Chapter 1 : The nature of the economic problem
Resources: factors used to produce goods and services
The economic problem: unlimited wants exceeding finite resources
Scarcity: a situation where there is not enough to satisfy everyone’s wants
Economic good: a product which requires resources to produce it and therefore has an
opportunity cost
Free good: a product which does not require any resources to make it and so does not
have an opportunity cost
Chapter 2 : Factors of production
Factors of production: the economic resources of land, labour, capital and enterprise
Land: gifts of nature available for production
Labour: human effort used in producing goods and services
Capital/ capital goods: human-made goods used in production
Consumer goods: goods and services purchased by households for their own
satisfaction
Enterprise: risk bearing and key decision making in a business
Occupationally mobile: capable of changing use
Geographically immobile: incapable of moving from one location to another location
Mobility of labour: the ability of labour to change where it works or in which occupation
Mobility of capital: the ability to change where capital is used or in which occupation
Mobility of enterprise: the ability to change where the enterprise is used or in which
occupation
Entrepreneur: a person who bears the risks and makes the key decisions in a business
Labour forces: people in work and those actively seeking work
Productivity: the output per factor of production in an hour
Labour productivity: output per worker hour
Output: goods and services produced by the factors of production
Investment: spending on capital goods
Gross investment: total spending on capital goods
Depreciation (capital consumption): the value of capital goods that have worn out or
become obsolete
Net investment: gross investment minus depreciation
Negative net investment: a reduction in the number of capital goods caused by some
obsolete and worn out capital goods not being replaced
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Chapter 3 : Opportunity cost
Opportunity cost: the next best alternative foregone while making a choice
Chapter 4 : Production possibility curve
Production possibility curve: a curve that shows the maximum output of two types of
products and combination of those products that can be produced with existing
resources and technology
Chapter 5 : Microeconomics and macroeconomics
Microeconomics: the study of the behaviour and decisions of households and firms,
and the performance of individual markets
Macroeconomics: the study of the whole economy
Market: an arrangement which brings buyers into contact with sellers
Economic agents: those who undertake economic activities and make economic
decisions
Private sector: firms owned by shareholders and individuals
Chapter 6 : The role of markets in allocating resources
Economic system: the institutions, organisations and mechanisms that influence
economic behaviour and determine how resources are allocated
Planned economic system: an economic system where the government makes the
crucial decisions, land and capital are state-owned and resources are allocated by
directives
Directives: state instructions given to state-owned enterprises
Mixed economic system: an economy in which both the private and public sectors
play an important role
Market economic system: an economic system in where the consumers determine
what is produced, resources are allocated by the price mechanism and land and capital
are privately owned
Price mechanism: the way the decisions made by households and firms interact to
decide the allocation of resources
Capital-intensive: the use of a high proportion of capital relative to labour
Labour-intensive: the use of a high proportion of labour relative to capital
Demand: the willingness and ability to buy a product
Supply: the willingness and ability to sell a product
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Market equilibrium: a situation where demand and supply are not equal at the current
price
Market disequilibrium: a situation where demand and supply are not equal at the
current price
Chapter 7 : Demand
Demand: the willingness and ability to buy a product
Market demand: total demand for a product
Aggregation: the addition of individual components to arrive at a total amount
Extension in demand: a rise in the quantity demanded caused by a fall in the price of
the product itself
Contraction in demand: a fall in the quantity demanded caused by a rise in the price of
the product itself
Changes in demand: shifts in the demand curve
Increase in demand: a rise in demand at any given price, causing the demand curve to
shift to the right
Decrease in demand: a fall in demand at any given price, causing the demand curve to
shift to the left
Normal goods: a product whose demand increases when income increases and
decreases when income falls
Inferior goods: a product whose demand decreases when income increases and
increases when income falls
Substitute: a product that can be used in place of another
Complement: a product that is used together with another product
Ageing population: an increase in the average age of the population lmao boomers
Birth Rate: the number of live births per thousand of the population in a year
Chapter 8 : Supply
Supply: the willingness and ability to sell a product
Market supply: total supply of a product
Extension in supply: a rise in the quantity supplied caused by a rise in the price of the
product itself
Contraction in supply: a fall in the quantity supplied caused by a fall in the price of the
product itself
Change in supply: changes in supply conditions causing shifts in the supply curve
Increase in supply: a rise in supply at any given price, causing the supply curve to shift
to the right
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Decrease in supply: a fall in supply at any given price, causing the supply curve to shift
to the left
Unit cost: the average cost of production. It is found by dividing total cost by output
Improvements in technology: advances in the quality of capital goods and methods of
production
Direct taxes: taxes on the income and wealth of individuals and firms
Indirect taxes: taxes on goods and services
Tax: a payment to the government
Subsidy: a payment by a government to encourage the production or consumption of a
product
Chapter 9 : Price determination
Equilibrium price: the price where the demand and supply are equal
Excess supply: the amount by which supply is greater than demand
Disequilibrium: a situation where demand and supply are not equal
Excess demand: the amount by which demand is greater than supply
Chapter 11 : Price elasticity of demand
Price elasticity of demand (PED) : a measure of the responsiveness of the quantity
demanded to a change in price
Elastic demand: when the quantity demanded changes by a greater percentage than
the change in price
Inelastic demand: when the quantity demanded changes by a smaller percentage than
the change in price
Perfectly elastic demand: when a change in price causes a complete change in the
quantity demanded
Perfectly inelastic demand: when a change in price has no effect on the quantity
demanded
Unit elasticity of demand: when a change in price causes an equal change in the
quantity demanded, leaving a total revenue unchanged
Chapter 12 : Price elasticity of supply
Price elasticity of supply (PES): a measure of the responsiveness of the quantity
supplied to a change in price
Elastic supply: when the quantity supplied changes by a greater percentage than the
change in price
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Inelastic supply: when the quantity supplied changes by a smaller percentage than the
change in price
Perfectly inelastic supply: when a change in price has no effect on the quantity
supplied
Perfectly elastic supply: when a change in price causes a complete change in
quantity supplied
Unit PES: when a change in price causes an equal percentage change in the quantity
supplied
Chapter 13 : Market economic system
Public sector: the part of the economy controlled by the government
State-owned enterprises (SOEs): organisations owned by the government which sell
products
Privatisation: the sale of public sector assets to the private sector
Price mechanism: the system by which the market forces of demand and supply
determine prices
Market failure: market forces resulting in an inefficient allocation of resources
Free rider: someone who consumes a good or service without paying for it
Allocative efficiency: when resources are allocated to produce the right products in
the right quantities
Productively efficient: when products are produced at the lowest possible cost and
making full use of resources
Dynamic efficiency: efficiency occurring over time as a result of investment and
innovation
Chapter 14: Market Failure
Third Parties: those not directly involved in producing or consuming a product.
Social benefits: the total benefits to a society of an economic activity.
Social costs: the total costs to a society of an economic activity.
Private benefits: benefits received by those directly consuming or producing a product.
Private costs: costs borne to those directly consuming or producing a product.
External costs: costs imposed on those who are not involved in the consumption and
production activities of others directly.
External benefits: benefits enjoyed by those who are not involved in the consumption
and production activities of others directly.
Social optimum output: the level of output where social cost equals social benefits
and society’s welfare is maximised.
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Merit goods: products which the government considers consumers do not fully
appreciate how beneficial they are and so which will be under-consumed if left to the
market forces. Such goods generate positive externalities.
Demerit goods: products which the government considers consumers do not fulare ly
appreciate how harmful they are and so which will be over consumed if left to market
forces. Such goods generate negative externalities.
Public good: a product which is non-rival and non-excludable and hence needs to be
financed by taxation.
Private good: a product which is both rival and excludable.
Monopoly: a single seller.
Price fixing: when two or more firms agree to sell a product at the same price.
Chapter 15: Mixed Economic System
Mixed economic system: an economy in which both the private and public sectors
play an important role.
Rationing: a limit on the amount that can be consumed.
Lottery: the drawing of tickets to decide who will get the products.
Nationalisation: moving the ownership and control of an industry from the private
sector to the government.
Public corporation: a business organisation owned by the government which is
designed to act in the public interest.
Cost benefit analysis (CBA): a method of assessing investment projects which takes
into account social costs and benefits.
Multinational companies(MNCs): companies which produce in more than one country.
Chapter 16: Money and Banking
Money: an item which is generally acceptable as a means of payment.
Commercial banks: banks which aim to make profit by providing a range of banking
services to households and firms.
Liquidity: being able to turn an asset into cash quickly without a loss
Central bank: a government owned bank which provides banking services to the
government and commercial banks and operates monetary policy.
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Chapter 17: Households
Disposable income: income after income tax has been deducted and state benefits
received.
Wealth: a stock of assets including money held in bank accounts, shares in companies,
government bonds, cars and property.
Rate of interest: a charge for borrowing money and a payment for lending money.
Average propensity to consume(APC): the proportion of household disposable
income which is spent.
Consumption: expenditure by households on consumer goods and income.
Savings ratio: the proportion of household disposable income that is saved.
Average propensity to save(APS): as saving ratio, it is the proportion of household
disposable income that is saved.
Mortgage: a loan to help buy a house.
Chapter 18: Workers
Earnings: the total pay received by a worker.
Wage rate: a payment which an employer contracts to pay a worker. It is the basic
wage a worker receives per unit of time or unit of output.
National minimum wage(NMW): a minimum rate of wage for an hour's work, fixed by
the government for the whole economy.
Wage differential: the difference in wages.
Primary sector: covers agriculture, fishing, forestry, mining and other industries which
extract natural resources.
Secondary sector: covers manufacturing and construction industries.
Tertiary sector: covers industries which provide services.
Elasticity of demand for labour: a measure of the responsiveness of demand for
labour to a change in wage rate.
Elasticity of supply of labour: a measure of the responsiveness of the supply of
labour to a change in the wage rate.
Specialisation: the concentration on particular products or tasks.
Division of labour: workers specialising in particular tasks.
Free market: prices for goods and services are self-regulated by buyers and sellers.
Chapter 19: Trade Unions
Trade unions: an association which represents the interests of a group of workers.
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Collective bargaining: representatives of workers negotiating with employers’
associations.
Real income: income adjusted for inflation.
Industrial action: when workers disrupt production to put pressure on employers to
agree to their demands.
Strike: a group of workers stopping work to put pressure on an employer to agree to
their demands.
Chapter 20: Firms
Industry: a group of firms producing the same products.
The quaternary sector: covers service industries that are knowledge based.
Internal growth: an increase in the size of a firm resulting from enlarging existing
plants or opening new ones.
External growth: an increase in the size of a firm resulting from a merger or taking over
another firm.
Horizontal merger: the merger of firms producing the same product and at the same
stage of production.
Vertical merger: the merger of one firm with another firm that either provides an outlet
for its products or supplies it with raw materials, components or the products it sells.
Conglomerate merger: a merger between firms producing different products.
Rationalisation: eliminating unnecessary equipment and plant to make a firm more
efficient.
Vertical merger backwards: a merger with a firm at an earlier stage of the supply
chain.
Vertical merger forwards: a merger with a firm at a later stage of the supply chain.
Internal economies of scale: lower long run average costs resulting from a firm
growing in size.
External economies of scale: lower long run average costs resulting from an industry
growing in size.
Internal diseconomies of scale: higher long run average costs arising from a firm
growing too large.
External diseconomies of scale: higher long run average costs arising from an
industry growing too large.
State-owned enterprise: a firm or business organisation created, owned and controlled
by a government to carry out commercial activities.
Chapter 21: Firms and Production
Corporation tax: a tax in profits of a company.
Investment: the purchase of productive assets by firms.
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Chapter 22: Firms, Costs, Revenue And Objectives
Total cost: the total amount that has to be spent on the factors of production used to
produce a product.
Average total cost: total cost divided by output.
Fixed cost: costs which do not change with output in the short run.
Average fixed cost: total fixed cost divided by output.
Variable costs: costs that change with output.
Average variable cost: total variable cost divided by output.
Long run: the time period when all factors of production can be changed and all costs
are variable.
Price: the amount of money that has to be given to obtain a product.
Total revenue: the total amount of money received from selling a product.
Average revenue: the total revenue divided by the quantity sold.
Profit satisficing: sacrificing some profit to achieve other goals.
Profit maximisation: making as much profit as possible.
Chapter 23: Market structure
Market structure: the conditions which exist in a market including the number of firms.
Competitive market: a market with a number of firms that compete with each other.
Normal profit: the minimum level of profit required to keep a firm in the industry in the
long run.
Supernormal profit: profit above that needed to keep a firm in the market in the long
run.
Monopoly: a market with a single supplier.
Barrier to entry: anything that makes it difficult for a firm to start producing the product.
Barrier to exit: anything that makes it difficult for a firm to stop making the product.
Scale of production: the size of production units and the methods of production
used.oo
Sunk costs: cost that cannot be recovered if the firms leaves the industry.
Oligopoly: Small number of large companies control the supply in a market.
Chapter 24: The role of government
Local government: a government organisation with the authority to administer a range
of policies within an area of the country.
Natural monopoly: an industry where a single firm can produce at a lower cost than
two or more firms because of the existence of significant economies of scale.
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Strategic industries: industries that are important for the economic development and
safety of the country.
National champions: industries that are, or have the potential to be, world leaders.
Trade bloc: a regional group of countries that remove trade restrictions between
themselves.
Free international trade: the exchange of goods and services between countries
without any restrictions.
Chapter 25: The Macroeconomic Aims Of Government
Aggregate Demand: Total Demand in the economy (expenditure + exports +
investment + government spending)
Aggregate Supply: Total Supply in the economy.
Economic growth: an increase in the output of an economy and in the long run an
increase in the economy’s productive potential.
Actual economic growth: an increase in the output of an economy.
Potential economic growth: an increase in an economy’s productive capacity.
Full employment: the lowest level of unemployment possible.
Economically active: being a member of the labour force.
Unemployment rate: % of labour force who are willing and able to work but are without
jobs.
Price stability: the price in the economy nit changing significantly over time.
Inflation rate: % rise in the price level of goods and services over time.
Balance of payments: the country’s economic transactions with other countries.
Chapter 26: Fiscal policy
Balanced Budget: Government income = government expenditure.
Budget: Government income & government expenditure for a 1 year period.
Budget deficit: Government expenditure is greater than its income for that year.
Budget surplus: Government income is greater than its expenditure for that year.
National debt: the total amount the government has borrowed over time.
Multiplier effect: the final impact on aggregate demand being greater than the initial
change.
Circular flow of income: Model showing the flow of money, factors of production &
goods/services in the economy.
Direct taxes: Taxation on income and wealth (income tax, corporation tax, inheritance
tax, capital gains tax).
Fiscal policy: Use of taxation and government spending to influence the economy.
Indirect taxes: Taxation on spending (VAT, excise duties, import taxes)
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Proportional taxes: one which takes the same percentage of the income or wealth of
all taxpayers.
Progressive taxes: Usually implemented through direct taxes & take a higher % of
income as tax from higher earners.
Regressive taxes: Usually associated with indirect taxes - taking a higher % of income
from lower earners.
Taxation: form of income for the government through direct or indirect charges (taxes).
Automatic stabilisers: forms of government expenditure and taxation that reduces
fluctuations in economic activities without any change in government policy.
Inflation: the rise in the price level of goods and services.
Flat taxes: taxes with a single rate.
Informal economy: that part of the economy that is not regulated, protected or taxed by
the government.
Expansionary fiscal policy: rise is government expenditure or cuts in taxation to
increase aggregate demand.
Contractionary fiscal policy: cuts in government expenditure or rise in taxation to
decrease aggregate demand.
Chapter 27: Monetary policy
Monetary policy: decisions on the money supply, the rate of interest and the exchange
rate taken to influence aggregate demand
Foreign exchange rate: the price of one currency terms of another currency or
currencies
Expansionary monetary policy: increases in the money supply and/ or the rate of
interest designed to increase aggregate demand
Contractionary monetary policy: cuts in the money supply or growth of the money
supply and/or rises in the rate of interest designed to reduce aggregate demand
Chapter 28: Supply-side policies
Supply-side policy: measures designed to increase aggregate supply.
Deregulation: the removal of rules and regulations.
Chapter 29: Economic Growth
GDP: The total value of the goods and services produced in an economy over a given
time period.
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Circular flow of income: Model showing the flow of money, factors of production &
goods/services in the economy.
Value added: difference between the sales revenue received and cost of raw materials
used.
Transfer payments: transfer of income from one group to another not in return for
providing a good or service.
Nominal GDP: GDP valued using the current prices (no inflation consideration).
Real GDP: GDP that has had the effect of inflation removed.
Subsistence agriculture: the output of agricultural goods for farmers’ personal use.
Recession: a reduction is real GDP over a period of 6 months+.
International Monetary Fund (IMF): an international organisation which promotes
international cooperation and helps countries with balance of payments problems
Real GDP per capita: average Real GDP per person in the country. This allows any
changes in the population size to be reflected.
Chapter 30: Employment And Unemployment
Employment: being involved in a productive activity for which payment is received.
Unemployment: someone who is able and willing to work but cannot find a job
Flexible labour force: a labour force that adjusts quickly and smoothly to changes in
market conditions
Economically active: labour both- employed and unemployed.
Economically inactive: those not in the labour force.
Labour market participation rate: the proportion of the working-age population who
are in the labour force
Claimant count: a measure of unemployment which counts as unemployed those in
receipt of unemployment benefits.
Labour force survey (ILO) measure: a measure of unemployment which counts as
unemployed people who identify as such in a survey.
Frictional unemployment: temporary unemployment due to workers who are between
jobs
Structural unemployment: unemployment caused by long-term changes in the pattern
of demand and methods of production.
Cyclical unemployment: unemployment caused by lack of aggregate demand
Search unemployment: lost jobs looking for jobs they are willing to accept.
Casual unemployment: workers regularly being between periods of employment.
Seasonal unemployment: unemployment caused by a fall in demand at particular
times of the year
Regional unemployment: caused by a decline in job opportunities in a particular area
of the country.
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Technological unemployment: capital replacing labour.
Chapter 31: Inflation And Deflation
Inflation: an increase in the price of a basket of goods and services that is
representative of the economy as a whole.
Deflation: sustained fall in the prices of goods and services.
Disinflation: a fall in the rate of inflation.
Cost push inflation: an increase in prices caused by an increase in costs.
Demand pull inflation: prices rise when aggregate demand in an economy outpaces
aggregate supply.
Consumer prices index (CPI): a measure of the weighted average of the prices of a
representative basket of goods and services.
Wage-price spiral: wage rises leading to higher prices which, in turn, lead to further
wage claims and price rises.
Monetary inflation: rises in the price level caused by an excessive growth of the
money supply.
Monetarists: a group of economists who think that inflation is caused by money supply
growing more rapidly than output
Hyperinflation: a very rapid and large rise in the price level
Index-inking: changing payments in line with changes in the inflation rate.
Menu costs: costs involved in having to change prices as a result of inflation.
Shoe-leather costs: costs involved in moving money around to gain high interest rates.
Chapter 32: Living standards
Human Developement Index (HDI): a measure of living standards which takes into
account income, education and life expectancy
Genuine Progress Indicator (GPI): a measure of living standards which takes into
account a variety of indicators including income, leisure time, distribution of income and
environmental standards
Purchasing power parity: an exchange rate based on the ratio of the price of a basket
of products in different countries
Gender Inequality Index (GII): a measure of gender inequalities in terms of
reproductive health, empowerment and labour market participating
Happy Life Expectancy Index (HLEI): an index which multiples life expectancy by a
happiness index
Gross National Happiness: a measure of living standards which includes a wide
number of indicators including income, psychological well being, education and
ecological diversity.
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Chapter 33: Poverty
Absolute poverty: a condition where people’s income is too low to enable them to
meet their basic needs
Relative poverty: a condition where people are poor in comparison to others in the
country. Their income is too low to enable them to enjoy the average standard of living
in their country.
Multidimensional Poverty Index (MPI): a measure of poverty based on deprivations in
education, health and standard of living
Chapter 34: Population
Emigration: the act of leaving a country to live in another country
Birth rate: the number of births in a year per 1000 population in a year
Death rate: the number of deaths in a year per 1000 population in a year
Net immigration: more people coming to live in the country than people leaving the
country to live elsewhere
Infant mortality rate: the number of deaths per 1000 live births in a year
Net migration: the difference between immigration and emigration
Population pyramid: a diagram showing the age and gender structure of a country’s
population
Dependency ratio: the proportion of the population that has to be supported by the
labour force
Optimum population: the size of population which maximises the country’s output per
head
Chapter 35: Differences in economic development between countries
Economic development: an improvement in economic welfare
The World Bank: an international organisation which provides long term loans on
favourable terms, to promote development
The IMF: an international organisation that promotes international trade and global
financial security.
Chapter 36: International specialisation
Tariff: a tax on imports
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Chapter 37: Free trade and protection
Globalisation: the process by which the world is becoming increasingly interconnected through
trade and other links
Quota: a limit placed on imports or exports
Emargo: a ban on the imports or exports
Exchange control: a limit on the amount of foreign currency that can be obtained
Voluntary export restraints (VERs): agreements with other governments to restrict their
exports to the country
Infant industries: new industries with relatively low output and high cost
Declining industries: old industries which are going out of business
Strategic industries: industries that are considered important for the survival or development of
the country
Dumping: selling products in a foreign market at a price below the cost of production
Chapter 38: Foreign exchange rates
Foreign exchange rate: the price of one currency in terms of another currency or currencies
Fixed exchange rate: an exchange rate whose value is set at a particular level in terms on
another currency or currencies
Devaluation: a fall in the value of a fixed exchange rate
Revaluation: a rise in the value of a fixed exchange rate
Floating exchange rate: an exchange rate which can change frequently as it is determined by
market forces
Appreciation: a rise in the value of a floating exchange rate
Depreciation: a fall in the value of a floating exchange rate
Foreign direct investment (FDI): setting up production units or buying existing production units
in another country
Hot money flows: the movement of money around the world to take advantage of differences
in interest rates and exchange rates
Chapter 39: Current account balance of payments
Trade in goods: the value of exported goods and the value of imported goods
Trade in goods deficit: expenditure on imported goods exceeding revenue from exported
goods
Trade in goods surplus: revenue from exported goods exceeding expenditure on imports
Trade in services: the value of exported services and the value of imported services
Trade in service surplus: revenue from exported services exceeding expenditure on imported
services
Primary income: income earned by people working in different countries and investment
income which comes into and goes out of the country
Secondary income: transfers between residents and non-residents of money, goods or
services, not in return for anything else
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Current account balance: a record of the income received and expenditure made by a country
in its dealings with other countries
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