business in a given market
efficiency or industry reaches the lowest point of its average cost curve implying an
efficient use of
scarce resources and a high level of factor productivity
Productivity Efficiency = output per unit of input or output per person employed
Profit Profits are made when total revenue exceeds total cost. Total profit = total
revenue – total cost. Profit per unit supplied = price – average total cost
Profit per unit Profit per unit (or the profit margin) = AR - ATC
Profit related pay Where part of the earnings of people working for a business are linked
directly to the profits made by that business. Profit related pay is often used
as an incentive to raise productivity
Property rights Property rights confer legal control or ownership of a good. For markets to
operate
efficiently, property rights must be clearly defined and protected -‐ perhaps
through government legislation and regulation
Public bads Public bads include environmental damage and global warming which affects
everyone
– no one is excluded from the dis-benefits
Public goods Pure public goods are non-‐rival – consumption of the good by one person
does not reduce the amount available for consumption by another person,
and non-‐excludable – where it is not possible to provide a good or service
to one person without it thereby
being available for others to enjoy
Public ownership Public ownership refers to state owned companies e.g. nationalised industries.
Public sector Government organisations that provide goods and services in the economy -
‐ for example through state education and the national health service
Purchasing Purchasing EOS arise when firms gain discounts from bulk buying
economies
Quota A quota is a limit on the quantity of a product can be supplied to a market

A-level Economics:
Microeconomics
Key Term Glossary
Rational choice ‘Rational choice’ involves the weighing up of costs and benefits and trying to
maximise the surplus of benefits over costs
Redistribution Measures taken by government to transfer income from some individuals to
others
Regressive tax A tax is said to be regressive when low income earners pay a higher
proportion of their income in tax than high income earners
Regulations Regulations are legally enforced rules that restrict or ban specified activities
Regulator A government agency that monitors the performance of firms in an industry

such as OFCOM or the Office of Rail Regulation
Relative poverty Relative poverty measures the extent to which a household's financial
resources falls below an average income threshold for the economy
Revenue Revenue (or turnover) is the income generated from the sale of output in
goods markets
Revenue Revenue maximization is when MR = zero (i.e. when price elasticity of
maximisation demand = 1)
Road pricing A direct charge to road users for their use of a particular road e.g. a
motorway toll
Satisficing Maximising behaviour may be replaced by satisficing which in essence involves
the owners setting minimum acceptable levels of achievement in terms of
revenue and profit.
Scarcity Scarce means limited. There is only a limited amount of resources available to
produce the unlimited amount of goods and services we desire
Second degree This type of price discrimination involves businesses selling off packages of a
price discrimination product deemed to be surplus capacity at lower prices than the previously
published/advertised price
Self sufficiency Where people meet their own wants and needs without producing a surplus
to trade
Seller’s market A market where demand exceeds supply, allowing the sellers of a product to
have greater control over prices, terms, etc. The opposite of a buyer’s
market
Sex discrimination The Sex Discrimination Act of 1975 outlawed unequal opportunities for
Act 1975 employment and promotion in the workplace because of gender and it set up
the Equal Opportunities Commission
Short run The short run is defined as a period of time where at least one factor of
production is assumed to be in fixed supply
Shortage A situation in which quantity demanded is greater than quantity supplied
Shut down price In the short run the firm will continue to produce as long as total revenue
covers total variable costs or put another way, so long as price per unit > or
equal to average variable cost (AR = AVC).
Signalling Prices have a signalling function because the price in a market sends important
information to producers and consumers
Social benefit The benefit of production or consumption of a product for society as a
whole. Social benefit = private benefit + external benefit
A-level Economics:
Microeconomics
Key Term Glossary
Social cost The cost of production or consumption of a product for society as a whole.
Social cost = private cost + external cost
Social efficiency The socially efficient output is where Marginal Social Cost (MSC) = Marginal
Social Benefit. (MSB)
Social exclusion When low income groups are denied access to goods and services normally
available to members of society e.g. healthcare
Spare capacity Where a firm or economy can produce more with existing resources. When
there is plenty of spare capacity, elasticity of supply tends to be high
Specialisaton A method of production where a business or area focuses on the production
of a limited scope of products or services to gain greater productive efficiency
Speculation Speculation is the activity of buying a good or service in anticipation of a
change in the price/market value e.g. currency or stock market speculation
Spill-over effects External effects of economic activity, which have an impact on outsiders who
are not producing or consuming a product – these can be negative (creating
external costs) or positive (creating external benefits)
Stakeholder conflict When different stakeholders have incompatible objectives
Stakeholders Groups who have an interest in the activity of a business e.g. shareholders,
managers, employees, suppliers, customers, government, local communities.
Stakeholders have different objectives e.g. owners want maximum profits,
customers low prices and workers high wages and rising living standards
State provision Government provided good or services funded through tax revenue, in order
to provide goods that have positive externalities or are public goods
Static efficiency Efficiency occurring in a single time period i.e. efficiency now
Subsidy Payment to suppliers that reduce their costs. The effect of a subsidy is to
increase supply and therefore reduce the market equilibrium price
Substitutes Goods in competitive demand and act as replacements for another product
Substitutes in A substitute in production is a product that could have been produced using
production the same resources. Take the example of barley. An increase in the price of
wheat makes wheat growing more attractive
Substitution effect When a price fall encourages consumers to buy more of a relatively lower
priced product and less of a higher priced substitute
Supply Quantity of a good or service that a producer is willing and able to supply
onto the market at a given price in a given time period
Supply chain Different stages of making, distributing and selling a good or service from the
production of parts, through to distribution and sale of the product
Supply shock An event that directly alters firms’ costs and prices shifting the supply curve
either to the right (lower costs) or left (higher costs). E.g. unexpected
changes in the global prices of commodities such as oil, gas and metals
Sunk costs Sunk costs cannot be recovered if a business decides to leave an industry
Tacit collusion Tacit collusion occurs where firms undertake actions that are likely to
minimise a competitive response, e.g. avoiding price cutting or not attacking
each other’s market
A-level Economics:
Microeconomics
Key Term Glossary
Technology The application of knowledge to production
Time lags Time lags occur in production, particularly in agriculture, when decisions
about the quantity to be produced are made well ahead of the actual sale.
Demand and the price may change in the interval, creating a problem for the
producer
Total costs Total Costs (TC) = total fixed costs + total variable costs
Total revenue Total revenue (TR) is found by multiplying price (P) by the number of units
sold (Q). TR = P x Q
Tradeable permits Government issued licences allowing firms to emit a specified amount of
pollutant e.g. C02. Firms can buy and sell permits in a market.
Trade off The process of making a choice between alternatives e.g. deciding if is worth
sacrificing a new car for a holiday
Trade Unions Trade unions are organisations of workers that seek through collective
bargaining with employers to protect and improve the real incomes of their
members, provide job security, protect workers against unfair dismissal and
provide a range of other work-related services including support for people
claiming compensation for injuries sustained in a job.
Tragedy of the When no one owns a resource, it gets over-‐used, for example fish stocks
Commons and deforestation -‐ people use and benefit from it without regard to the
effect on others
Value judgement A view of the rightness or wrongness of something, based on a personal view.
Variable cost Variable costs vary directly with output. I.e. as production rises, a firm will
face higher
total variable costs. Examples of variable costs include costs of raw materials,
labour costs and consumables
Vertical integration Vertical Integration involves acquiring a business in the same industry but at
different stages of the supply chain
Welfare loss The excess of social cost over social benefit for a given output
Willingness to pay The maximum price a consumer is prepared pay to obtain a product
X inefficiency The lack of real competition may give a monopolist less of an incentive to
invest in new ideas or consider consumer welfare
Zero Hours Under zero-‐hours contracts employees agree to be available for work as
Contracts and when it is required
A level Economics: Macroeconomics
Key Term Glossary
AAA credit rating The best credit rating that can be given to a corporation's or a
government’s bonds, effectively indicating that the risk of default is
negligible
Accelerator Where planned capital investment is linked positively to the past and
effect expected growth of consumer demand or national income
Aggregate The total demand for all goods and services in an economy
demand
Aggregate supply The total supply of all goods and services in an economy
Aggregate Either an inflation shock or a shock to potential national output; adverse

supply shock aggregate supply shocks of both types reduce output and can increase
the rate of inflation
Animal spirits The state of confidence or pessimism held by consumers and businesses
Appreciation A rise in the market value of one exchange rate against another
Anything of value owned by an individual, institution or economic agent
Asset
Austerity Economic policy aimed at reducing a government's deficit (or borrowing).
Austerity can be achieved through increases in government revenues
primarily via tax rises and/or a reduction in government spending or future
spending commitments.
Automatic Automatic fiscal changes as the economy moves through stages of the
stabilisers business cycle –
e.g. a fall in tax revenues from the circular flow in a recession.
Bank run When a large number of people suspect that a bank may go bankrupt and
withdraw their deposits. Bank runs are rare, one happened with the
Northern Rock in 2007.
Bond Both companies and governments can issue bonds. The issue of new
government debt is done by the central bank and involves selling debt to
capital markets
Additional Information:
Forms part of an individual's wealth (along with cash, gold, shares, property etc); when
bond values rise (e.g. after a rise in demand from financial investors who may feel more
confident in the financial prospects of the bondissuer), consumer (and corporate)
wealth rises which can stimulate consumption (and investment) spending in the
macroeconomy; however this also squeezes down rates of return on assets (see yield)
which can further stimulate consumer spending (cheaper to borrow)
Brain drain The movement of highly skilled people from their own country to
another nation
BRIC economies The BRIC grouping – Brazil, Russia, India and China – short hand for the rise
of emerging markets. The BRICs have a bigger share of world trade than the
USA
The stock of all assets that are considered liquid enough to act as generally acceptable
Broad Money
means of exchange i.e. cash plus bank savings account deposits
This broader measure ('M4' measure in UK) should correlate to the money supply in
the Quantity Theory since debit card payments transfer bank deposits from buyer to
Key Term Glossary

seller; however, some measures of broad money would include bank time deposits,
which pay interest and are not instantly accessible without penalty
Bubble When the prices of securities or other assets rise so sharply and at such a
sustained rate that they exceed valuations justified by fundamentals,
making a sudden collapse likely (at which point the bubble "bursts")
Budget deficit Occurs when government spending is greater than tax revenues.
Reducing the deficit can be achieved by tax increases or cuts in
government spending or a period of economic growth which brings
about a rise in direct and indirect tax revenues
Business Expectations about the future of the economy – vital in influencing
confidence business decisions about how much to spend on new capital goods
Capacity Measures how much of the productive potential of the economy is being
utilisation used. Utilisation falls during a recession leading to a rise in spare capacity
Capital market A stock or a bond market where firms can raise money for investment
purposes
Capital stock The value of the total stock of capital inputs in the economy
Capital-‐ Replacing workers with machines in a bid to increase productivity and
labour reduce the unit cost of production. This can lead to structural
substitution unemployment
Catch-‐up effect This occurs when countries that start off poor tend to grow more rapidly
than countries that start off rich. The result is some convergence in the
standard of living as measured
by per capita GDP
Claimant Count The number of people claiming unemployment-‐related benefits
Classical LRAS The classical LRAS curve is drawn as vertical because classical economists
argue that a country’s productive capacity is determined by factors other
than price and demand such as investment and innovation
Closed economy An economy operating without imports and exports – i.e. closed to global
trade
Comparative Comparative advantage refers to the relative advantage that one country or
advantage producer has over another. Countries can benefit from specializing in and
exporting the product(s) for which it has the lowest opportunity cost of
supply
Constant prices Constant prices tells us that the data has been inflation adjusted
Consumer Expectations about the future including interest rates, incomes and jobs
confidence
Consumer durables Products such as washing machines that are not used up immediately when
consumed and which provide a flow of services over time
Consumer price The consumer price index (CPI) is the government's preferred measure of
index inflation
Corporation Tax A tax on the profits made by companies
Cost push inflation An increase in the price level caused by a sustained increase in firms’ costs of
production
Credit rating The assessment given to debts and borrowers by a ratings agency according
to their safety from an investment standpoint -‐ based on their
creditworthiness, or the ability of the company or government that is
borrowing to repay. Ratings range from AAA, the
Key Term Glossary
safest, down to D, a company that has already defaulted

Creeping inflation Small rises in the general price level over a long period
Creeping A period of time where import tariff rates rise and where countries
protectionism introduce quotas and barriers to the mobility of labour and capital
Crowding out rapid growth of government spending leads to the transfer of scarce
productive resources from the private sector to the public sector where
productivity might be lower. If the government runs a budget deficit, it will
have to sell debt to the private sector and getting individuals and institutions
to purchase the debt may require higher interest rates. A rise in interest
rates may then crowd-out private investment and consumption, offsetting
the fiscal stimulus
Crowding in occurs when higher government spending leads to an increase in private
Crowding in
sector investment. The crowding in effects occurs because higher government
spending leads to an increase in economic growth and therefore encourages firms to
invest because there are now more profitable investment opportunities.
Current account The overall balance of credits minus debits for trade in goods, trade in
services, investment income and transfers
Current account The amount by which money relating to trade, investment etc going out of a
deficit country is more than the amount coming in. A current account deficit implies
a net reduction of demand in a country’s circular flow
Cyclical trade deficit A trade deficit that arises purely due to changes in the economy’s cycle, for
example many countries run a deficit when their economy is growing
strongly
Cyclical Unemployment caused by a lack of aggregate demand for goods and services,
unemployment where national output < potential output leading to a negative output gap
Default A default occurs when a borrower has broken the terms of a loan or other
debt, for example if a borrower misses a payment. The term also means any
situation when borrower can no longer repay its debts in full, such as
bankruptcy or a debt restructuring
Deflation A persistent fall in the general price level of goods and services
De-industrialisation A decline in the share of national income from manufacturing industries
Depreciation A fall in the market value of one exchange rate against another
Depression Used to describe a severe recession which may become a prolonged
downturn in the economy and where a nation’s GDP falls by at least 10 per
cent
Deregulation Reducing barriers to entry in order to make a market more competitive
Developing country Countries lacking a high degree of 3ndustrialization and/or other measures of
development
Direct Taxes Taxes that are paid directly by the taxpayer to the government. For example,
taxes on income or profit (income tax, corporation tax, capital gains tax)
Discouraged People often out of work for a long time who give up on job search
workers
Discretionary fiscal Deliberate attempts to affect aggregate demand using changes in government
policy spending, direct and indirect taxation and borrowing
Discretionary Disposable income adjusted for spending on essential bills such as fuel
income
Disposable income Gross income less income tax and national insurance contributions plus cash
welfare benefits. Disposable income is the money that comes into a
household from various sources, including welfare benefits but after taxes on
Key Term Glossary

income
Double dip When an economy goes into recession twice without having undergone a full
recession recovery in between
Dumping When a producer in one country exports a product to another at a price
below the price it charges in its home market or below the costs of supply
Ecological debt Ecological debt is the concept that people’s demands have exceeded the
Earth’s ability to cope with the rising consumption of its resources
Economic cycle Variations in the annual rate of growth of an economy over time
Economic growth An increase in the real value of goods and services produced in a country or
area as measured by the annual % change in real national output. Also a long -
‐run increase in a country’s productive capacity.
Economic shocks Unpredictable events such as volatile prices for oil, gas and foodstuffs
Economic stability When indicators such as growth, prices and unemployment do not change
much from one year to another
Economically active Those who are unemployed and actively seeking employment
Economically Those who are of working age but are neither in work nor actively seeking
inactive work
Emerging markets The financial markets of developing countries
Exchange rate The rate at which one currency can be exchanged for another.
Expansionary A relaxation of monetary policy means an attempt to use an expansionary
monetary policy monetary policy to boost aggregate demand, output and jobs – includes
lower interest rates
Expectations How we expect the future to unfold – this can have powerful effects on the
spending decisions of households, businesses and the government
Expenditure The value of the goods and services purchased by households and by
measure of GDP government, investment in machinery and buildings. It also includes the value
of exports minus imports. Calculation is as follows: AD=C+I+G+X-‐M
Expenditure-‐ Policies that are designed to ‘switch’ expenditure from imports to
switching policies domestically produced goods in order to improve the balance of payments
and stimulate GDP
Export revenue Sales from selling goods and services overseas, an injection of demand
Factors of Inputs required for production (Land, Labour, Capital and Enterprise,
Production although occasionally a 5th FOP is included; Technology)
Financial assets For consumers the main financial assets are property, pensions, equities, unit
trusts and cash
The independent body responsible for promoting effective competition between all
Financial Conduct
Authority financial services firms (including independent financial advisers) and that all operate
within the banking regulations, to ensure that consumers get a fair deal from financial
firms
Came into force in 2013, replacing the discredited Financial Services Authority
Fine-tuning Changes in monetary policy or fiscal policy designed to gradually manage the
level of aggregate demand and prices e.g. small changes in policy interest
rates
Fiscal austerity or Fiscal austerity refers to decisions by a government to reduce the amount of
fiscal tightening government borrowing (i.e. cut the size of a fiscal deficit) over a period of
years
Key Term Glossary
Fiscal deficit This happen when government expenditure is higher than the revenue from
tax receipts in a particular year
Fiscal policy A government’s policy regarding taxation and public spending and borrowing.
It can be loose (with the emphasis on increased spending and lower ta x
revenue to boost economic activity, with the acceptance of a wider fiscal
deficit) or tight (with the emphasis on cutting spending and boosting tax
revenue, resulting in a slower economy
Fiscal stability Many governments seek to maintain a degree of balance between tax
revenues and public sector spending. A balanced budget is one in which
spending equal revenue
Fiscal stimulus Government measures, normally involving increased public spending and
lower direct and/or indirect taxation, aimed at giving a positive jolt to
economic activity
Forecast A prediction made about the likely future performance of an economy
Foreign direct FDI stands for Foreign Direct Investment. FDI is investment from one
investment country into another (normally by companies rather than governments) that
involves establishing operations or acquiring tangible assets, including stakes
in other businesses
Free trade When trade is allowed to occur without any form of restriction such as a
tariff
Frictional when workers are unemployed for short periods of time (up to 3 months)
Unemployment between jobs
Full capacity output A level of national output where all available factor inputs are fully employed
– this is a factor influencing the underlying growth rate (LRAS)
Full employment When there enough job vacancies for all the unemployed to take work
G20 A group of finance ministers and central bank governors from 20 economies
G7 A group of seven major industrialized countries: Canada, France, Germany,
Italy, Japan, the UK and the USA
GDP Gross domestic product (GDP) is the total value of output in the UK and is
used to measure change in economic activity
Gini Coefficient A measure of the extent to which groups of households, from the bottom of
the income distribution upwards, receive less than an equal share of income.
Globalisation The deepening of relationships between countries of the world reflected in
an increasing level of overseas trade and investment
GNI Gross National Income – income generated from the resources owned by
inhabitants and businesses of a given country
Golden Rule A rule introduced by the former Labour government which says that
borrowing on state provided goods and services should be zero over the
course of one economic cycle.
Borrowing is allowed when it finances capital investment
Government debt The total stock of unpaid debt issued by a government. A government will
normally borrow money by issuing bonds or other securities
Gross Domestic National income per head of population, a baseline measure of living
Product per capita standards
Gross National This is broadly the same as GDP except that it adds what a country earns
Income (GNI) from overseas investments and subtracts what foreigners earn in a country
and send back home. GNI is affected for example by profits from businesses
owned overseas and also remittances sent home by migrant workers
Haircut A reduction in the value of a troubled borrower’s debts, imposed on, or
Key Term Glossary

agreed with, its lenders as part of a debt restructuring
Hard landing A full-scale recession shown by a decline in real national output

Hidden partly those in the population who would take a job if offered, but are not in work and
unemployment not seeking work; and partly those who are underemployed
Hot Money Money that flows freely and quickly around the world looking to earn the
best rate of return. It might be invested in any asset whose value is expected
to rise (e.g. property or shares) or placed in an account offering the best real
rate of interest.
Household wealth The value of assets – including property, shares, savings and pension fund
assets
Human capital Investment in education and training to increase the quality of the labour
force and to make people more flexible in a changing world of work
Human An index to assess comparative levels of development in countries, quantified
Development Index in terms of literacy, life expectancy and purchasing power
Hysteresis When a sustained period of low aggregate demand can lead to permanent
damage to the supply side of the economy
Immobility of labour Barriers to the movement of people between areas and between jo bs
Income elasticity Responsiveness of demand to a change in the real income of consumers
Inflation The rate of increase of consumer prices expected by consumers.
expectations Expectations can influence spending and saving decisions.
Inflation A sustained increase in the general price level for goods and services
Inflation target The Bank of England has a CPI inflation target, which is currently 2 per cent
Inflationary Demand and supply-‐side pressures that can cause a rise in the general price
pressures level. Demand-‐pull inflationary pressure is greatest when actual GDP
exceeds potential GDP causing a positive output gap. Cost-‐push inflationary
pressure can arise from increases in unit wage costs, rising import prices and
an increase in the prices of raw materials, fuel and components used in
production
Infrastructure The transport links, communications networks, sewage systems, energy
plants and other facilities essential for the efficient functioning of a country
and its economy
Innovation Changes to products or production processes – innovation is important in
delivering improvements in dynamic efficiency and generating better goods
and services
The price of liquidity (money in a spendable form e.g. bank deposits or cash)
Interest Rate
i.e. what has to be paid in the future for a loan now; cuts in r encourage more spending
due to reduced mortgages, cheaper credit & more investment; real r = nominal r –
inflation (= the price of borrowed funds in terms of purchasing power); in times of very
high inflation, high nominal r can mean negative real r i.e. borrowing is cheap (loan can
be repaid out of inflated nominal income); with deflation, government cannot set
nominal r below zero yet real r is made negative by falls in the general price level
(making monetary policy ineffective)
International An organization of 186 countries, promoting global monetary cooperation,

Monetary Fund financial stability, international trade, employment and sustainable economic
(IMF) growth. It has provided help for several nations in the wake of the 2007-‐09
financial crises.
Key Term Glossary
International A nation’s stock of foreign currency and gold

reserves
Inventories These consist of materials and supplies which are stored for use in
production, work-‐in progress, finished goods and goods for re-‐sale
Investment Spending on capital goods including plant & machinery and infrastructure
(usually assumed to be done by firms)
Investment income Interest, profits and dividends from assets owned and located overseas
Job search The process by which workers find appropriate jobs given their tastes and
skills
Keynesian The economics of John Maynard Keynes. The belief that the state can
economics directly stimulate demand in a stagnating economy. For instance, by
borrowing money to spend on public works projects like roads, housing,
schools and hospitals
Keynesian Unemployment caused by a lack of aggregate demand in the economy – a
unemployment deficiency of private sector spending causes output and employment to
contract
Labour demand There is normally an inverse relationship between the demand for labour and
the wage rate that a business needs to pay for each additional worker
employed
Labour force The labour force is defined as the number of people either in work or
actively seeking paid employment and available to start work.
Labour market This is made up of firms willing to employ workers and labour seeking
employment. The demand for labour by firms is downward sloping with
respect to wage (price of labour), while the supply of labour by households is
upward sloping with respect to wage. The labour market is in equilibrium
where the demand for labour equals the supply of labour.
Labour shedding Cut backs in employment often seen in a slowdown or a recession
Labour shortages When businesses find it difficult to recruit the workers they need
Labour supply The number of people able, available and willing to work at prevailing wage
rates
Lagging indicators Indicators which tend to follow economic cycles e.g. unemployment
Leading indicators Indicators which predict future economic trends e.g. consumer confidence
Leveraging The use of borrowed funds to increase your capacity to spend or invest
LIBOR LIBOR stands for the London Interbank Offered Rate and is used by banks
world-wide to determine the rate at which they lend to each other -‐
whether that’s receiving or giving loans (including 24 hour – 5 year loans).
Libor rates are set daily and released at the same time everyday – 11am
London time
Life-cycle model A theory that says that savings rates depend on how old someone is
Liquidity The ease with which something can be converted to cash with little loss of
value
Liquidity trap When very low interest rates cease to have a strong effect on aggregate
demand
Long term In the UK this refers to those unemployed for more than one year
unemployed
Macroeconomic The overall performance in terms of output, prices, jobs, trade and living
performance standards.
Marginal propensity The proportion of any change in income that is spent rather than saved
Key Term Glossary

to consume
Marginal propensity The change in total saving as a result of a change in income

to save
Marginal rate of tax The rate of tax on the next unit (£1) of income earned
Misery index Calculated by adding together the unemployment rate and the rate of
inflation
The belief that monetary policy is the only way for government to run the macro
Monetarism
economy effectively.
Additional Information: Milton Friedman from the Chicago School of Economics was the
godfather and his ideas particularly influenced the policies of Ronald Regan and Margaret
Thatcher. It is entirely anti-Keynesian, against any government intervention in markets
outside of the use of monetary policy
Manipulation of the money supply to achieve macro-economic goals
Monetary policy
Since 1997 Bank of England’s Monetary Policy Committee has set interest rate to target
inflation (2.0% CPI since 2003), so Government is not in direct control; in theory, after
2 year lag, a rise in interest rate will reduce inflation via a fall in AD (higher mortgage
repayments reduces C, higher cost of borrowing reduces I etc.)
Monetary stimulus Changes in monetary policy designed to increase aggregate demand including
lower policy interest rates and measures to increase the supply of credit
Monetary Policy Bank of England committee of 9 people meets every month to set interest
Committee (MPC) rates.
Its 9 members meet monthly to set the base interest rate (or asset transactions, such
as quantitative easing); if inflation is forecast to rise above the 2% central target over
the next 24 months, the MPC may recommend a rise in base rate to slow down AD
and bring inflation back to target (2% plus or minus 1 % ); they will do the reverse if
inflation is set to undershoot to avoid the dangers of deflation; they will try to support
GDP growth as part of their attempt to meet the inflation target; before 1997 when
MPC started this work, base rates were manipulated by governments and could be used
to achieve short term political goals like rate cuts before a general election
Money supply The entire quantity of a country’s commercial bills, coins, loans and credit
Liquidity is the ease or speed with which an asset can be turned into spendable form
(i.e. money) without loss of value; in a complex modern economy there is a massive
range of assets of varying liquidity which could count as money: in UK government
tracks MO, which is notes & coins plus banks’ deposits at the Bank of England
(‘narrow money’) and M4, which is MO plus bank and building society deposits (‘broad
money’); M4 therefore includes more of what UK consumers could spend (but much of
the bank deposits might be held as personal savings so M4 may not correlate to
spending and inflation via the Quantity Theory)
In economics, money illusion, or price illusion, is the name for the human cognitive
Money illusion
bias to think of money in nominal, rather than real, terms. In other words, the face
value (nominal value) of money is mistaken for its purchasing power (real value) at a
previous point in time.
Moral hazard When an insured party decides to take higher risks because t hey perceive
their losses will be covered
Loan to buy a property
Mortgage
Key Term Glossary

Usually requires borrower to put down a deposit of 5-10% of the house price and is
repayable (sum borrowed plus interest) over a period of 25 years; interest repayments
may be variable (in line with base rate movements, influencing consumption) or fixed per
month; demand for mortgages is complementary to demand for houses and is inversely
related to interest rates (price of mortgage) ceteris paribus; demand curve for
mortgages may shift right if population grows, house prices are expected to rise etc
Multiplier effect If there is an initial injection (e.g. a rise in exports or government spending)
into the economy then the final increase in aggregate demand and real GDP
will be greater.
NAFTA North American Free Trade Agreement -‐ a free trade area agreement
signed by the US, Canada and Mexico
The stock of cash (notes and coin) in circulation or held by banks and the central bank
Narrow Money
Formerly measured as MO in the UK; this is the most liquid form of money, though
only represents about 2% of broad money, which also includes bank deposits that are
used for most spending
National debt A government’s total outstanding debt -‐ effectively what the government
still owes from the budget deficits accumulated over time
Nationalisation Bringing a privately owned asset such as a company under state control
Natural rate of
unemployment The ‘natural’ unemployment rate at which demand for labour matches the supply of
labour in the macro economy (leaving structural and frictional unemployment or
voluntary unemployment). Also known as the Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
NAIRU
The rate of unemployment where there is no pressure on wages or prices up or down;
part of Classical economic theory implying government should target low inflation and
not try to manipulate AD to fight unemployment. Supply side policies can reduce
NAIRU.
Negative equity When the value of an asset falls below the debt left to pay on that asset.
Term is most commonly used in connection with property prices after a
slump in prices
Negative interest An interest rate that is below zero. For real interest rates, this can occur
rate when the inflation rate is higher than nominal interest rates
Net investment Gross investment minus an estimate for capital depreciation
Net inward When the number of migrants coming into a country is greater than those
migration leaving
Net trade The balance between the value of exports and imports
Nominal GDP Monetary value of all goods and services produced expressed at current
prices
Nominal wage The annual growth of wages unadjusted for inflation
growth
Non-inflationary Sustained growth of real national output whilst maintaining price stabilty
growth
Output gap Difference between actual and potential national output. A negative output
gap means that an economy has a large margin of spare productive capacity
Output measure Value of the goods and services produced by all sectors of the economy;
GDP agriculture, manufacturing, energy, construction, the service sector and
government
Key Term Glossary
Overseas assets Assets such as businesses, shares, property which are owned in overseas
countries and which might generate a flow of income which is a credit item
on the current account of the balance of payments
Paradox of thrift If people save more in a recession, it will reduce consumption and thus AD
will fall, impeding economic growth and, eventually, lowering the general
level of savings
Part time workers workers who only work a fraction of the hours and the days which are the norm for a
particular job
Patent box A reduced rate of Corporation Tax applied to profits from patents –
designed to stimulate research and innovation and improve the supply-‐side
of the economy
Peak The high point of the economic cycle beyond which a recession starts
Pension Fund Fund that pools employees’ pension benefits and holds them so that they can
be paid
at retirement. The money is invested in stocks, bonds and other assets to
boost returns and ensure that there are sufficient funds to be paid out
Per capita incomes Income per head of the population – a measure of average living standards
Phillips Curve A statistical relationship between unemployment and inflation
Policy asymmetry When a given change in interest rates affects different groups or different
countries to a lesser or greater degree
Population of the total number of people aged between the statutory school leaving age and the state
working age retirement age
Precautionary saving Saving because of fears of a loss of real income or employment
Price stability Price stability occurs when there is low inflation and the price changes that
do occur have little impact on day-to-day decisions of people
Productive potential Productive capacity of the economy – boosted by high quality investment
Productivity A measure of efficiency e.g. output per person employed or output per
person-‐hour
Progressive tax A tax that taxes higher income people proportionally more than mower
income people – it reduces inequality
Propensity to import Proportion of any change in income that is spent on overseas products
Propensity to save Proportion of any change in income that is saved rather than spent
Protectionism Restricting trade through tariffs and other forms of import controls
Part of the Bank of England, created in 2012 to be responsible for the regulation of UK
Prudential Regulation
Authority (PRA) financial institutions (banks, building societies and insurance companies) to ensure bank
lending and insuring is prudent (and not risking individual or collective bank bankruptcy)
Its function would address the causes of the 2008 financial meltdown in which individual
financial institutions had borrowed and lent excessively so that when lenders wanted to
pull their savings out of their bank, it caused mass panic that banks wpuld not be able to
comply, leading to bank failure and huge government bail-out; it is also expected to act
if competition between financial institutions weakens (along with FCA)
Purchasing power The buying power of a unit of currency. It is inversely related to the rate of
inflation
Quantitative easing The introduction of new money into the national supply by a central bank.
(QE) The idea is to add more money into the system to lower the risk of
depression and deflation and encourage banks/people to borrow and spend
Key Term Glossary

Classical theory explaining inflation as the result of excessive monetary growth
Quantitative Theory
of Money
Additional information:
MV=PT Money stock (M) x velocity of circulation of a unit of currency per year (V) =
amount spent; average price level (P) x number of transactions (T) = value of output
bought. If T rises at long term trend growth and V is constant, any monetary growth in
excess of LTTG will be inflationary. Problems; It assumes that V and T remain constant
which they may not depending on many other contextual factors.
Quota A physical limit on the quantity of a good that can be imported into a
country
Real disposable Income after taxes and welfare benefits, adjusted for the effects of inflation
income
Real income Nominal income adjusted for price changes, expressed at constant prices
Real interest rate The nominal rate of interest adjusted for inflation
Real wage The nominal wage adjusted for the effects of inflation
Real wage (classical)
Unemployment When workers are unemployed because real wages are too high and inflexible
downwards, leading to insufficient demand for workers from employers
Recession A period of at least six months when an economy suffers a fall in output. Or
a broadly-‐ based contraction in output, employment, investment and
confidence
Recovery A phase of the economic cycle, after a recession/depression, during which
real GDP starts to increase and unemployment begins to fall
Redundancy Making someone redundant is to end their employment
Regressive tax A tax that is the same for everyone in a society regardless of income or
wealth. They tend increase inequality (VAT, sin taxes)
Relative deflation An economy with an inflation rate, which is lower than comparable
economies. Over time, a low relative rate of inflation can lead to an
improvement in price competitiveness
Remittances Sending of money to people in another country. For many lower-‐income
nations, remittance income is now a big contribution to Gross National
Income (GNI)
Repo Rate (policy The official ‘base’ rate of interest that is set by the Monetary Policy
rate) Committee and which, when changed, sends a signal to the rest of the
financial markets about a desired change in the direction of other borrowing
and savings interest rates. Repo is the rate of interest at which the Bank of
England is prepared to lend to banks
Retail Price Index The RPI is broadly similar to the CPI but includes mortgage repayments and
(RPI) some taxes and excludes the top 4 per cent of earners. It is used to calculate
annual changes in wages, state benefits and pensions
Riccardian Occurs when rational economic actors, especially firms and households,
equivalence expect taxes and interest rates to rise as a consequence of higher
government spending and borrowing and decide to reduce investment and
consumption.
Risk averse Exhibiting a dislike of uncertainty, often seen in a recession
Saving ratio The percentage of disposable income that is saved rather than spent
Seasonal when workers are unemployed at certain times of the year, such as building workers or
unemployment agricultural workers in the winter
Self-employed workers who work on their own account and are not employees
Key Term Glossary

in the UK this is the number of people unemployed for under a year
Short term
unemployed
Slowdown A fall in the rate of growth of an economy but not a full-‐scale recession
Slump A sustained decrease in real GDP and a persistent rise in unemployment
Soft landing A slowdown in economic activity but which does not result in a recession
Sovereign debt Debt issued by or guaranteed by a government
Spare capacity When a business is not making full use of its available capacity – there are
spare factors of production including land, labour and capital. When an
economy has plenty of spare capacity, short run aggregate supply tends to be
elastic.
Stagflation A combination of slow growth and rising inflation. The most notable recent
period of stagflation occurred during the 1970s, when world oil prices rose
dramatically, and UK inflation rose at one point to nearly 30 per cent
Sterling exchange External value of sterling calculated using a weighted index of a basket of
rate index currencies – weightings are based on the value of trade with different
countries
Stimulus Monetary policy and/or fiscal policy aimed at encouraging higher growth
and/or inflation. This can include interest rate cuts, quantitative easing, tax
cuts and government spending increases
Structural trade A trade deficit that arises due to supply-‐side weaknesses rather than a
deficit change in GDP or currency – caused by poor competitiveness
Structural budget The size of a fiscal (budget) deficit adjusted to take account of the effects of
deficit changes in the economic cycle
Structural when the pattern of demand and production changes leaving workers unemployed in
unemployment labour markets where demand has shrunk, where there is a mismatch between the
skills demanded by firms and the skills supplied by the labour force. Examples
of structural unemployment are; regional unemployment, sectoral
unemployment or technological unemployment
Sustainable growth Growth that meets the needs of the present without compromising the
ability of future generations to meet their own needs. Growth that can
continue without damage to the environment, or the exhaustion of non-‐
renewable resources
Target A target is an objective of government policy e.g. low inflation
Tariff A tax on imported products which may be ad valorem (%) or a specific tax (a
set amount per unit imported).
Tight labour market When demand for labour is high and there are shortages of labour.
Businesses may have to offer higher wages to attract and keep the workers
they need
Time lags The time it takes for one change e.g. a change in interest rates to affect other
variables
e.g. consumer confidence and spending
Toxic debt Loans that may not be repaid. For example, if one home loan on one street
goes bad, it might make people think that all the loans on the street will go
bad
Trade deficit A trade deficit occurs when a country imports a greater value of goods and
services than it exports. A trade deficit as a net withdrawal from the circular
flow of income
Trade-‐off A trade-‐off implies that choices have to be made between different
objectives of economic policy for example a trade-‐of between economic
Key Term Glossary

growth and inflation
Tragedy of the A conflict over finite resources between individual interests and the common
Commons good which can lead to irreversible damage to the stock of natural resources
available to current and future generations
Transmission How a change in interest rates affects the various sectors of the economy
mechanism
Trend growth The long run average growth rate – mainly determined by changes in the
stock of available factor inputs and also improvements in productivity. Trend
growth is represented by a rightward shift in the LRAS (or PPC boundary)
Trough The low point of the economic cycle beyond which a recovery starts
Twin Deficits Twin deficits refer to a situation where an economy is running both a fiscal
deficit and also a deficit on the current account of the balance of payments
Under-employment Workers are underemployed when they are willing to supply more hours of
work than their employers are prepared to offer.
Unemployment trap When the prospect of the loss of unemployment benefits dissuades those
without work from taking a new job – creates a disincentives problem
Unit wage costs Labour costs per unit of output
Unsecured credit Credit not secured by another asset – i.e. money borrowed on credit cards
Wage price spiral Where workers bid for higher wages because they have seen their real
income eroded by rising prices. This can lead to a further burst of cost-‐
push inflation
Wealth effect The supposed link between changes in wealth and household spending
World Bank A source of financial and technical assistance to developing countries. It can
provide loans and grants for a wide array of purposes that include
investments in education, health, public administration, infrastructure,
financial and private sector development, agriculture and environmental and
natural resource management
World Trade WTO oversees trade agreements, negotiations and disputes between
Organisation member countries. The WTO is an organisation that was formed in 1995 to
control trade agreements between countries and to set rules on
international trade. It replaced GATT(the General Agreement on Tariffs and
Trade)
The income return on an investment, expressed annually as a percentage based on the
Yield
investment outlay
e.g. a £1000 one-year government bond (see bonds) may sell for £950 today, implying a
rate of return of £50/£950 = 5.3% p.a.; corporate bonds may need to offer a higher
return to offset the higher risk of default; however, if government run up a bigger
deficit and need to borrow via selling more bonds, they will flood the bond market with
bonds, which will depress the bond price (raising the rate of return they need to offer),
savers may now move to government bonds so corporate bonds need to offer higher
return; hence, budget deficits put upward pressure on interest rates throughout
financial markets
Zero Hours An employment contract under which the employee is not guaranteed work
Contract and is paid only for work carried out
Zombie Companies Weak and inefficient companies which are able to survive thanks to low
interest rates and a supposedly more tolerant attitude to corporate
borrowers by banks.

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A-level Economics: Micro

Conspicuous Conspicuous consumption is consumption designed to impress others rather

Duopoly Any market that is dominated by two firms

Duopsony Any market that is dominated by two buyers

Elastic supply Where the price elasticity of supply is greater than +1

External costs Negative spillover effects of production or consumption for which no

Indirect tax An indirect tax is imposed on producers (suppliers) by the government.

Innovation The commercial development of exploiting new or improved products

Inputs Labour, capital and other resources used in production

Monopoly A single seller of a product in a given market or industry

Off-peak pricing Charging lower prices outside periods of intensive use

Oligopoly A market dominated by a few large suppliers. Market concentration is high

Quota A quota is a limit on the quantity of a product can be supplied to a market

Regulator A government agency that monitors the performance of firms in an industry

Technology The application of knowledge to production

Key Term Glossary

Aggregate Either an inflation shock or a shock to potential national output; adverse

Key Term Glossary

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safest, down to D, a company that has already defaulted

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Hard landing A full-scale recession shown by a decline in real national output

International An organization of 186 countries, promoting global monetary cooperation,

Key Term Glossary

International A nation’s stock of foreign currency and gold

Key Term Glossary

Marginal propensity The change in total saving as a result of a change in income

Key Term Glossary

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