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Level 1

Micro and Macro Economics


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Aggregate Demand
the total demand for a country's goods and services at a given price level and in a given time period
Aggregate Supply
the total amount that producers in an economy are willing and able to supply at a given price level in a given time period
Allocative efficiency
Where consumer satisfaction is maximised
Arithmetic mean
the sum of the items divided by the number of items
Asymmetric information
information not equally shared between two parties
Automatic stabilisers
forms of government spending and taxation that change automatically to offset fluctuations in economic activity
Average
the sum of the items divided by the number of items
Average propensity to save
the proportion of disposable income saved.
Average propensity to consume
the proportion of disposable income spent.
Balance of payments
a record of money flows coming in and going out of a country.
Bar chart
a diagram where the lengths of the bars show the different values of the items
Capacity utilisation
the extent to which firms are using their capital goods
Capital
Man-made aids to production
Circular flow of income
the movement of spending and income throughout the economy
Claimant count
a measure of unemployment that includes those receiving unemployment-related benefits
Clearing price
the price where demand and supply are equal
Ceteris paribus
All other thing being equal assuming other variables remain unchanged
Change in demand
this is where a change in a non-price factor leads to an increase or decrease in demand for a product
Choice
the selection of appropriate alternatives
command economy
an economic system in which resources are state owned and also allocated centrally
Complements
Goods for which there is a joint demand
consumer confidence
how optimistic consumers are about future economic prospects
consumer expenditure
spending by households on consumer products
Consumer Price Index
a measure of changes in the price of a representative basket of consumer goods and services.
Consumer surplus
The extra amount that a consumer is willing to pay for a product above the price that is actually paid.
corporation tax
a tax on firms' profits
Cost-push inflation
Increases in the price level caused by increases in the costs of production
Cross Elasticity of Demand
The responsiveness of demand for one product in relation to a change in the price of another.
current account deficit
when more money is leaving the country than entering it, as a result of sales of its exports, income and current transfers from abroad being less than imports, income and current transfers going abroad
Cyclical unemployment
unemployment arising from a lack of aggregate demand
Deflation
a sustained fall in the general price level
Deflationary Fiscal Policy
Designed to reduce aggregate demand.
Demand
the quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Demand curve
this shows the relationship between the quantity demanded and the price of a product
Demand-pull inflation
increases in the price level caused by increases in aggregate demand
Demand schedule
the data that is used to draw the demand curve for a product
Demerit goods
Their consumption is more harmful than is actually realised
developed economy
an economy with a high level of income per head
developing economy
an economy with a low level of income per head
Direct tax
one that taxes the income of people and firms and that cannot be avoided
Discretionary fiscal policy
deliberate changes in government spending and taxation designed to influence aggregate demand
disequilibrium
any position in the market where supply and demand are not equal
disposable income
income after taxes on income have been deducted and state benefits have been added
dissave
spending more than disposable income
distribution of income
how income is shared out between households in a country
division of labour
the specialisation of labour where the production process is broken down into separate tasks
economic cycle
the tendency for economic activity to fluctuate outside its trend growth rate, moving from a high level of economic activity (boom) to negative economic growth (recession)
Economic efficiency
where both allocative and productive efficiency are achieved
Economic growth
in the short run, an increase in real GDP, and in the long run, an increase in productive capacity, that is, in the maximum output that the economy can produce
economically inactive
people of working age who are neither employed nor unemployed
economic problem
how to allocate scarce resources among alternative uses
economics
the study of how to allocate scarce resources in the most efficient way
economic system
the way in which production is organised in a country or group of countries
effective demand
the willingness and ability to buy a product
Efficiency
Where the best use of resources is made for the benefit of consumers.
elastic
responsiveness to a change in market conditions
Elasticity
the extent to which buyers and sellers respond to a change in market conditions
entrepreneur
someone who bears the risks of the business and who organises production
entrepreneurship
the willingness of an entrepreneur to take risks and organise production
equilibrium price
the price where demand and supply are equal
equilibrium quantity
the quantity that is demanded and supplied at the equilibrium price
exchange
the process by which goods and services are traded
exchange rate
the price of one currency in terms of another currency or currencies
exports
products sold abroad
external benefits
the benefits that accrue as a consequence of externalities to third parties
external costs
the costs that are the consequence of externalities to third parties
externality
an effect whereby those not directly involved in taking a decisions are affected by the actions of others
Factor endowment
The stock of factors of production
Factors of production
The resource inputs that are available in an economy for the production of goods and services
Factor services
The services provided by the factors of production
Fiscal drag
People's income being dragged into higher tax bands as a result of tax brackets not being adjusted in line with inflation
Fiscal policy
The taxation and spending decisions of a government
Free market mechanism
The system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms
Free rider
Someone who directly benefits from the consumption of a public good but who does not contribute towards its provision
Frictional unemployment
Short-term unemployment occurring when workers are in-between jobs
Full employment
A situation where those willing and able to work can find employment at the going wage rate.
Goods
Tangible products, i.e products that can be seen and touched, such as cars, food and washing machines.
Government bond
A financial asset issued by the central or local government
Government spending
Spending by the central bank and local government on goods and services
Gross domestic product
The total output of goods and services produced in a country
Household
Group of people whose spending decisions are connected
Human capital
Education, training and experience that a worker, or group of workers possesses
Hyperinflation
An inflation rate above 50 per cent
Hysteresis
Unemployment causing unemployment
Imports
Products bought from abroad
Income elastic
Goods for which a change income products a greater proportionate change in demand
Income elasticity of demand
The responsiveness of demand to a change in income
Income inelastic
Goods for which a change in income produces a less than proportionate change in demand
Index number
A number showing the variation in, for example, wages or prices, as compared with a chosen base period or date
Indirect tax
Is a tax levied on goods or services.
Inefficiency
Any situation where economic efficiency is not achieved
Inferior goods
Goods for which an increase in income leads to a fall in demand
Inflation
A sustained rise in the price level.
Inflationary rise
The distortion of price list alas caused by inflation
Informal economy
Economic activity that is not recorded or registered with the authorities in order to avoid paying tax or complying with regulations, or because the activity is illegal
Information failure
A lack of information resulting in consumers and producers making decisions that do not maximise welfare.
Injections
Additions of extra spending into the circular flow of income
International Labour Organisation
A member organisation of the United Nations that collects statistics on labour market conditions and seeks to improve working conditions.
Investment
Spending on capital goods
Labour
The quantity and quality of human resources.
Labour force
The people who are employed and unemployed, that is, those who are economically active.
Labour force survey
A measure of unemployment based on a survey using the ILO definition of unemployment
Labour productivity
Output of a good or service per worker in a given time period
Land
Natural resources in an economy.
Leakages
Withdrawals of possible spending from the circular flow of income
Long-term unemployment
Unemployment lasting for more than a year
Macroeconomic equilibrium
A situation where aggregate demand equals aggregate supply and real GDP is not changing
Market
Where or when buyers and sellers meet to trade or exchange goods and services.
Market economy
An economic system whereby resources are allocated through the markets forces of demand and supply.
Market failure
Where the free market mechanism fails to achieve economic efficiency
Menu costs
The costs of changing prices due to inflation
Merit goods
These have more private benefits than their consumers actually realise.
Macroeconomics
Looks at the economy as a whole
Microeconomics
Deals with the economic behaviour or individuals or groups within the economy.
mixed economy
An economy system in which resources are allocated through a mixture of the market and direct public sector involvement.
Monetary policy
Central bank and /or government decisions on the rate of interest, the money supply and the exchange rate
Monetary Policy Committee
A Committee of the Bank of England with responsibility for setting the interest rate in order to meet the government's inflation target
Movement along the demand curve
This is in response to a change in the price of a product
Multiplier effect
The process by which any change in a component of aggregate demand results in a greater final change in real GDP
Negative externality
This exists where the social cost of an activity is greater than the private cost
Net exports
The value of exports minus the value of imports
Net savers
People who save more than hey borrow
Nominal GDP
Output measured in current prices and so not adjusted for inflation
Non-excludability
Situation existing where individual consumers cannot be excluded from consumption
Non-rivalry
Situation existing where consumption by one person does not affect the consumption of all others
Normal goods
Goods for which an increase in income leads to an increase in demand.
Notional demand
The desire for a product
Occupational immobility of labour
Difficulty of moving from one type of job to another
Output gap
The difference between an economy 's actual and potential ready GDP
Opportunity cost
The cost of next best alternative which is foregone when a choice is made
Overheating
The growth in aggregate demand outstripping the growth in aggregate supply, resulting in inflation
Pareto Efficiency
Where it is impossible to make anyone better off without making someone else worse-off.
Polluter pays principle
Any measure, such as a green tax, whereby the polluter pays explicitly for the pollution caused
Positive externality
This exists where the social benefit of an activity exceeds private benefit
Price
The amount of money that is paid for a given amount of a particular good or service
Price elastic
Where the percentage change in the quantity demand is sensitive to a change in price
Price Elasticity of Supply
The responsiveness of the quantity supplied to a change in the price of the product
Price Elasticity of Demand
The responsiveness of the quantity demanded to a change in the price of the product
Price inelastic
Where the percentage change in the quantity demanded insensitive to a change in price
Price level
The average of the prices of all the products produced in an economy
Price. System
A method of allocating resources by the free movement of prices
Private benefits
The benefits directly incurred by those taking a particular action
Privatisation
Transfer of assets from the public to the private sector
Producer surplus
The difference between the price a producer is willing to accept and what it is actually paid.
Production
The output of goods and services
Production Possibility Curve
This shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology
Productive potential
The maximum output that an economy is capable of producing
Productive efficiency
Where production takes place using the least amount of scarce resources.
Productivity
Output, or production , of a good or service per worker
Profit
The difference between the total revenue (sales revenue)of a producer and total cost
Progressive tax
A tax that takes a higher percentage from the income of the rich
Protectionism
The protection of domestic industries from foreign competition
Public goods
Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry
Quasi-public good
A good that has some but not all of the characteristics of a public good
Quota
A limit on imports
Rate of interest
The charge for borrowing money and the amount paid for lending money
Real disposable income
income after taxes on income have been deducted and state benefits have been added and the result has been adjusted to take into account changes in the price level
Real GDP
The country's output measured in constant prices and so adjusted for inflation
Real interest rate
The nominal interest rate minus the inflation rate
Recession
A fall in real GDP over a period of six months or more
Regressive tax
A tax that takes a greater percentage from the income of the poor
Retail prices index
Measure of inflation that is used for adjusting pensions and other benefits to take account of changes in inflation and frequently used in wage negotiations.
Retained profits
Profit kept by firms to finance investment.
Saving
Real disposable income minus spending
Savings ratio
Savings as a proportion of disposable income
Scarcity
A situation where there are insufficient resources to meet all wants
Services
Intangible products , i.e. products that cannot be seen or touched, such as banking, beauty therapy and insurance
Shoe leather costs
Costs in terms of the extra time and effort involved in reducing money holdings.
Shortage
An excess of demand over supply
Social benefits
The total benefits of a particular action
Social costs
The total costs of a particular action
Specialisation
The concentration by a worker or workers,firms, region or whole economy on a narrow range of goods and services
Structural unemployment
Unemployment caused by the decline of certain industries and occupations due to changes in demand and supply
Sub-market
A recognised or distinguishable part of a market. Also known as a market segment
Subsidy
A payment, usually from government, to encourage production or consumption of a product
Substitutes
Competing goods
Supply
The quantity of a product that producers are willing and able to provide at different market prices over a period of time
Supply curve
This shows the relationship between the quantity supplied and the price of a product
Supply schedule
The data used to draw up the supply curve of a product
Supply-side policies
policies designed to increase aggregate supply by improving the efficiency of labour and product markets
Surplus
An excess of supply over demand
Sustainable economic growth
economic growth that can continue over time and does not endanger future generations' ability to expand productive capacity
Target savers
people who save with a target figure in mind
Tariff
a tax on imports
Third party
those not directly involved in making a decision
Time series
information shown at successive points or intervals of time
Tradable permit
a permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used , can be sold to another polluter
trade-off
the calculation involved in deciding on whether to give up one good for another
trade deficit
the value of imports exceeding the value of exports
trade surplus
the value of exports exceeding the value of imports
Trend growth
the expecting increasing potential output over time. it is a measure of how fast the economy can grow without generating inflation
Unemployment
a situation where people are out of work but are willing and able to work
unit cost
average cost per unit of output
voluntary export restraint
a limit placed on imports from a country with the agreement of that country's government
Want
Anything you would like irrespective of whether you have the resources to purchase it.
Wealth
a stock of assets e.g property, shares, and money held in a savings account
weighted average
an average that takes into account the relative importance of the different items
World Trade Organisation
an international organisation that promotes free international trade and rules on international trade disputes