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Microeconomics
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the study of the behaviour of individual markets
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Macroeconomics
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the study of way the whole economy works
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Ceteris Paribus
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the assumption that all other variables are being held equal while a single variable is being altered in an economic model
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Positive economics
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Examines matters of economics that can proven to be right or wrong by looking at the facts
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Normative economics
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Examines matters of economics that are based upon opinions which are not able to be proven right or wrong by facts
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Scarcity
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exists because of the limited availability of economic resources relative to society's unlimited demand for goods and services
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Land
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physical factor of production that consists of natural resouces
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Labour
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human factor of production that is the mental and physical contribution of the workforce to production
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Capital
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a factor of production made by humans and is used to produce goods and services which occurs due to investment
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Entrepreneurship
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factor of production involving the organization of other factors of production
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Opportunity cost
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the next best alternative foregone when an economic decision is made
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Free goods
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Goods that are unlimited in supply and have no opportunity cost when the market price is zero
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Economic good
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A good or service that is relatively scarce and has a price where an opportunity cost is involved
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Utility
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the satisfaction of pleasure that an individual derives from the consumption of a good or service
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Production Possibilities Curve
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shows the maximum combinations of goods and services that can be produced by an economy in a given time period if all the resources in the economy are used fully and efficiently
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Actual Output
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The production of goods and services in an economy achieved in a given time period
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Potential output
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The possible production that would be achieved in an economy if all available factors were employed
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Economic growth
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the growth of real output in an economy over time
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Economic development
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involves improvement in standards of living, reduction in poverty, improved health and improved education as well as increased freedom and economic choice
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Sustainable development
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economic development that meets the needs of the present without compromising the ability of future generations to meet their needs
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Free market economy (Market economy)
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an economy where the means of production are privately held by individuals and firms; demand and supply are used to determine what to produce, how to produce it and whom to produce for
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Planned economy (command economy)
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an economy where the means of production are owned by the state; the state determines what to produce, how to produce it and whom to produce it for
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Transition economy
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an economy moving from a centrally planned economy to a more market-oriented economic system
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Market
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where buyers and sellers come together to establish an equilibrium price and quantity for a good or service
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Demand
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The willingness and ability to purchase a quantity of a good or service at a certain price over a given time period
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Law of Demand
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as the price of a good or service increases, the quantity demanded decreases
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Demand curve
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a graphical representation of the law of demand which is a downward-sloping curve or line illustrating the inverse relationship between price and quantity demanded
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Supply
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The willingness and ability of a producer to produce a quantity of a good or service at a certain price over a given time period
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Law of Supply
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as the price of a good increases, the quantity supplied increases, ceteris paribus
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Supply Curve
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a graphical representation of the law of supply which is an upward-sloping curve or line illustrating the direct relationship between price and quantity supplied
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Equilibrium Price
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the market clearing price that occurs where demand is equal to supply
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Maximum price (ceiling price)
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a price set by the government, above which the market price is not allowed to rise; protects consumers from high prices
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Minimum price (price floor)
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a price set by the government, below which the market price is not allowed to fall; protects producers who are producing essential products
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Buffer stock scheme (price controls)
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Sets a maximum and minimum price in a market to stabilize prices
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Price elasticity of demand (PED)
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a measure of the responsiveness of the quantity demanded of a good or service to a change in its price
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Elastic demand
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a change in the price of a good or service that will cause a proportionally larger change in the quantity demanded; infinity > PED > 1
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Inelastic demand
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a change in the price of a good or service that will cause a proportionally smaller change in the quantity demanded; 0 < PED < 1
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Cross elasticity of demand (XED)
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a measure of the responsiveness of the demand of a good or service to a change in the price of a related good
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Substitute good
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goods that can be used instead of each other such as butter and margarine; usually have positive XED
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Complement good
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goods that are used together such as DVD players and DVD discs; usually have negative XED
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Income elasticity of demand (YED)
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a measure of the responsiveness of demand for a good to a change in income
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Normal good
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has a positive income elasticity of demand; as income rises, demand rises
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Inferior good
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has a negative YED; as income rises, demand decreases
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Price elasticity of supply (PES)
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a measure of the responsiveness of the quantity supplied of a good or service to a change in its price
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Indirect Tax
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an expenditure tax on a good or service; shown as an upward shift in the supply curve where the distance between the supply curves is the amount of the tax
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Specific tax
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the amount of tax that is imposed upon a product; a parallel shift of supply curves
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Ad Valorem Tax
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A tax on a good or service where the amount depends on the value of the good or service; shown as a divergent shift of the supply curve
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Market Failure
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the failure of markets to produce at the socially efficient level of output
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Positive externalities
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beneficial effects that are enjoyed by a third party when a good or service is produced or consumed
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Negative externalities
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bad effects that are suffered by a third party when a good or service is consumed;example could be environmental problems
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Public goods
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goods or services that would not be provided at all by the market; they are non-rivalrous and non-excludable
Example: flood barriers
Example: flood barriers
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Merit goods
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Goods or services considered to be beneficial for people and would be under-provided by the market and so under-consumed
Example: education, health care
Example: education, health care
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Demerit goods
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Goods or services considered to have harmful effects for people but are over-provided by the market and so over-consumed
Example: alcohol, cigarettes
Example: alcohol, cigarettes
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Equilibrium
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Where the quantity demanded of a good or service at a given price is the same as the quantity supplied
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An increase in demand
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Caused by any of the determinants of demand (an increase in consumer incomes)
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An increase in supply
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Caused by any changes of the determinants of supply (a fall in the cost of factors used to make the good)
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A maximum price
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The imposition of an indirect tax shifts the supply curve upwards (left) and raises the price to consumers; quantity demanded will fall; revenue will fall
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A minimum price
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Marginal social cost is greater than the marginal private cost; there is a welfare loss for society
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A specific tax on a product
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Marginal private cost is greater than marginal social cost
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Negative externalities of production
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Marginal private benefit is greater than marginal social benefit; welfare loss because of the negative externality produced
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Positive externalities of production
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Marginal social benefit is greater than marginal social benefit
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Negative externalities of consumption
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a simplified model of the economy that shows the flow of money through the economy
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Positive externalities of consumption
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the total money value of all final goods and services produced in the economy in one year
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Circular flow of income
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The total money value of all final goods and services produced in the economy in one year, plus net property income from abroad
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Gross domestic product (GDP)
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GNP minus depreciation (capital consumption)
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Gross national product (GNP)
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GDP that is not adjusted for inflation
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Net National Product (NNP)
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GDP that is adjusted for inflation
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Nominal GDP
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The total money value of all final goods and services produced in an economy in one year per head of the population
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Real GDP
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A composite index that brings together measurements of life expectancy at birth, literacy rate, school enrollment rate and GDP per capita to measure relative development
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GDP per capita
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the total spending in an economy consisting of consumption, investment, government expenditure and net exports
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Human Development Index (HDI)
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the spending by households on consumer goods and services over a period of time
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Aggregate demand (AD)
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the addition to the capital stock of the economy in the form of factories, offices, machinery and equipment which is used to produce goods and services
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Consumption
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a situation where total spending (AD) is greater than the full employment level of output causing inflation
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Investment
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the situation where total spending (AD) is less than the full employment level of output causing unemployment
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Inflationary Gap
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Shows the fluctuations in the level of economic activity in an economy over time and suggests that changes are cyclical; consists of peak, recession, trough and recovery
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Inflationary gap
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government policies designed to influence AD in the economy which affects the average price level and real national output
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Deflationary Gap
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A policy using changes in government spending and/or direct taxation to achieve economic objectives
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Deflationary gap
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A policy using changes in the money supply or interest rates to achieve economic objectives; usually done by the central bank
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Business cycle (Trade cycle)
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The total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods
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Demand-side policies
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AS that varies with the level of demand for goods and services and this is shifted by changes in the costs of factors of production
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Fiscal policy
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AS that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity or quality of factors of production
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Monetary Policy
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Government policies designed to shift the LRAS curve to the right which increases the potential output in the economy
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Aggregate supply (AS)
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a situation that exists when people who are willing and able to work cannot get jobs
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Short-run aggregate supply (SRAS)
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exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work
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Long-run aggregate supply (LRAS)
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- exists when workers are carrying out jobs for which they are overqualified so they are not using their skills and abilities fully
- workers who are employed part-time even through they are available to work full-time
- workers in a planned economy are undertaking jobs that would not exist in a free market
- workers who are employed part-time even through they are available to work full-time
- workers in a planned economy are undertaking jobs that would not exist in a free market
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Supply-side policies
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The number of unemployed workers expressed as a percentage of the total workforce
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Unemployment
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The unemployment that exists when there is a long term pattern of demand and production methods which change and there becomes a permanent fall in the demand for a particular type of labour
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Full employment
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unemployment that exists when people have left a job and are in the process of searching for a new job
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Underemployment
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unemployment that exists when people are out of work because their usual job is out of season
Example: ski instructor in the summer or farmer in the winter
Example: ski instructor in the summer or farmer in the winter
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Unemployment rate
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unemployment that exists when there is insufficient AD in the economy and real wages do not fall to compensate for this
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Structural unemployment
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Unemployment that exists when real wages in the economy get pushed up above their equilibrium either by the governent or by trade unions
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Frictional (search) unemployment
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Sustained increase in the general level of prices and a fall in the value of money
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Seasonal unemployment
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Inflation that is caused by increasing AD in an economy that shifts the AD curve to the right
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Cyclical unemployment (demand deficient unemployment)
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Inflation that is caused by an increase in the costs of production in an economy that shifts the SRAS curve to the left
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Real wage unemployment
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A persistent fall in the average price level in an economy
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Inflation
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taxation imposed on people's income or wealth and on firm's profits
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Demand-pull inflation
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a tax on expenditure; added to the selling price of a good and service
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Cost-push inflation
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A system of direct taxation where tax is imposed at an increasing rate for successive bands of income
Marginal tax rate is higher than the average tax rate
As the income increases the fraction of income paid increases
Marginal tax rate is higher than the average tax rate
As the income increases the fraction of income paid increases
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Deflation
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A system of taxation in which tax is imposed at a decreasing average rate as income rises
As income increases, the fraction of income paid as taxes decreases
As income increases, the fraction of income paid as taxes decreases
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Direct tax (direct taxation)
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A system of taxation in which tax is imposed at a constant rate as income rises
As income rises, the fraction of income paid as taxes is constant
As income rises, the fraction of income paid as taxes is constant
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Indirect tax (indirect taxation)
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AD equals SRAS
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Progressive taxation
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A government may use fiscal or monetary policy to shift AD to the right; expands the economy which increases employment but prices will be higher
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Regressive taxation
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Occurs when a trade union or the government raises the wage rate above the equilibrium
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Proportional taxation
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Occurs when the demand for labour falls but real wages remain constant
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Short-run equilibrium output
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When there is an increase in the costs of factors of production such as wage increases then firms' costs are pushed upwards and the SRAS curve shifts; average prices rise while real output falls
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Equilibrium level and the full employment level
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When an increase in AD caused by a sustained increase in any of the components of AD will shift the AD curve right; average price levels will rise and real output increase as well
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Business cycle
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undefined
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Expansionary demand-side policy
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undefined
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Real wage unemployment diagram
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undefined
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Demand deficient unemployment diagram
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undefined
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Cost-push inflation diagram
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undefined
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Demand-pull inflation diagram
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undefined
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