Allocative efficiency;Allocative efficiency occurs when resources are distributed

in a way that is most socially desirable.

Average cost;Average cost is the cost per unit of output.
Average revenue;Average revenue is the revenue per unit of output.
Capital;Capital is man-made goods used in the production process.
Ceteris paribus;Ceteris paribus means `all other things being equal'. It is used in
economics to examine the relationship between two variables while holding all other
variables constant.
Competitive market;A competitive market is a market in which there are many buyers
and sellers, none of whom can influence the price.
Consumer surplus;Consumer surplus is the difference between the price a consumer is
willing to pay for a good or service and the price they actually pay.
Diseconomies of scale;Diseconomies of scale occur when a firm's long-run average
costs increase as output increases.
Division of labour;Division of labour occurs when the production process is broken
down into a series of specific tasks, each performed by a different worker.
Economic goods;Economic goods are goods that are scarce, meaning that they have a
price and are not available in unlimited quantities.
Economic growth;Economic growth is the increase in the level of economic activity,
usually measured by an increase in real GDP.
Economic welfare;Economic welfare is the level of prosperity and material wellbeing
in an economy.
Elastic demand;Elastic demand is a type of demand in which a small change in price
causes a large change in quantity demanded.
Elasticity of demand;The elasticity of demand is the responsiveness of the quantity
demanded of a good or service to a change in its price.
Entrepreneur;An entrepreneur is an individual who takes risks and starts a new
business or introduces a new product.
Equilibrium;Equilibrium occurs when the quantity demanded of a good or service is
equal to the quantity supplied.
Excess demand;Excess demand occurs when the quantity demanded of a good or service
is greater than the quantity supplied at the prevailing market price.
Excess supply;Excess supply occurs when the quantity supplied of a good or service
is greater than the quantity demanded at the prevailing market price.
Fixed cost;Fixed cost is a cost that does not vary with the level of output.
Free market economy;A free market economy is an economic system in which resources
are allocated through the decentralized decisions of firms and households
interacting in markets.
Inferior goods;Inferior goods are goods for which demand decreases as income
increases.
Marginal cost;Marginal cost is the cost of producing one additional unit of output.
Marginal revenue;Marginal revenue is the revenue earned from selling one additional
unit of output.
Market;A market is any arrangement that allows buyers and sellers to exchange goods
and services.
Market demand;Market demand is the sum of the individual demand curves for a good
or service.
Market economy;A market economy is an economic system in which resources are
allocated through the decentralized decisions of firms and households interacting
in markets.
Market failure;Market failure occurs when the market fails to allocate resources in
the most socially desirable way.
Market supply;Market supply is the sum of the individual supply curves for a good
or service.
Monopolistic competition;Monopolistic competition is a market structure in which
there are many firms selling differentiated products, and entry and exit are
relatively easy.
Monopoly;A monopoly is a market structure in which there is a single supplier of a
good or service with no close substitutes.
Normal goods;Normal goods are goods for which demand increases as income increases.
Opportunity cost;Opportunity cost is the cost of forgoing the next best alternative
when making a decision.
Perfect competition;Perfect competition is a market structure in which there are
many buyers and sellers, none of whom can influence the price.
Price ceiling;A price ceiling is a legal maximum price for a good or service, set
by the government.
Price discrimination;Price discrimination occurs when a firm charges different
prices to different consumers for the same good or service.
Price elasticity of demand;The price elasticity of demand is the responsiveness of
the quantity demanded of a good or service to a change in its price.
Price floor;A price floor is a legal minimum price for a good or service, set by
the government.
Producer surplus;Producer surplus is the difference between the price a producer
receives for a good or service and the cost of producing it.
Product differentiation;Product differentiation is the process of making a product
different from other similar products.
Profit;Profit is the difference between total revenue and total cost.
Revenue;Revenue is the total amount of money a firm receives from selling its goods
or services.
Short-run;The short-run is a period of time in which at least one input is fixed.
Substitute goods;Substitute goods are goods that can be used in place of each
other.
Supply;Supply is the quantity of a good or service that producers are willing and
able to offer for sale at a given price.
Supply curve;A supply curve shows the relationship between the quantity of a good
or service that producers are willing and able to offer for sale and the price of
that good or service.
Total cost;Total cost is the cost of all the inputs a firm uses in production.
Total revenue;Total revenue is the total amount of money a firm receives from
selling its goods or services.
Variable cost;Variable cost is a cost that varies with the level of output.
Yed;Yed (income elasticity of demand) is the responsiveness of demand for a good or
service to a change in income.
Aggregate demand (AD);Aggregate demand (AD) is the total demand for goods and
services in an economy.
Aggregate supply (AS);Aggregate supply (AS) is the total amount of goods and
services that producers are willing and able to supply at a given price level.
Automatic stabilisers;Automatic stabilisers are government policies that
automatically stabilise the economy when it experiences fluctuations in economic
activity.
Balanced budget;A balanced budget is a budget in which government spending is equal
to government revenue.
Business cycle;The business cycle refers to the fluctuations in economic activity
that occur over time.
Capital;Capital refers to the stock of manufactured resources that are used to
produce goods and services.
Ceteris paribus;Ceteris paribus is a Latin phrase meaning "all other things being
equal" or "holding all else constant."
Circular flow of income;The circular flow of income is a model of the economy that
shows the flow of goods, services, and payments between households and firms.
Deflation;Deflation is a sustained decrease in the general price level of goods and
services in an economy over a period of time.
Demand-pull inflation;Demand-pull inflation occurs when aggregate demand (AD)
exceeds aggregate supply (AS), leading to an increase in the general price level of
goods and services.
Depreciation;Depreciation is the decrease in value of an asset over time.
Disinflation;Disinflation is a decrease in the rate of inflation.
Economic growth;Economic growth is an increase in the level of real GDP in an
economy over a period of time.
Exchange rate;An exchange rate is the price of one currency in terms of another
currency.
Expansionary fiscal policy;Expansionary fiscal policy involves increasing
government spending or decreasing taxes in order to stimulate aggregate demand (AD)
and economic growth.
Expansionary monetary policy;Expansionary monetary policy involves increasing the
money supply in order to stimulate aggregate demand (AD) and economic growth.
Exports;Exports are goods and services produced domestically and sold to other
countries.
Fiscal policy;Fiscal policy is the use of government spending and taxation to
influence the economy.
Fixed exchange rate;A fixed exchange rate is an exchange rate that is set and
maintained by the government.
Gross domestic product (GDP);Gross domestic product (GDP) is the total value of all
final goods and services produced within a country in a given period of time.
Imports;Imports are goods and services produced in other countries and purchased
domestically.
Inflation;Inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time.
Interest rate;The interest rate is the price paid for the use of money over a
period of time.
Investment;Investment refers to spending on capital goods that are used to produce
other goods and services.
Laffer curve;The Laffer curve is a theoretical relationship between tax rates and
government revenue.
Macroeconomics;Macroeconomics is the branch of economics that studies the economy
as a whole, rather than individual markets.
Microeconomics;Microeconomics is the branch of economics that studies individual
markets and the behaviour of individual decision makers within those markets.
Monetary policy;Monetary policy is the use of interest rates and other monetary
instruments to influence the economy.
Multiplier effect;The multiplier effect is the process by which an initial increase
in spending leads to a larger increase in national income and output.
Natural rate of unemployment;The natural rate of unemployment is the rate of
unemployment that exists when the economy is at full employment.
Nominal GDP;Nominal GDP is GDP measured in current prices, without adjustment for
inflation.
Output gap;The output gap is the difference between actual GDP and potential GDP.
Phillips curve;The Phillips curve is a negative relationship between unemployment
and inflation.
Potential GDP;Potential GDP is the level of real GDP that can be sustained over the
long run without creating inflationary pressure in the economy. It is indicated by
the position of LRAS in the Classical AD/AS diagram.
Productivity;Productivity is the amount of output produced per unit of input.
Real GDP;Real GDP is GDP adjusted for inflation.
Recession;A recession is a period of economic contraction, typically defined as a
decline in real GDP for two consecutive quarters.
Savings;Savings are income that is not spent on consumption.
Stagflation;Stagflation is a combination of high inflation and high unemployment.
Structural unemployment;Structural unemployment is unemployment that arises from a
mismatch between the skills of workers and the requirements of available jobs.
Supply-side policies;Supply-side policies are government policies that aim to
increase the productive capacity of the economy and shift the long-run aggregate
supply (LRAS) curve to the right.
Trade-off;A trade-off is a situation in which achieving one goal requires
sacrificing another goal.
Unemployment;Unemployment is the number of people who are willing and able to work
but cannot find a job.
Voluntary unemployment;Voluntary unemployment occurs when workers choose not to
accept available jobs at the going wage rate.
Wealth;Wealth is the total value of assets owned by individuals or society as a
whole.
Ad valorem tax; An indirect tax imposed on a good where the value of the tax is
dependent on the value of the good.
Asymmetric information; Where one party has more information than the other,
leading to market failure.
Capital; One of the four factors of production - goods which can be used in the
production process.
Capital goods; Goods produced in order to aid production of consumer goods in the
future.
Ceteris paribus; All other things remaining the same.
Command economy; All factors of production are allocated by the state, so they
decide what, how and for whom to produce goods.
Complementary goods; Negative XED if good B becomes more expensive, demand for good
A falls.
Consumer goods; Goods bought and demanded by households and individuals.
Consumer surplus; The difference between the price the consumer is willing to pay
and the price they actually pay.
Cross elasticity of demand (XED); The responsiveness of demand for one good (A) to
a change in price of another good (B); %change in QD of A/%change in P of B.
Demand; The quantity of a good/service that consumers are able and willing to buy
at a given price at a given moment of time.
Diminishing marginal utility; The extra benefit gained from consumption of a good
generally declines as extra units are consumed; explains why the demand curve is
downward sloping.
Division of labour; When labour becomes specialised during the production process
to do a specific task in cooperation with other workers.
Economic problem; The problem of scarcity - wants are unlimited but resources are
finite, so choices have to be made.
Efficiency; When resources are allocated optimally, so every consumer benefits and
waste is minimised.
Enterprise; One of the four factors of production - the willingness and ability to
take risks and combine the three other factors of production.
Equilibrium price/quantity; Where demand equals supply so there are no more market
forces bringing about change to price or quantity demanded.
Excess demand; When price is set too low so demand is greater than supply.
Excess supply; When price is set too high so supply is greater than demand.
Externalities; The cost or benefit a third party receives from an economic
transaction outside of the market mechanism.
External cost/benefit; The cost/benefit to a third party not involved in the
economic activity; the difference between social cost/benefit and private
cost/benefit.
Free market; An economy where the market mechanism allocates resources so consumers
and producers make decisions about what is produced, how to produce and for whom.
Free rider principle; People who do not pay for a public good still receive
benefits from it, so the private sector will under-provide the good as they cannot
make a profit.
Government failure; When government intervention leads to a net welfare loss in
society.
Habitual behaviour; A cause of irrational behaviour - when consumers are in the
habit of making certain decisions.
Incidence of tax; The tax burden on the taxpayer.
Income elasticity of demand (YED); The responsiveness of demand to a change in
income - %change in QD/%change in Y.
Indirect tax; Taxes on expenditure which increase production costs and lead to a
fall in supply.
Inferior goods; YED<0 - goods which see a fall in demand as income increases.
Information gap; When an economic agent lacks the information needed to make a
rational, informed decision.
Information provision; When the government intervenes to provide information to
correct market failure.
Labour; One of the four factors of production - human capital.
Land; One of the four factors of production - natural resources such as oil, coal,
wheat, physical space.
Luxury goods; YED>1 i.e. an increase in incomes causes a larger proportional
increase in demand.
Market forces; Forces in free markets which act to reduce prices when there is
excess supply and increase them when there is excess demand
Maximum price; A ceiling price which a firm cannot charge above
Minimum price; A floor price which a firm cannot charge below
Mixed economy; Both the free market mechanism and the government allocate resources
Model; A hypothesis which can be proven or tested by evidence -- it tends to be
mathematical whilst a theory is in words
Negative externalities of production; Where the social costs of producing a good
are greater than the private costs of producing the good
Non-excludable; A characteristic of public goods -- someone cannot be prevented
from using the good
Non-renewable resources; Resources which cannot be readily replenished or replaced
at a level equal to consumption -- the stock level decreases over time as they are
consumed
Non-rivalry; A characteristic of public goods -- one person’s use of the good does
not prevent someone else from using it
Normal goods; YED>0 --demand increases as income increases
Normative statement; Subjective statements based on value judgements and opinions
-- cannot be proven or disproven
Opportunity cost; The value of the next best alternative forgone
Perfectly price elastic good; PED/PES=Infinity -- quantity demanded/supplied falls
to 0 when price changes
Perfectly price inelastic good; PED/PES=0 -- quantity demanded/supplied does not
change when price changes
Positive externalities of consumption; Where the social benefits of consuming a
good are larger than the private benefits of consuming that good
Positive statement; Objective statements which can be tested with factual evidence
to be proven or disproven
Possibility production frontier (PPF); Depicts the maximum productive potential of
an economy, using a combination of two goods or services, when resources are fully
and efficiently employed
Price elasticity of demand (PED); The responsiveness of demand to a change in price
i.e. %change in QD/%change in P
Price elasticity of supply (PES); The responsiveness of supply to a change in price
i.e. %change in QS/%change in P
Price mechanism; The system of resource allocation based on the free market
movement of prices, determined by the demand and supply curves
Private cost/benefit; The cost/benefit to the individual participating in the
economic activity
Private goods; Goods that are rivalry and excludable
Producer surplus; The difference between the price the producer is willing to
charge and the price they actually charge
Public goods; Goods that are non-excludable and non-rivalry
Rationality; Decision-making that leads to economic agents maximising their utility
Regulation; Laws to address market failure and promote competition between firms
Relatively price elastic good; When PED/PES>1 -- demand/supply is relatively
responsive to a change in price so a small change in price leads to a large change
in quantity demanded/supplied
Relatively price inelastic good; When PED/PES<1 -- demand/supply is relatively
unresponsive to a change in price so a large change in price leads to a large
change in quantity demanded/supplied
Renewable resources; Resources which can be replenished, so the stock of resources
can be maintained over a period of time
Scarcity; The shortage of resources in relation to the quantity of human wants
Social cost/benefit; The cost/benefit to society as a whole due to the economic
activity
Social optimum position; Where marginal social cost equals marginal social benefit
-- the amount which should be produced/consumed in order to maximise social welfare
Social science; The study of societies and human behaviour
Allocative efficiency; When resources are allocated to the best interests of
society, when there is maximum social welfare and maximum utility; P=MC
Asymmetric information; Where one party has more information than the other,
leading to market failure and causing problems for regulators
Average cost/average total cost (AC/ATC); The cost of production per unit quantity
produced
Average revenue (AR); The price each unit is sold for TR quantity sold
Bilateral monopoly; Where there is only one buyer and one seller in the market
Cartels; A formal collusive agreement where firms enter into an agreement to
mutually set prices
Collusion; Occurs when firms agree to work together, for example by setting a price
or fixing the quantity they produce
Competition policy; Government action to increase competition in markets
Competitive tendering; When the government contracts out the provision of a good or
service and invites firms to bid for the contract
Conglomerate integration; The merger of firms with no common connection
Constant returns to scale; Output increases by a constant amount for each unit of
increase in inputs.
Contestable market; When there is the threat of new entrants into the market,
forcing firms to be efficient
Decreasing returns to scale; An increase in inputs by a certain proportion will
lead to output increasing by a smaller proportion
Demergers; A single business is broken into two or more businesses to operate on
their own, to be sold or to be dissolved
Deregulation; The removal of legal barriers to allow private enterprises to compete
in a previously protected market
Derived demand; The demand for one good is linked to the demand for a related good
Diminishing marginal productivity; If a variable factor is increased when another
factor is fixed, there will come a point when each extra unit of the variable
factor will produce less extra output than the previous unit; after a certain
point, marginal output falls
Diseconomies of scale; The disadvantages that arise in large businesses that reduce
efficiency and cause average costs to rise
Divorce of ownership from control; Firms are owned by shareholders, who have little
say in the day to day running of the business, and controlled by managers; this
leads to the principal-agent problem
Dynamic efficiency; Efficiency in the long run -- concerned with new technology and
increases in productivity which causes efficiency to increase over a period of time
Economies of scale; The advantages of large scale production that enable a large
business to produce at a lower average cost than a smaller business
External economies of scale; An advantage which arises from the growth of the
industry within which the firm operates, independent of the firm itself
Fixed cost; Costs which do not vary with output
For-profit business; A business whose main aim is to make money
Game theory; Used to predict the outcome of a decision made by one firm, when it
has incomplete information about the other firm
Geographical mobility of labour; The ease and speed at which labour can move from
one area to another
Horizontal integration; The merger of firms in the same industry at the same stage
of production
Increasing returns to scale; An increase in inputs by a certain proportion will
lead to an increase in output by a larger proportion
Interdependent; The actions of one firm directly affects another firm
Internal economies of scale; An advantage that a firm is able to enjoy because of
growth in the firm, independent of anything happening to other firms or the
industry in general
Limit pricing; When firms set prices low in order to prevent new entrants -- used
in contestable markets
Loss; When revenue does not cover costs
Marginal cost; The additional cost of producing one extra unit of good
Marginal revenue; The additional revenue gained by selling one extra unit of good
Maximum wage; A ceiling wage which people can't earn any more than.
Minimum efficient scale; The lowest level of output necessary to fully exploit
economies of scale.
Minimum wage; A floor wage which people cannot earn below.
Monopolistic competition; Where there are a large number of buyers and sellers who
are relatively small and act independently, selling non-homogeneous goods.
Monopoly; A single seller in the market.
Monopsony; A single buyer in the market.
N-firm concentration ratio; The percentage of market share held by the ‘n’ biggest
firms.
Nationalisation; When a private sector company or industry is brought under state
control, to be owned and managed by the government.
Natural monopoly; Where economies of scale are so large that not even a single
producer is able to fully exploit them -- it is more efficient for there to be a
monopoly than many sellers.
Non-collusive oligopoly; When firms in an oligopoly compete against each other,
rather than making agreements to reduce competition.
Non-price competition; When firms compete on factors other than price, for example,
customer service or quality -- they aim to increase the loyalty to the brand which
makes demand more inelastic.
Normal profit; The minimum reward required to keep entrepreneurs supplying their
enterprise, the return sufficient to keep the factors of production committed to
the business; TC=TR.
Not-for-profit business; Where firms are run in order to maximize social welfare
and help individuals and groups -- any profit they do make is used to support their
aims.
Occupational mobility of labour; The ease and speed at which labour can move from
one type of job to another.
Oligopoly; Where a few firms dominate the market and have the majority of market
share, they act interdependently.
Organic growth; Where firms grow by increasing their output.
Overt collusion; Collusion where firms come to a formal agreement, for example, a
cartel.
Perfect competition; A market with many buyers and sellers selling homogenous goods
with perfect information and freedom of entry and exit.
Perfectly contestable market; A market with no barriers to entry, where a new firm
can easily enter and compete against incumbent firms completely equally.
Predatory pricing; When a large, established firm is threatened by new entrants so
sets such a low price that other firms make losses and are driven out of the
market.
Price leadership; Where one firm sets prices and other firms tend to follow this
firm as they are fearful of engaging in a price war.
Price wars; Where firms continuously drive prices down to the point where they are
frequently making losses and firms are forced to leave.
Principal-agent problem; Where the agent makes decisions on behalf of the
principal; the agent should maximize the benefits of the principal but have the
temptation of maximizing their own benefits.
Private sector; The part of the economy that is owned and run by individuals or
groups of individuals.
Privatisation; The sale of government equity in nationalized industries or other
firms to private investors.
Productive efficiency; When resources are used to give the maximum possible output
at the lowest possible cost; MC=AC.
Profit maximisation; When firms produce at a point which derives the greatest
profit; MC=MR.
Profit satisficing; When a firm earns just enough profit to keep its shareholders
happy.
Public sector; The part of the economy that is owned or controlled by local or
central government.
Regulatory capture; When regulators become more empathetic and are able to ‘see
things from the firm’s perspective’, which removes impartiality and weakens their
ability to regulate.
Revenue maximisation; When firms produce at a point which derives the greatest
revenue; MR=0.
Sales maximisation; When firms produce at a point where they sell as many of their
goods and services as possible without making a loss; AR=AC.
Static efficiency; The level of efficiency at one point in time
Sunk cost; Costs that cannot be recovered once they have been spent
Supernormal profit; The profit above normal profit, TR>TC
Tacit collusion; Collusion where there is no formal agreement, such as price
leadership
Third degree price discrimination; When monopolists charge different prices to
different groups for the same good or service
Total cost; The cost to produce a given level of output, which is the sum of total
variable costs and total fixed costs
Total revenue; Revenue generated from the sale of a given level of output, which is
the product of price and quantity sold
Variable cost; Costs which change with output
Vertical integration; When a firm merges or takes over another firm in the same
industry, but at a different stage of production
X-inefficiency; When firms produce at a cost above the AC curve, due to factors
such as inefficiencies in management or production.
Absolute advantage; When a country can produce a good more cheaply in absolute
terms
than another country
Absolute poverty; When people are unable to afford sufficient necessities to
maintain
life - those on less than $1.90 a day
Aid; When a country voluntarily transfers resources to another or gives
loans on a concessionary basis
Appreciation; An increase in the value of the currency using floating exchange
rates
Asymmetric information; When one party has more knowledge than another -- this
causes
market failure in the financial sector
Automatic stabilisers; Mechanisms which reduce the impact of changes in the economy
on
national income
Balance of payments; A record of all financial dealings over a period of time
between
economic agents of one country and another
Buffer stock systems When a maximum and minimum price are imposed together in order
to bring about price stability.
Capital account; A part of the balance of payment -- records debt forgiveness,
inheritance taxes, transfers of financial assets and sales of assets
Capital expenditure; Government spending on investment goods such as new roads,
schools and hospitals, which will be consumed in over a year
Capital flight; When large amounts of money are taken out of the country, rather
than being left there for people to borrow and invest
Central banks; A financial institution that has direct responsibility to control
the money
supply and monetary policy, to manage gold reserves and foreign
currency and to issue government debt
Common market; Members trade freely in all economic resources and impose a
common external tariff
Comparative advantage When a country is able to produce a good more cheaply
relative to
other goods produced; it has a lower opportunity cost
Current account; A part of the balance of payments -- records payments for the
purchase
and sale of goods and services, as well as incomes and transfers
Customs union; The removal of all tariff barriers between members and the
introduction of a common external tariff
Current expenditure; General government final consumption plus transfer payments
plus
interest payments
Cyclical deficit; The part of the deficit that occurs because government spending
fluctuates around the trade cycle
Depreciation; A fall in the value of the currency using floating exchange rates
Devaluation; When the currency is decreased against another under a fixed system
Developed country; Countries with a higher GDP per capita and a higher standard of
living
Developing country; Countries with a lower GDP per capita and a lower standard of
living
Discretionary fiscal policy Deliberate manipulation of government expenditure and
taxes to
influence the economy; expansionary and deflationary fiscal policy
Economic development; Improvements in living standards
Emerging economies; A country that is growing quickly and has some characteristics
of a
developed country but is not fully there yet
Exchange rate; The purchasing power of a currency in terms of what it can buy of
other currencies
Financial account; A part of the balance of payments -- records FDI, portfolio
investment
and the transfer of gold and currency reserves
Financial markets; When buyers and sellers can buy and trade a range of services or
assets that are fundamentally monetary in nature
Fiscal deficit; When the government spends more than it receives in a year
Fixed exchange rate; The value of the currency is set against the value of another
and that
exchange rate does not change
Foreign currency gap; When a country does not export enough to finance the purchase
of
goods from overseas
Foreign direct investment; Investment by one private sector company in one country
into another private sector company in another
Free trade; Trade with no barriers or restrictions
Free trade agreements; When two or more countries in a region agree to
reduce/eliminate trade barriers on all goods from member countries
Free floating exchange rate; Value of the currency is determined purely by market
demand and supply of the currency
General government final consumption; Spending on goods and services which will be
consumed within the next year
Gini coefficient; A measure of income inequality -- the ratio of the area between
the 45 degree line (the line of perfect equality) and the Lorenz curve and the
whole area under the 45 degree line
Globalisation; The growing interdependence of countries and the rapid rate of
change it brings about -- movement towards free trade of goods and services, free
movement of labour and capital and free interchange of technology and intellectual
capital.
Harrod-Domar model; Savings provide the funds that are used for investment, and
growth rates depend on the level of saving and the productivity of investment.
Therefore, growth in developing countries is limited by the lack of investment.
Human capital; The economic value of an individual’s skills, experience, training
etc.
Human Development Index (HDI); Measures an economy’s development based on income,
health and education.
Infrastructure; Facilities required for an economy to function, such as roads.
International competitiveness; The ability of a country to compete effectively and
become attractive in international markets.
J-curve; A current account will worsen before it improves following a depreciation
of the currency.
Laffer curve; Shows that a rise in tax rates does not necessarily lead to a rise in
tax revenue, due to the impact on incentives and work.
Lewis 2 model; A model which suggests that countries will develop through
industrialisation as labour is moved from the unproductive agriculture sector to
the more productive urban sector. This increases wages and leads to more saving and
investment.
Lorenz curve; The cumulative percentage of population plotted against the
cumulative percentage of income that those people have.
Market bubbles; When the price of an asset rises massively and greatly exceeds the
value of the asset itself.
Market rigging; A group of individuals or institutions collude to fix prices or
exchange information that will lead to gains for themselves at the expense of other
participants in the market.
Microfinance schemes; Schemes which aim to give poor and near-poor households
permanent access to a range of financial services.
Managed floating exchange rate; Value of the currency is determined by demand and
supply but the Central Bank intervenes to prevent large changes.
Marshall-Lerner condition; The sum of the price elasticities of imports and exports
must be more than one if a currency depreciation is to have a positive impact on
the trade balance.
Monetary unions; Two or more countries with a single currency.
Moral hazard; When individuals act in their own best interests knowing there are
potential risks- another cause of financial market failure.
National debt; The sum of government debts built up over many years.
Primary product dependency; When a country relies heavily on primary products, such
as agricultural goods or mining.
Progressive taxation; Where those on higher incomes pay a higher marginal rate of
tax -- those on higher incomes pay a higher percentage of their income on tax.
Proportional taxation; The proportion of income paid on the tax remains the same
whilst the income of the taxpayer changes -- everyone pays the same percentage of
their income on tax.
Protectionism; When government enact policies to restrict the free entry of imports
into their country, such as tariffs and quotas.
Quota; Limits placed on the level of imports allowed into a country.
Regressive taxation; Where the proportion of income paid in tax falls whilst the
income of the taxpayer increases -- those on lower incomes pay a higher percentage
of their income on tax.
Relative poverty; When income falls below an average income threshold. In the UK,
this is those on less than 60% of median household income.
Revaluation; When the currency is increased against the value of another under a
fixed system.
Speculation; Trading financial assets in hope of significant returns.
Structural deficit; The deficit which occurs when the cyclical deficit is 0.
Tariffs; Taxes placed on imported goods in an attempt to prevent people from buying
them.
Terms of trade; The ratio of an index of a country's export prices to an index of
its import prices. average export price index x100/average import price index.
Theory of comparative advantage; Countries will find specialisation mutually
advantageous if the opportunity costs of production are different.
Trade creation; When a country moves from buying goods from a high cost to a lower
cost producer.
Trade diversion; When a country moves from buying goods from a low cost producer to
a higher cost one.
Trade liberalisation; Reduction or removal of protectionist policies.
Trading bloc; A group of countries that reduce or remove trade barriers between
them.
Transfer payments; Government spending for which there is no corresponding output,
where money is taken from one group and given to another.
Transfer pricing; Where firms manipulate the price of their good so that profit is
increased in areas of low tax.
Unit labour costs; The cost of employing workers for each unit of a good,
calculated by dividing total wages by real output.
Specialisation; The production of a limited range of goods by a
company/country/individual so they aren’t self-sufficient and have to trade with
others
Specific tax; A tax imposed on a good where the value of the tax is dependent on
the quantity that is bought
State provision of goods; Through taxation, the government provides public goods or
merit goods which are underprovided in the free market
Subsidy; Government payments to a producer to lower their costs of production and
encourage them to produce more
Substitutes; Positive XED; if good B becomes more expensive, demand for good A
rises
Supply; The ability and willingness to provide a particular good/service at a given
price at a given moment in time
Symmetric information; Where buyers and sellers both have access to the same
information
Trade pollution permits; Licenses which allow businesses to pollute up to a certain
amount. The government controls the number of licenses and so can control the
amount of pollution. Businesses are allowed to sell and buy the permits which means
there may be incentive to reduce the amount they pollute
Unitary price elastic demand; When PED=1 -- a change in price leads to a change in
quantity demanded by the same proportion i.e. same % change
Unitary price elastic supply; When PES=1 -- a change in price leads to a change in
quantity supplied by the same proportion i.e. same % change
Utility; The satisfaction derived from consuming a good
Weakness at computation; A cause of irrational behaviour compared with standard
economic theory -- when consumers are bad at making calculations, estimating
probabilities and working out future benefits/costs leading to sub-optimal
consumption decisions