1.

The Basic Economic Problem

Capital : goods/materials that are used for the production of other
items. Not consumed
in their own right.
Consumption : Using up goods/services.
Consumer Goods: goods that are wanted because they provide
satisfaction to their
owner.
Demerit Goods: goods that are perceived to have a negative
impact/effect on
society/individuals.
Economic Rent:
Economy : Total value of goods & services produced &
exchanged within a country.
Enterprise: risk taking & decision making in business
Exchange:
Factors of Production: land, labour, capital, enterprise.
Fixed Capital: capital goods that do not need replacing in the
short term (machinery,
tools, buildings).
Free Goods: goods that require no resources to make (wind,
sunshine).
Goods: items produced by the factors of production (usually for
economic gain).
Labour: the human effort (mental & physical) required to
produce something.
Land: the land we use/build on & resources that are contained in
the land and water.
Markets: Place where goods & services are exchanged (
may be visible or invisible).
Merit Goods: goods that are perceived to provide positive
externalities (beneficial to
society)
Needs: requirements for continued existence (food, clean water,
 shelter)
Opportunity Cost: the cost of the next best alternative.
Production Possibility Curve: a curve that represents possible
output if the factors of
production are used efficiently. Also known as the ‘ o pportunity
cost curve’ as it can be
used to show the opportunity cost of producing different
products/quantities).
Public Goods: good provided by the government (paid for
through taxes) that
everybody benefits from (street lighting).
Resources: items that are needed/ useful for consumption or the
production of other
items.
Scarcity: limited availability of resources (ones that will run out
eventually), not enough
to satisfy all the wants.
Services: something that fulfils a need, often not a physical
object (banking, teachers,
policemen).
Transfer Earnings:
Wants: the desires that people have that are not necessary for
their existence/ luxuries.
Working Capital: capital products that are used up in the
production process (raw
materials).
2. The Allocation of Resources
Complementary goods: goods that are purchased to support/go
with another product
(petrol & cars).
Contraction in demand: movement along the demand curve to
the left (higher price &
lower quantity demanded).
Contraction in supply: movement along the supply curve to the
left (lower price &
lower quantity supplied).
Cross elasticity of demand:
Demand: want/willingness to buy a product.
Diminishing Marginal utility: consumption of additional units of
a product provide less
utility (satisfaction) each time.
Effective Demand: the financial ability to actually purchase the
product.
Elasticity: the responsiveness of quantity supplied or demanded
in relation to changes
in price/income/other products.
Equilibrium: the point at which the supply and demand curves
cross/intersect
Excess Demand: quantity demanded is greater than the quantity
supplied at a given
price.
Excess Supply : quantity supplied is greater than quantity
demanded at a given price.
Extension in demand: a movement along the demand curve to
the right (lower price &
higher quantity demanded).
Extension in supply: a movement along the supply curve to the
right (higher price &
higher quantity supplied).
External costs: costs of production that have to be paid by
someone other than the
firm/individual (cleaning up pollution).
External benefits: benefit of production to others outside the
firm/individual (1st aid
training for employees)
Individual Demand: the amount a single person would be willing
to buy at a range of
prices.
Inferior goods: goods that consumers demand less of as incomes
increase due to
them opting to buy higher quality alternatives.
Marginal Utility: the additional satisfaction gained from the
consumption of an extra
unit of a product.
Market Demand: total demand for a product
Price elastic demand: a % change in price results in greater %
change in quantity
demanded.
Price inelastic demand: a % change in price results in smaller %
change in quantity
demanded.
Price elastic supply: a % change in price results in greater %
change in quantity
supplied.
Price inelastic supply: a % change in price results in smaller %
change in quantity
supplied.
Private costs: the costs that the company/individual has to pay
for production (labour,
raw materials).
Private benefits: the benefits to the company/individual of
production (profits).
Social costs: private costs + external costs
Social benefits: private benefits + external benefits
Substitute goods: goods that can be used as a
substitute/alternative for a product
(butter & margarine).
Supply: the number of goods/services firms are able & willing to
supply at a range of
prices.
Unitary elasticity: % change in price results equal % change in
quantity demanded or
 supplied.
Utility: the satisfaction gained from consuming a product.
3. The Individual as producer, consumer and borrower
Barter: system of trade through swapping items.
Cash: notes, coins and debit cards.
Central bank: the government’s bank, responsible for issuing
money, setting interest
rates.
Checking account: Instant access account, see current account.
Commercial bank : High St bank (HSBC etc) offering a range of
accounts to individuals
and businesses.
Credit card : electronic payment card that allows users to make
purchases with
borrowed money that can be paid at a later date.
Current account: instant access account used for routine/regular
transactions.
Debit card: electronic payment card linked to current/checking
account that has the
funds to make the transaction.
D isposable income: the money available after paying taxes that
you can choose how
to use.
Liquidity : the ability for and item/asset to be exchanged for cash
with no loss of value.
Money: commodity that is universally accepted for as payment
for all goods and
services.
Money supply : the sum of the notes, coins and deposits in banks
& financial institution.
Piece rate : payment based on quantity produced (fruit picking
etc)
Salary : Annual payment total that is paid monthly.
Specialisation: Working on specific stage/stages of production in
 the aim of increasing
productivity & lowering costs.
Stock exchange: organisation that facilitates the buying and
selling of shares in Public
& Private Limited Companies.
Trades union: organisation of workers that negotiate wages,
working conditions &
hours. Collective bargaining.
Wage : hourly rate for labour, often calculated weekly.
Wealth: collection of assets (houses, land, shares in companies,
money saved in bank
accounts).
4. The private firm as producer and employer
Average cost: total cost/output.
Average fixed costs : downward sloping line (from left to right)
as the fixed costs are
shared among increased output.
Average revenue : total revenue/number of product/services sold.
Average variable costs: initially downward sloping as increasing
returns to labour and
economies of scale are achieved with increased output & then
they rise with output.
Breakeven
Point: total revenue = total cost (no profit or loss made).
Cartel: small group of large firms that work together to keep
prices high & therefore
keep all their profits high. Usually illegal.
Cooperative
: organisation owned by its workers and they share the rewards.
Costs: the money paid to produce/provide the service/product.
Diseconomies of scale: when an increase in the scale of
production results in
increased average costs (overtime
pay etc).
Diminishing returns to labour: additional workers eventually add
decreasing levels of
marginal output (eg. too many people share tools and get in each
others way)
Division of labour: the allocation of workers to specific tasks in
the production line.
Economies of scale: when increases in production (output) lead
to reduced total
average costs (discount for bulk buying etc).
Factory: the site/building that produces the product, a firm may
have more than one.
Firm: The company/business that owns one or more factories.
Fixed costs: costs that have to be paid regardless of level
production (rent, loan
repayments).
Horizontal integration : merging of firms at the same stage of
production.
Increasing returns to labour : initially as additional workers are
employed their
marginal output increases.
Industry: A group of firms producing similar or same goods (eg:
soft drinks industry coca
cola would be a firm in this industry).
Marginal cost: the additional cost of producing an extra unit.
Marginal Product/productivity : additional output gained from
the employment of an
additional worker.
Marginal revenue: the additional revenue gained from selling an
extra unit.
Monopoly: Single firm controls the supply in a market (has no
competitors).
Multinational Company (MNC): Company that has outlets or
production facilities in
more than one country. Usually plcs.
Normal Profit: profit level just high enough to keep firms in the
industry.
Oligopoly: Small number of large companies control the supply
in a market.
Partnership : 2 to 20 individuals jointly own a business and share
the profits(solicitors).
Primary Industry: Industries involved in extracting raw materials
(agriculture, fishing,
forestry, mining).
Private Limited Company (Ltd): company owned by
shareholders, but shares only
sold privately, not on the stock exchange.
Productivity: output per worker.
Profit: revenue costs
(the money you are left over with after costs are deducted).
Public Limited Company (plc): company owned by shareholders
& shares sold on the
stock exchange to the public.
Revenue: total money obtained from sales (before any
deductions).
Secondary Industry : Manufacturing or construction industries.
Ones that make things
(factories, carpenters, bakers, builders).
Soletrader:
Single owner of a business, usually small scale.
Supernormal
Profit: increased demand in an industry leads firms to make
above
normal profits.
Tertiary Industry: Industries that provide a service (banking,
solicitors, teachers, police
forces, doctors).
Total costs : fixed costs + variable costs.
Total Revenue : price x output (the total amount of money
 gained from sales of a
product).
Transnational Company (TNC) : see multinational company.
Variable costs : costs that are dependent on the level of
production (raw materials,
labour in some cases).
Vertical Integration: merging of firms which are involved in the
production of the same
product but at different stages.
5. Role of government
Aggregate Demand : Total Demand in the economy (expenditure
+ exports +
investment + government spending)
Aggregate Supply : Total Supply in the economy.
Balanced Budget: Government income = government
expenditure
Budget: Government income & government expenditure for a 1
year period.
Budget deficit: Government expenditure is greater than its
income for that year.
Budget surplus: Government income is greater than its
expenditure for that year.
Circular flow of income : Model showing the flow of money,
factors of production &
goods/services in the economy.
Direct taxes: Taxation on income and wealth (income tax,
corporation tax, inheritance
tax, capital gains tax).
Fiscal policy : Use of taxation and government spending to
influence the economy.
Indirect taxes : Taxation on spending (VAT, excise duties,
import taxes)
Interest Rates : Cost of borrowing or reward for saving money.
Base rate set by the
 central bank. Commercial bank rates generally follow base rate
changes but at a higher
total rate.
Monetary policy : Use of interest rates or the money supply to
influence the economy.
Money supply:
Multiplier effect:
Progressive taxes : Usually implemented through direct taxes &
take a higher % of
income as tax from higher earners.
Regressive taxes : Usually associated with indirect taxes taking
a higher % of income
from lower earners.
Taxation : form of income for the government through direct or
indirect charges (taxes).
6. Economic Indicators
Consumer Price Index (CPI) : very similar to the RPI
increasingly
the measure of
choice for Governments.
Cyclical unemployment : unemployment linked to the boom &
bust cycles of the
economy.
Frictional unemployment : unemployment associated with
people that are between
jobs.
Full employment : everybody who is willing and able to work is
in employment.
Gross Domestic Product (GDP) : Total value of goods and
service produced in a
country.
GDP per Capita : GDP divided by the population. Useful for
comparing countries &
reflects changes in population size..
 Gross National Product (GNP) : Total value of goods and
services produced by a
country, including foreign earnings but subtracting the earnings
by foreign firms within
the country.
GNP per Capita : GNP divided by the population.
Human Development Index : An indicie that takes into account
socioeconomic
indicators. Always a number between 0 & 1, the closer to one the
higher the level of
development.
Net National Product (NNP) : GNP minus the value of capital
depreciation.
Real GDP : GDP with the effects of inflation removed.
Retail Price Index : weighted index showing price changes as a
% for a hypothetical
basket of goods.
Seasonal unemployment : unemployment that is linked to
seasonal demand for labour
(eg. fruit picking & tourist industry jobs).
Structural unemployment: unemployment as a result of the
labour force lacking the
skills demanded by the current industries.
Unemployment : members of the labour force that are willing
and able to work and
seeking employment.
7. Developed and developing economies
Demography : The study of population.
Dependency ratio:
Human Development Index (HDI) : An index that attempts to
measure quality of life by
taking into account socioeconomic
indicators. Always a number between 0 & 1, the
closer to one the higher the level of development.
 Less Developed Country (LDC):
More Developed Country (MDC):
Old dependents:
Optimum population:
Overpopulation
: when there are not enough resources to support the population
without a decline in living standards.
Primary industry : industries that extract raw materials (mining,
fishing).
Population pyramids : chart that shows the age & sex structure of
a countries
population
Purchasing Power Parity (PPP):
Secondary industry : industries that manufacture or construct
(factories, carpenters,
builders).
Tertiary industry : Industries that provide a service (banking,
teaching, fire service).
Underpopulation
: when there could be population increase without a reduction in
living standards.
Young dependents:
8. International Aspects
Absolute advantag e: When a country can make more than
another country of a certain
product with the same amount of labour.
Balance of payments : The sum of the current, financial &
capital accounts which
account for all trad & financial transactions for a country.
Balancing item:
Comparative advantage : The relative advantage of producing a
certain product to
trade even if the country has an absolute disadvantage in it.
Current account : The account that records the visible & invisible
trades of a country as
well as government aid payments.
Embargo : A ban on the import of a product/products from a
certain country.
Exchange rate : The value of one currency in relation to another
currency.
Exports : Goods sent to another country in exchange for money.
Financial & capital accounts : the Governments accounts that
record the movement of
money in & out of the country (not for the sale of goods) & the
sale of fixed assets.
Fixed exchange rat e: when the value of a currency is pegged to
(fixed to) another
major currency such as the US dollar.
Floating exchange rate:
Free trade:
Imports : Goods brought into the country in exchange for money.
Infant industries:
Internal trade : Trade within a country.
International trade : Trade between two or more countries
Protectionism : Methods of restricting imports and possibly
increasing exports.
Quotas : Limits on the number of imports of certain products.
Reserve assets:
Subsidies : Money given to industries by the Government to
attract them or make them
more competitive.
Tariffs: Taxes placed on imports