Economics IGCSE - Definitions Ms.

Sonali

1) Scarcity – It is a condition that exists because there are limited resources to satisfy our unlimited
wants.

2) Consumer goods – These are goods that immediately satisfy the wants of the consumers. Eg/ food

3) Capital Goods They are used to produce other goods, for example machines in a factory.

4) Factors of production – Land, Labour, Capital, Enterprise

5) Labour - The people used in the production of goods and services

6) Returns of factors of production – Rent, wages, interest, profit

7) Finance - Funding for a firm

8) Human Capital – this refers to the improvement in the ability and skills of labour that comes about due
to a higher level of training and education received and better healthcare.

9) Primary sector – This sector of the economy extracts or harvests products from the earth. Eg/
Farming, mining, fishing

10) Secondary sector - This sector of the economy manufactures goods. Eg/ production of cars

11) Tertiary - This sector of the economy provides services. Eg/ Banking, tourism, teaching

12) Opportunity cost The cost of the next best alternative foregone

13) The economic problem is what, how and for whom to produce when there are finite resources to
meet infinite wants

14) PPC
It shows the maximum output combinations of two goods a
country could produce if all its resources are fully and efficiently
employed and technology remains constant

15) Price Mechanism – This is when the forces of demand and supply determine the prices and resource
allocation of a country.

16) Free market economies These are economies where resources are mainly owned by individuals and
private firms and where the price mechanism acts as the means of allocating resources and in
determining prices.

17) Mixed Economies These are economies where resources are owned by the private sector and the
government and resource allocation and price determination is carried out by the price mechanism
AND by the government.
For example, in Sri Lanka, the government controls prices of essential services (public transportation)
and utilities (electricity, water) while all other prices are determined by the market forces. Ownership
of roads, electricity, water, some land and a large % of public transportation is by the government.
Production of a large % of goods & services is carried out in the private sector, eg/ garments, food,
hotels.

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Economics IGCSE - Definitions Ms. Sonali

18) Entrepreneur It is the factor of production that takes all the business risks and organizes the other
factors of production.

19) Personal Disposable Income – This is a person’s income after all statutory payments have been paid
out.

20) Savings – That part of personal disposable income which is not spent on goods and services.

21) Demand - The quantity of goods/services consumers are willing and able to buy at a given price

22) Subsidies A government grant given to producers to increase production. It reduces their cost of
production and hence the price of the good falls.

23) Substitute goods These are goods that could be used instead of the other. They are in competitive
demand. Eg/ tea and coffee.

24) Complementary goods These are goods that are bought and consumed together. They are in joint
demand. Eg/ DVD player and DVD’s.

25) Derived demand This is when the demand for one good is due to the increase in demand for another
good. Eg/ construction workers are in derived demand due to the demand for buildings/ houses.

26) Indirect taxes These are taxes on expenditure. Eg/ VAT

27) Direct taxes These are taxes on a person’s income and wealth. Eg/ income tax and inheritance tax.

28) Excess supply A disequilibrium situation when quantity supplied exceeds quantity demanded. This
occurs at prices above the market/ equilibrium price.

29) Excess demand A disequilibrium situation when quantity demanded exceeds quantity supplied. This
occurs at prices below the market/ equilibrium price.

30) Price elasticity of demand The responsiveness of quantity demanded to a change in price.
PED = % change in qty demanded
% change in price

31) Elastic demand This is when an increase in price will result in a more than proportionate decrease in
quantity demanded; The value of PED will be greater than 1.

32) Price inelastic demand This is when an increase in price results in a less than proportionate decrease
in quantity demanded for a good; Value of elasticity is less than 1.

33) Income elasticity of demand
It measures the responsiveness of quantity demanded to a change in income.
YED = % change in qty demanded
% change in income

34) Inferior goods The demand for these goods falls as a person’s income increases. Eg/ Public
transportation. YED is negative.

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Economics IGCSE - Definitions Ms. Sonali

35) Normal goods The demand for these goods increases as a person’s income increases. Eg/ cars. YED is
positive.

36) Price Elasticity of supply
It measures the responsiveness of quantity supplied to a change in price.
PES = % change in qty supplied
% change in price

37) Spare capacity – when a firm is operating at less than full capacity.

38) Price inelastic supply - when an increase in price results in a less than proportionate increase in
quantity supplied for a good; Value of elasticity is less than 1.

39) Merit goods: These are goods that are under consumed/ provided by the market mechanism because
the consumers are not fully aware of their benefits. Furthermore, they provide external benefits to
society. Eg/ education, healthcare.

40) De-merit goods: These are goods that are over consumed/ provided by the market mechanism
because the consumers are not fully aware of their harm. Furthermore, they incur an external cost on
society. Eg/ cigarettes and addictive drugs.

41) Market failure This is when the price mechanism fail to allocate resources efficiently.

42) Externalities: An externality is a cost or benefit, that is a by-product/spillover effect of a
production/consumption process which affects a third party, not involved in this process.
Eg/ Negative externalities - pollution and congestion. Eg/ Positive externalities – more productive
labour force due to higher education or better healthcare.

43) External costs:
These are costs experienced by a third party, a consumer or a producer, not directly involved in the
consumption or the production of the good/service. Eg/ pollution and congestion.

44) Private costs:
These are costs experienced by parties that are directly involved in the consumption or the production of
the good/service. Eg/ wages, rent for firms, cost of petrol for motorists.

45) External Benefits:
These are benefits that accrue to third parties, consumers or producers, not directly involved in the
consumption/ production of the good.

46) Private Benefits:
These are benefits that accrue to parties directly involved in the consumption/ production of the good.
Eg/ possibility of earning a higher salary after gaining a degree.

47) Public goods
These are goods, usually provided by the govt, that have the following characteristics:
• Non-excludability – If it is provided for one, you cannot exclude another from using it.
• non-rivalry – The use of the good by one, does to reduce the availability of the good for others.

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Economics IGCSE - Definitions Ms. Sonali

48) Free Rider problem

It is when a person could benefit from the consumption of a good without contributing to the cost of
provision of the good. Due to the non-excludability characteristic of public goods, the producer cannot
stop a consumer from consuming the public good even if he does not pay for it.

49) Public sector – the sector of the economy where goods and services are provided by government
organisations.

50) Private sector – the sector of the economy where the provision of goods and services is by businesses
that are owned by individuals or groups of individuals.

51) Privatisation – This is when the ownership of public sector firms is transferred to the private sector
usually by the sale of shares.

52) Nationalisation – This is when private sector firms are bought over by the government, i.e ownership
is transferred from the private sector to the public sector.

53) Ageing population – This is when the average age of the population is rising.

54) Productivity – Output per input. Eg/ Labour productivity is output per worker.

55) Capital-intensive production These are processes that require a relatively high level of capital
investment compared to labour costs. The processes tend to be highly automated. Eg/ car
manufacturing

56) Labour-intensive production These are processes that require a relatively high level of labour
compared to capital.

57) Innovation - An idea which leads to a new product/process

58) Division of labour Breaking down of a large job into smaller, simpler tasks so that each worker or
groups of workers could specialize in these tasks.

59) Specialisation Where one person concentrates on producing one product or one job, for example
Chemistry teacher.

60) International specialisation Where one country concentrates on producing one or a narrow range of
products Saudi Arabia – oil, Maldives - tourism.

61) Total revenue = Price x quantity sold

62) Variable costs These are costs that vary directly with the level of output produced. Eg/ wages

63) Fixed costs These are costs that do not vary with the level of output produced. Eg/ rent, insurance

64) Total cost = Total variable cost + total fixed cost

65) Average cost = Total cost/ output

66) EOS – It refers to the fall in long run average costs of production as output increases.

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Economics IGCSE - Definitions Ms. Sonali

67) Dis-EOS - It refers to the rise in long run average costs of production as output increases.

68) Internal EOS It refers to the fall in long run average costs of production as an individual firm expands.

69) External EOS It refers to the fall in long run average costs of production as the industry expands.

70) A tradable pollution permit system
The govt sets a limit/quota on the amount of pollution allowed in an industry & then allocates pollution
permits to individual firms. So the firms are then allowed to pollute upto the level set by the permit. It is
also possible to trade any excess/surplus permits or even save them for future use.

71) Wealth is the value of assets owned by a person (or household).

72) Supply of labour – this refers to the quantity of labour (employees) willing and able to work at any
given wage

73) National Minimum Wage It is a legal/ government imposed wage floor, that prevents employers from
paying a rate below this to their workers.

74) Trade Unions These are organisations made up of workers, that use their collective bargaining power
to negotiate higher pay and better working conditions for their members.

75) Occupational immobility of labour – it refers to the obstacles that prevent workers from moving
from one occupation to another to take up an available job.

76) Geographical immobility of labour – it refers to the inability of workers to move from one
geographical area to another to take up an available job.

77) Merger – when two or more firms decide to join together to become one legal entity.

78) Takeover - One firm buys control of another firm

79) Vertical Integration – This is when two firms in the same industry but in 2 different stages of
production merge. Eg/ A car manufacturer (MBW) merges with a tyre manufacturer (Dunlop)

80) Horizontal Integration - This is when two firms in the same industry but in 2 different stages of
production merge. Eg/ A car manufacturer (MBW) merges with another (Audi)

81) Rationalisation – This is when firms let go of duplicated jobs/ excess or less efficient workers and shut
down units/departments/ product lines of the firm in order to cut costs. Such exercises are usually
undertaken when two firms merge horizontally.

82) Conglomerate Integration - This is when two firms in unrelated industries merge. Eg/ A car
manufacturer merges with a school.

83) Competition – It is the rivalry that exists between firms when trying to sell goods in a particular market.

84) Competitive market – market structure where there are a large number of buyers and sellers and low
barriers to entry.

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Economics IGCSE - Definitions Ms. Sonali

85) Anti-competitive practices – These are practices by firms that prevent competition in an industry
such as collusions, raising barriers to entry, predatory pricing and restricting consumer choice.

86) De-regulation - This is when the rules and regulations of the industry that hinder competition are
removed. Competition in the industry is likely to increase as entry barriers are removed.

87) Competition Policy – These are policies that try to increase the level of competition in the country and
try to protect consumers from anti-competitive practices that may be carried out by dominant firms.

88) Oligopoly this is a market structure where a few large interdependent firms exist. They may collude &
set high prices.

89) Price wars – This is a series of price reductions by firms in oligopoly markets (undercut prices)

90) Monopoly – this is a market structure where one dominant firm operates.
A firm is classified as a monopoly if it controls more than 25% of the market.

91) Barriers to entry – These are obstacles that prevent firms from entering a market/industry.

92) Injections are an addition to the circular flow which does not arise from current consumption (I, G, X)

93) Investment is defined as a rise in the capital stock of the country.

94) Capital stock is the total value of productive capacity in the UK, made up of machines and factories.

95) Withdrawals Income (savings, taxes and imports) that is withdrawn during the current time period, so
reducing the circular flow of income

96) Nominal Gross Domestic Product (GDP) is the money value of all goods and services produced
within the UK.

97) Real GDP is the inflation-adjusted value of goods and services produced within the UK i.e. the nominal
value of GDP adjusted for inflation.

98) Economic growth – the increase in real GDP of a country over a period of time.

99) Economic Growth rate refers to the rate of increase of real GDP over a period of time.
Thus “falling growth” implies output rising less quickly.

100) Recession – This is when a country experiences negative economic growth (2 consecutive quarters
(6 months) of negative economic growth).

101) Inflation - The sustained rise in the general level of prices

102) Cost-push inflation: The cause of this type of inflation is the rising costs of production faced by
producers that are then passed onto their consumer as higher prices.

103) Demand-pull inflation This occurs when the Aggregate Demand in the economy increases and
supply cannot match this. Prices of goods and services get bid-up.

104) Budget/ fiscal deficit: Occurs when government expenditure is greater than government revenue.

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Economics IGCSE - Definitions Ms. Sonali

105) Budget or fiscal surplus: it occurs when government expenditure is less than government
revenue.

106) Balance of trade: value of visible exports – value of visible imports.

107) Trade deficit : when the value of visible imports > value of visible exports

108) The current account of the Balance of payments account: this records the net trade in goods
and services, profits, interests and dividends (net income from abroad) and current transfers of a
country.

109) Monetary Policy is the use of interest rates (and money supply) to bring about changes in the AD
of the country. The main objective of monetary policy in many countries is to control inflation.

110) Supply side policies - These are policies that improve the productive capacity of the economy and
increase the aggregate supply of the country by improving the efficiency of the economy or by
increasing competition.

111) Balance of Payments - records all financial transactions between UK residents and the rest of the
world.

112) Appreciation (of a currency): the value of a country’s currency rises in terms of another currency.
This happens in a country with a freely-floating exchange rate. Exports will become more expensive
and imports cheaper.

113) Depreciation (of a currency): the value of a country’s currency falls in terms of another currency.
This happens in a country with a freely-floating exchange rate. Exports will become cheaper and
imports more expensive.

114) Hot Money flows - short term, speculative capital that move in and out of a country in search of
higher interest rates.

115) Foreign Direct Investment – When a company (usually MNC’s) makes an investment in a foreign
country. The investment may be in the form of setting up new factories/businesses or buying shares in
existing businesses. Eg/ Ford setting up a factory in China

116) Fiscal Policy – This is the use of government expenditure and revenue to achieve the government’s
macroeconomic objectives. It could be expansionary or contractionary.

117) Policy trade-off – This is when the use of demand-side policies to correct/ pursue one economic
objective, ends up worsening the other. Eg/ When expansionary fiscal policy is used to achieve
economic growth, it may lead to demand-pull inflation.

118) Devaluation – This is when the government intervenes in the foreign currency market to reduce
the value of the currency. This happens in a country with a fixed exchange rate.

119) Revaluation - This is when the government intervenes in the foreign currency market to increase
the value of the currency. This happens in a country with a fixed exchange rate.

120) Unemployment – When workers who are willing & able to work cannot find a job

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Economics IGCSE - Definitions Ms. Sonali

121) Working population – Those within the working age (16-65) who are either employed or
unemployment

122) Seasonal Unemployment - This is the type of unemployment that comes about due to the fall in
demand for certain goods/services during particular seasons Eg/ construction and agricultural
workers are unemployed during winter.

123) Structural Unemployment - This is the unemployment caused by the long-term decline in demand
for the products of an industry that causes the demand for workers in this industry to fall. They are
unable to find another job as they maybe occupationally immobile/ lack the relevant skills. Eg/ Coal
miners due to the decline in demand for coal.

124) Cyclical unemployment: this is caused by falling aggregate demand for goods and services due to
a downturn in the trade/ economic cycle causing the derived demand for labour to fall.

125) Invisible trade – Trade in services. Eg/ Tourism, education, banking

126) Globalisation - refers to the closer integration and inter-connectedness of countries that comes
about due to improved technology and an increase in international trade.

127) Trading blocs – These are groups of countries that come together and for a union to promote free
trade between them; they abolish all trade barriers between them.

128) Trade barriers – These are obstacles that are imposed by governments to limit the number of
imports coming into the country.

129) Tariffs – These are taxes on imports. When a tariff is imposed, the price of imports would rise.

130) Quotas – These are quantitative restrictions imposed on the amount of imports that are allowed to
enter a country.

131) International borrowings – the amount of money a country has borrowed from abroad.

132) Dumping – When excess supply of a good is sold in another country at a low price, below the
average cost of production. It is an unfair trading practice and could cause a fall in demand for the
domestic alternative.

133) MNC – This is a firm which has its headquarters in one country produces and sells in several others.
They bring FDI into other countries.

134) WTO – an international organisation that promotes free trade by organizing rounds of talks to
persuade member countries to reduce trade barriers.

135) Speculation – its when an asset is bought or sold based on a prediction, in the hope of making a
capital gain. For example, shares/ currency maybe bought to be sold at a later date at a higher price.