Accelerator – increase in demand leads to a disproportional increase in investment, assuming: full capacity, no stock, constant capital output ratio
Aggregate demand – the total demand for goods and services from all sources in the economy. It includes consumer spending, investment by firms in plant, machinery and stocks, government spending, the net effect of international trade. An increase in aggregate demand may lead to an increase in output provided there is underutilized productive capacity in the economy. If there is no spare capacity, and the economy is producing using all available, suitable resources, rising demand is likely to lead to inflation.
Aggregate supply – the total of goods and services produced in the economy. In the short run, aggregate supply may increase in response to rising aggregate demand. In the long run, it can increase only if more resources become available or if there are improvements in technology or if efficiency is increased in some other way. Better, more efficient management can also help. These are sometimes associated with increases in human capital – the expertise available in the economy.
Allocative efficiency – describes the extent to which the allocation of resources matches consumer preferences
Asset – anything of value which can be made to yield benefits
Balance of payments – a record on all transactions associated with imports and exports, together with all international capital movements
Black market – when a market is controlled, e.g. by rationing, a black market develops, where people who have things to sell and people who want to buy them evade the controls
Bonds – a borrower may issue a bond, which is a promise to repay a certain sum of money at a date some time in the future. In return for the loan which is the price of the bond, interest will be paid, usually a fixed rate. Bonds may be traded on the Stock Exchange, and the price will reflect the attractiveness of the interest rate relative to current market rates.
Capacity – the maximum amount which can be produced with given amounts of fixed capital
Circular flow of income – the way in which income flows around the economy, from firms to households and back to firms in a continuous process
Competitive markets – those markets where a number of firms compete strongly with one another. In these markets prices are likely to be kept close to the minimum average cost; they will therefore tend to be productively efficient
Complementary goods – consumed together so that a change in demand for one will lead to a change in demand for the other
Consumer expenditure – the sum of total spending by consumers in the whole economy over a period of time. It is a component of aggregate demand. The level of consumer expenditure and its likely future growth are sometimes important variables for a business which is considering whether to expand
Consumer Price Index – measure changes in the prices of consumer goods and services and is used for macro-economic policy purposes
Demerit good – a good which has been found through the political process to be socially undesirable
Diseconomies of scale – as firms grow, they may encounter certain cost increases which make the larger scale of production less efficient
- communication costs
- loss of flexibility
Economic growth – an increase in output and real incomes. An increase in value of output goods and services in the economy over a period of time. It is usually measured using gross domestic product.
Economic stability – requires sustainable growth rates, low inflation, low unemployment and avoidance of significant trade imbalances, in the long term
Economies of scale – as some firms grow, they are able to produce at a lower average cost than before
Externalities – costs and benefits which result from a firm’s operations but which are paid for by their parties. They are economic side effect. They include external costs such as pollution and congestion and external benefits such as the improvement in the general appearance of a shopping area when new shops open up in previously derelict premises.
Factors of development:
- macro stability
- openness
- education
- institutions
Factors of production (and their returns) – land (rent), labour (wages), capital (interest), enterprise (profit)
Fixed costs – all those costs which stay the same regardless of the quantity produced. They include the cost of capital equipment and buildings, interest charges, management and administrative costs
Free market – a market in which there is no government interference
Free trade – trade which is not restricted by import controls such as tariffs, quotas or other methods
Immobility of labour – people are unable to take up a job which is available because they are living in another area (geographical immobility) or because they do not have the right skills for the job (occupational immobility)
Income redistribution – taxing high incomes much more than low incomes and providing benefits for those with little or no income of their own
Inferior good- a product with a negative income elasticity of demand. This means that a rise in income will lead to a fall in the quality sold
Inflation – is an increase in prices generally. Money loses some of its value because its purchasing power falls
Injections – spending flows which add to the circular flow of money. They include investment, government spending and exports. When injections increase there will be an increase in aggregate demand, which will have a multiplier effect on the economy
Investment – spending now on something that can be expected to generate an income in the future. Investment means spending on capital equipment which can be used to create products which will sell. Investment will increase productivity and may cut costs or contribute to improving quality. Investments may also be directed towards increasing human capital. Improved skills and knowledge bring high rates of return on investment in human capital.
Leakages – savings, taxation and imports, which leak out of the circular flow of national income and reduce aggregate demand
Market failure – occurs when market imperfections lead to an allocation of which is less efficient than it might be:
- public goods
- externalities
- labour immobilit
- lack of information
- poverty
- imperfect competition
Merit goods – such as education and health care may be consumed in smaller quantities than would be most effective from society’s point of view, if available only through the market
Multiplier – the amount by with an increase in injections into the circular flow of national income will increase total income in the economy. If investment or consumption increases, this adds to aggregate demand and many firms will be able to sell more investment goods and consumer products. The size of the multiplier will depend on the extent to which increasing incomes leak away into savings, taxation or imports.
Normative statement – value judgment such as should or ought and it is not proven to reference or data
Oligopoly – a market in which there are a few large firms competing with one another. It is characterized by differentiated products, barriers to entry, supernormal profits, price makers and price takers
Output – the end product of a firm, resulting from an economic process. Output can be valued according to its price in the market or stated in volume terms.
Overheating – occurs when aggregate demand exceeds aggregate supply
Positive statement – can be proven (checked)
Poverty trap – a situation in which a person may be worse off working than living on means-tested benefits because the marginal rate of taxation and the rate at which benefits are lost in combination remove the incentive effects of the earnings
Price mechanism functions:
- rationing
- signaling
- incentive
Production Possibility Frontier – is based on a two-product economy and shows the range of combinations that may be chosen if all resources are being fully utilized. The curve shows the opportunity cost in terms of loss of one product if it is decided to produce a little more of the other product.
Combinations of products inside the frontier entail unemployment of labour or capital or both.
Combinations of products outside the frontier are impossible because they require more resources than are currently available.
If the quantity of resources available increases, e.g. as a result of investment, then the frontier may shift outwards, allowing more of both goods to be produced. i.e. economic growth.
Productivity – output per person employed and a measure of efficiency
Public goods – items which must be provided by society as a whole for two reasons. No one can be excluded from benefiting from them
Quantative easing (printing money)– the ways in which central banks can increase liquidity in the economy. It may involve lending money to banks and buying bonds and other assets
Quasi-public goods – goods which have some features of public goods
Quotas – an import control which places a fixed limit on the quantity of the good which can be imported
Specialisation – the process by which individuals, firms and economies concentrate on producing those goods and services in which they have an advantage. Specialisation has the potential to increase output that can be obtained from a given quantity of resources. It is closely connected to the theory of comparative advantage. Scarce resources can produce more when specializing in the type of production to which they are best suited
Stock market – a market on which shares and bonds can be bought and sold on a second-hand basis. This means there is always a way in which securities can be exchanged for money, although the price will not be known much in advance
Trade deficit – occurs when visible imports are greater than visible exports
Trade-off – in making decisions people often have to consider that having more of one thing may mean having less of another
Unemployment – can be measured by claimant count, Labour Force Survey, ILO:
- demand deficiency (cyclical)
- structural
- technological
- real wage employment – where trade unions have used their monopoly power to push pay above its equilibrium level
- regional unemployment – where local industries have declined
- seasonal unemployment
- frictional unemployment – people who are between jobs
Variable costs – the costs of production which vary directly with the amount of output. They include raw materials, components and the labour and energy which are used in the actual production process
