A
Abnormal
profit
The profit over and above normal profit
(i.e. the profit over and above the opportunity cost of the resources used in
production by the firm).
Absolute
advantage
Exists when a country is able to produce a
good more cheaply in absolute terms than any other country.
Ad
velorem tax
A tax that is levied as a percentage of the
price of the good (e.g 17.5% VAT)
Allocative
efficiency
Occurs when nobody can be made better off
by transferring resources from one industry to another without making somebody
worse off.
Average
cost
The average cost of production per unit. It
is calculated by dividing the total cost by the quantity produced. It is equal
to the total variable cost + the total fixed cost.
Average
fixed cost
The average fixed cost of production per
unit. It is calculated by dividing the total fixed cost by the quantity
produced. It falls as quantity produced rises.
Average
product
The quantity of output per unit of input.
Average
revenue
Is calculated by dividing total revenue by
the quantity produced. It is equal to the price paid for the good (so long as
the price is the same for all consumers).
Average
variable cost
The average variable cost of production per
unit. It is calculated by dividing the total variable cost by the quantity
produced.
B
Barriers
to entry
Factors which make it difficult or
impossible for a firm to enter a particular market and compete with existing
firms.
Barriers
to exit
These can occur if there are high sunk
costs that can not be recovered if the firm leaves the industry.
C
Capital
One of the factors of production. It
includes all buildings and machinery.
Cartels
A group of producers that attempt to
increase the price of their good by limiting output or agreeing upon a price to
sell their goods at.
Ceteris
paribus
All other things remaining equal.
Choices
Economic choices have to be made regarding
the use of scare economic resources
Collective
bargaining
Bargaining between a group of managers and
a union for the purpose of agreeing upon new conditions/ contracts etc. for the
staff.
Command
economy
An economic system where the government
controls all of the factors of production.
Comparative
advantage
This advantage is measured in terms of
other goods a nation could produce.
Complementary
goods
A good which is usually purchased with
another (e.g., bread and butter).
Composite
demand
A good that is demanded for two or more
distinct choices (e.g., oil is used for petrol and the production of
chemicals).
Consumer
surplus
The difference between what consumers are
prepared to pay for a good and what they actually have to pay for a good.
Cost
benefit analysis
It is a method of appraising an investment
project. It involves placing a financial value on aspects such as leisure and
pollution.
Cross
elasticity of demand
Measures the responsiveness of demand of
one good to a change in the price of another good.
D
Demand
The quantity purchased at any given price.
Demand
curve
Shows the effective demand at any given
price level.
Demerit
good
A good that is deemed to be socially
unacceptable and is over provided by the market mechanism (e.g., cigarettes)
Derived
demand
The demand for one good results (is
derived) from another good (e.g., the demand for steel will increase if the
demand for cars increases).
Diminishing
returns
If increasing quantities of a variable
input (e.g., labour) are combined with a fixed input (e.g., capital) eventually
the marginal product and then the average product will fall.
Diseconomies
of scale
A rise in the longrun average costs as
production rises.
Division
of labour
Dividing the production process into small
tasks to be done by different workers. It happens when specialization takes
place (e.g., on a production line).
E
Economic
efficiency
The use of resources that leads to the
highest possible value of output.
Economic
goods
These goods are scare and they have an
opportunity cost
Economic
problem
Resources are scarce, however wants are
infinite.
Economic
resources
These are the inputs necessary for
production to take place; land, labour, capital and enterprise (entrepreneurial
activity).
Economies
of scale
A fall in the longrun average costs as
production rises.
Effective
demand
A want for a good or service that is backed
up by the money to purchase it.
Elastic
A percentage change in a variable leads to
a larger percentage change in the quantity demanded or supplied (an elastic
band!).
One of the factors of production that is
carried out by an entrepreneur.
Entrepreneur
Is the person who thinks of a business
idea, raises the capital and then organises the other three factor of
production.
Equilibrium
A situation of rest where there is no
desire to move from the current position.
Equilibrium
price and quantity
The price and quantity at which there is no
tendency to change as demand is equal to supply.
European
Union
A customs union of European nations formed
in 1991 by the Maastricht Treaty. It aims to promote trade and movement of
resources without any barriers.
Excess
demand
Where demand is greater than supply.
Excess
supply
Where supply is greater than demand.
Excise
duties
Taxes on a specific product (e.g., on
beer).
External
economies of scale
Arise when there is an increase in the size
of the industry the firm operates in.
Externalities
Occur when the actions of a firm lead to a
variety of effects that they do not charge for. They can be positive
externalities (e.g., extra healthcare is better for the community as a whole)
or negative externalities (e.g., pollution).
F
Factors
of production
These are the inputs necessary for
production to take place; land, labour, capital and enterprise (entrepreneurial
activity).
Financial
economies of scale
Large firms are able to borrow money
cheaper than small ones, as they are more likely to be able to repay the loan
(less chance of bankruptcy).
Fixed
capital
Is the capital that will not be converted
into the final product (e.g., factories and machinery).
Fixed
costs
These are costs that do not vary with the
level of output (e.g., rent, advertising campaigns and utility standing
charges).
Free
goods
These are gods that are unlimited in supply
and have no opportunity cost (e.g., air).
I
Immobility
of labour
When workers are unable to move to a
different area to take new jobs. This might be due to personal reasons or not
being able to sell a property.
Imperfect
competition
A market structure where there are several
firms in the industry, each of which has some ability to control the price they
set for their product.
Incidence
of tax
Measures the burden of tax on the taxpayer.
Income
elasticity of demand
Shows how the quantity demanded will change
in response to fluctuations in income.
Indirect
tax
Is a tax levied on goods or services (e.g.,
VAT or excise duties).
Inelastic
A percentage change in a variable leads to
a smaller percentage change in the quantity demanded or supplied (an inelastic
band!).
Inferior
good
Demand for the good falls when incomes,
i.e., it has a negative income elasticity (e.g., margarine or no frills goods).
Interest
It is the cost of obtaining credit or the
return paid to owners of capital.
Internal
economies of scale
Are economies of scale that arise due to an
increase in the scale of production of a firm.
J
Joint
Supply
Two or more goods are produced together, so
a change in the quantity supplied of one good will lead to a change in the
supply of another good (e.g., an increase in the supply of beef will lead to an
increase in the supply of leather).
L
Labour
One of the factors of production, it is the
workforce.
Land
One of the factors of production, it
includes all raw materials as well as the land.
Longrun
The period of time where all the factors of
production can be varied. Only the level of technology can not be changed
M
Macroeconomics
Looks at the economy as a whole.
Marginal
cost
This is the cost of producing one extra
unit of output.
Marginal
revenue
This is the extra revenue gained from
selling an extra unit of output.
Marginal
utility
The satisfaction gained from consuming one
extra unit of a good or service.
Market
Any way that buyers and sellers are able to
communicate and exchange goods and services (e.g., shop, mail order and
telephone).
Market
economy
An economic system which aims to resolve
the basic economic problem via the workings of the market mechanism (prices are
set through the interactions of buyers and sellers).
Market
failure
It is a situation where resources are
allocated inefficiently.
Marketing
economies
As output grows advertising per pound of
sales will be reduced.
Merit
goods
A good that is deemed to be socially
acceptable and is under provided by the market mechanism (e.g., health and
education)
Microeconomics
Deals with the economic behaviour or
individuals or groups within the economy.
Mixed
economy
An economy where both the free market
mechanism and the government planning process allocate resources (e.g., UK )
Mobility
of labour
The ease to which labour is able to move
regions or countries.
Monopolies
and mergers commission
Investigates potential monopoly situations (e.g.,
British Gas’s hold over the gas market).
Monopolistic
competition
A market structure where a large number of
small firms produce a non-homogeneous product and there are no barriers to
entry or exit
Monopoly
A market structure where one firm supplies
all output in the industry without facing competition due to the high barriers
to entry that exist.
N
Nationalisation
Taking a firm into public ownership (e.g.,
the government buying Rolls Royce in 1971).
Needs
The minimum item that a person needs for
survival
Non-excludability
Once a good is provided, no person can be
excluded from using it (e.g., street lighting and defence).
Non-price
competition
Any other way of selling more of a good
apart from lowering the price (e.g., advertising and free gifts).
Non-rivalness
Consumption of a good by one person does
not reduce the amount available for consumption by another person (e.g., street
lighting and defence).
Normal
good
Demand for these goods increase when income
rises, i.e., it has a positive income elasticity.
Normal
profit
The profit that a firm could make by
putting its resources in their next best use.
O
Occupational
mobility
The ease by which a worker can change jobs.
Office
of Fair Training (OFT)
Investigates potential or actual abuse of
monopoly power (e.g., the OFT’s investigation of the proposed take-over of
Manchester United by Sky television).
The benefits foregone of the next best
alternative.
Optimum
output
The level of output where longrun average
costs are lowest (minimum efficient scale).
Optimum
resource allocation
Occurs when resources are efficiently used
in such a way as to maximise the welfare or utility of consumers.
P
Perfect
competition
A market structure where there are many
buyers and sellers, where there is freedom of entry and exit, where there is
perfect knowledge and where all firms produce a homogeneous product.
Perfectly
price elastic
Buyers are prepared to buy any amount at a
given price, but demand falls to zero if the price rises.
Perfectly
price inelastic
The quantity demanded does not change in
response to price changes.
Planned
economy
An economic system where the government
controls all of the factors of production.
Price
discrimination
Charging a different price for the same
good or service in different markets (e.g., rail traveller being charged higher
prices when travelling in the morning).
Price
elasticity of demand
Shows how the quantity demanded will change
in response to movement in price.
Price
elasticity of supply
Shows how the quantity supplied will change
in response to movement in price.
Price
taker
A firm is forced to accept the prevailing
market price for the sale of its product.
Private
goods
Goods that can only be consumed by one
person at a time. The principles of non-excludability and non-rivalry do not
apply
Privatisation
The sale of government owned (nationalised)
industries to the private sector (e.g., sale of British Telecom in 1984).
Production
possibility curve
This shows the maximum potential level of
output for goods within an economy.
Productive
efficiency
Is achieved when production is at its
lowest cost.
Profit
The difference between total revenue and
total cost.
Profit
maximisation
It occurs where MC=MR
Public
goods
A good where consumption by one person does
not reduce the amount available for consumption by another person and where
once provided, all individuals benefit or suffer whether they wish to or not
(e.g., street lighting and defence).
R
Rationing
The distribution of restricted supplies by
the government. It tries to effect a fair distribution of the limited supplies
of basic necessities (e.g., during wartime).
Rent
The payment received for land.
S
Sales
maximisation
A managerial theory of the firm that suggests
firms will aim to maximise their level of sales as this will often lead to
higher salaries for the workers. This can sometimes lead to losses for the firm
as the price is continually lowered to encourage sales.
Sales
revenue maximisation
A managerial theory where the level of
production occurs where MR=0.
Satisficing
profits
A managerial theory that suggests managers
will only make sufficient profits to satisfy the demands of the shareholders.
Scarcity
Refers to the fact that resources are
limited in their supply
Services
Things that are purchased by consumers that
do not have physical characteristics (e.g., doctors and housecleaners).
Shortrun
A period of time where at least one factor
of production must be fixed (it is usually capital).
Specialisation
Economic units (individuals, firms, nations
etc.) concentrate on producing certain goods and services.
Specific
tax
A tax levied on a volume of goods (e.g.,
£2.35 on a pack of cigarettes).
Subsidy
This is money given to firms which lowers the
price of a good.
Substitute
goods
A good that can replaced by another (e.g.,
a mars bar can be replaced by a snickers)
Supply
The quantity of goods that suppliers are
willing to sell at any given price over a specified period of time.
Supply
curve
Shows the level of supply at any given
price.
T
Technical
economies
Arise because larger factories can be
productively more efficient or purchase large expensive pieces of equipment.
Terms
of trade
The ratio of export prices to import
prices.
Total
revenue
The total amount received from the sales of
a product.
Total
utility
The total satisfaction gained from
consuming an amount of a good or service.
Trade
unions
Organizations of workers that seek to
improve the welfare of the workforce.
U
Unitary
price elasticity of demand
Elasticity equals one. A percentage change
in price leads to an exact and opposite change in quantity demanded.
Utility
The satisfaction gained from consuming a
good or service. It is often expressed as utils.
V
Variable
costs
Costs that vary directly with the level of
output (e.g., raw materials).
Very
longrun
The time period during which all factors of
production and level of technology can be varied.
W
Wages
Payment received for labour.
Wants
The desired purchases of goods and services
by consumers.
Working
capital
Stocks of raw materials, semi-manufactured
and finished goods.