Hurtwood House School

AD VALOREM TAX

A percentage tax like VAT – causes the supply curve to tilt, i.e. steepen.

ALLOCATIVE EFFICIENCY

The ‘correct’ amount of goods are produced by the market, at P = MC.

ASYMETRIC Information

When either the buyer or seller has more information than the other party.

AVERAGE COST (AC)

The cost per unit produced, e.g. cost of each car, to produce.

BALANCE OF PAYMENTS

The total monetary inflows and outflows to and from a country in one year.

BASIC ECONOMIC PROBLEM

What goods to make, how to produce them, for whom are they made.

BLACK MARKET

The unofficial, unmeasured economy, e.g. undeclared earnings.

BUFFER STOCKS

Stockpiles built up in years of surplus and used to overcome shortages in other years, as seen in agriculture markets.

BUTTER MOUNTAINS 

Surplus production created by the use of guaranteed minimum prices, e.g. in the EU, Common Agricultural Policy.

CAPITAL GOODS

Are used to produce other goods, e.g. machinery.

CAPITAL INTENSIVE

Production methods using much mechanization and reduced amounts of labour.

CARBON TAXES

Higher taxation on economic activities causing CO₂ (carbon-dioxide) emissions, contributing to climate change and global-warming.

CENTRALISED DECISIONS

Economic choices made by the Government (rather than the price mechanism) in terms of resource allocation.

CHOICES

Have to be made because wants may be unlimited but the means of satisfying them (resources) are finite.

CLIMATE CHANGE

More extremes of weather variations possibly contributed to through human activity.

COBWEB THEORY

Last year’s price determines this year’s supply of agricultural goods, therefore time-lags cause price volatility in these markets.

COEFFICIENT

A numerical value calculated from elasticity formulas.

COLLECTIVELY CONSUMED

Services benefiting society as a whole and paid for out of general taxation rather than through the price mechanism, e.g. public goods like defence.

COMMAND ECONOMY

(or Planned Economy).  Where central authorities (Governments) make the main economic decisions rather than the price mechanism.

COMMODITIES

Primary products such as foods, e.g. wheat and minerals, e.g. oil or metals.

COMPARATIVE ADVANTAGE

Is a relative advantage one country may have in the production of one good (even though it may have an Absolute Advantage in both) due to lower Opportunity Costs than in another country.

COMPETITIVE SUPPLY

If the increased output of one good causes the automatic reduction in output of another, e.g. 2 farm products.

COMPLEMENTS

Two products that are used together.  (So higher Demand for one raises the Demand for the other).

CONDITIONS OF DEMAND

Determinants of Demand other than price, e.g. Income, Advertising etc.

CONSPICUOUS CONSUMPTION

Goods bought in order to display wealth, i.e. showing off.

CONSUMER GOODS

Are used up quickly by purchasers and are made by capital goods, e.g. foodstuffs and household products.

CONSUMER SURPLUS

Consumers would be willing to pay more than they actually are paying, therefore they receive a surplus of benefit over and above the amount paid for.

CONTRACTION OF DEMAND

A smaller quantity demanded due to a price rise, i.e. a movement along the existing Demand curve.

COSTS OF PRODUCTION

Determine the height of the Supply curve, e.g. raw materials, labour costs.

CROSS ELASTICITY OF DEMAND

A numerical measurement of the responsiveness of demand for one good to the change in price of another, e.g. Complements and Substitutes.

DEMAND

The amount people are willing to purchase at a particular price in a given time period.

DEMERIT GOODS

Social costs exceed private costs due to negative externalities, e.g. Cigarettes.

DERIVED DEMAND

The demand for one factor depends on or is determined by the demand for another, e.g. the demand for labour.

DIVISION OF LABOUR

When the production of a good is split up into numerous small parts in order to raise productivity (output per man) through Specialisation.

ECONOMIC AGENTS

Decision-making in the economy, i.e. consumers, firms and Governments.

ECONOMIC GROWTH

The expansion of the output potential of the economy (as shown by a shift in the Production Possibility Curve).

ECONOMIES OF SCALE

Reductions in the average cost of production (AC) in the long term due to bulk buying or raw materials, etc.

EFFECTIVE DEMAND

Purchasing power, i.e. the desire for good plus the ability to pay for it.

ELASTICITY

Measures the responsiveness of Demand or Supply to changes in a major determinant, e.g. Price.

ELASTIC

Demand or Supply is responsive to a change in price, etc. (i.e. % Δ QD/S > % Δ p).

ENGEL CURVES

Show the relationship between income and quantity demanded, e.g. for luxury or inferior goods.

ENTRY OF FIRMS

New producers in the industry causing supply in the market to rise.

EQUILIBRIUM

A position of balance or stability, e.g. where Demand equals Supply is the equilibrium (or market) price.

EXCEPTIONAL DEMAND

Where price and quantity show a positive relationship, e.g. for shares or housing.

EXCHANGE RATES

The price of one currency expressed in terms of another, e.g. £1.00 = $1.50.

EXIT OF FIRMS

Some producers leave the industry resulting in a fall in total supply.

EXTENSION OF DEMAND

An increase in quantity demanded caused by a price drop, therefore causing a movement along the existing Demand curve.

EXTERNAL DISECONOMY OF SCALE

Higher average cost (AC) due to factors outside of the individual firm, e.g. in the industry it operates within.

EXTERNAL ECONOMY OF SCALE

Lower AC due to factors outside the individual firm.

EXTERNALITIES

Spillover effects on third parties not directly involved in an economic activity, e.g. SC > PC = SB > PB.

FIXED FACTORS OF PRODUCTION

Can only change in the long-run, e.g. a new factory.

FREE GOODS

Have no Opportunity cost (and no price), e.g. fresh air.

FREE MARKET ECONOMY

Has no Government (public) sector therefore economic decisions are made entirely through the price mechanism.

FREE RIDERS

People who would receive the benefit of a service without paying for it.

FULL EMPLOYMENT

All factors of production are in use thereby maximizing the potential output of the economy.

GEOGRAPHICAL MOBILITY OF LABOUR

The ease or difficulty labour experiences if relocating to a different area of the country.

GIFFEN GOODS

A price rise may lead to more being purchased in exceptional cases, e.g. basic foods in low income countries.

GOVERNMENT FAILURE

When government intervention in a market causes a welfare loss rather than improvement.

GREEN BELT

Land protected from development in areas surrounding large cities.

GREENHOUSE GASES

Such as Carbon Dioxide and Methane that may contribute to climate change.

INCIDENCE (of taxes)

Who bears the impact of the tax, e.g. consumers and producers.

INCOME ELASTICITY of DEMAND

Measures the responsiveness of Quantity Demanded to a change in income.

INELASTIC

Demand or Supply is not very responsive to price changes (i.e. % Δ QD/S < % Δ p).

INFERIOR GOODS

The demand has an inverse relationship to income changes, e.g. public transport.

INFORMATION PROBLEMS

Include incomplete knowledge of a products’ overall costs or benefits.

INTERNALISING the EXTERNALITY

Increasing Private Costs up to the level of Social Costs in order to ‘make the polluter pay’.

INVERSE RELATIONSHIP

Where two factors move in opposite directions.

JOINT SUPPLY

Where increased production of one good automatically raises output of another.

KYOTO PROTOCOL (1997)

An international agreement to reduce pollution (not signed by the USA).

LABOUR INTENSIVE

A method of production relying on large amounts of labour and limited quantities of capital, e.g. in low-wage countries.

LABOUR MOBILITY

How easy or difficult it may be for workers to change employment.

LANDFILL TAXES

Are imposed on the burying of waste to encourage recycling schemes.

LUXURIES

Tend to have income-elastic demand, i.e. the demand increases a lot when income increases.

MARKET FAILURE

A market mechanism of demand, supply and price does not always allocate resources efficiently.

MAXIMUM PRICE

The highest price allowed (imposed below the equilibrium price) by the Government – results in shortages as Demand exceeds Supply.

MERIT GOODS

The Social Benefit exceeds the Private Benefit due to positive externalities, e.g. health and education.

MINIMUM PRICE

The lowest price allowed by the Government (set above the equilibrium price) – results in surpluses as Supply exceeds Demand.

MIXED ECONOMY

Is made up of the public sector (the Government) and the private sector (firms and consumers).

MONEY VOTES

Buying a good is a ‘vote’ for its continued production, therefore consumers can influence resource allocation decisions by firms.  (Consumer Sovereignty).

MONOPOLIES

A dominant firm in an industry, and a Pure Monopoly would be a single firm, i.e. 100% market share.

MORTGAGE

A long-term loan in order to help finance the purchase of a property.

NECESSITIES

Basic essentials like foodstuffs which have inelastic demand regarding price and income.

NEGATIVE EXTERNALITIES

Exist when Social Costs exceed Private Costs, i.e. negative spillover effects on the third party.

NON-RENEWABLE RESOURCES

Finite natural resources such as fossil fuels, e.g. coal or oil.

NORMAL GOODS

Exhibit typical behaviour, i.e. demand shows a positive relationship with income and an inverse relationship with price.

NORMATIVE ECONOMICS

Is based on subjective opinion, i.e. value judgements of what ‘should be’ or ‘ought to be’ the situation.

OBJECTIVE STATEMENTS

Factual statements that can be proved or disproved, i.e. Positive Statements.

OCCUPATIONAL MOBILITY OF LABOUR

The ease or difficulty of workers changing their type of employment, e.g. into a different industry.

OPPORTUNITY COST

The cost of giving up the next best alternative when one choice is made.

OVERPROVISION

When the free market equilibrium exceeds the amount that is the social optimum.

PERFECTLY INELASTIC

No change in Demand or Supply when price changes.  (Perfectly Elastic implies infinite Demand and Supply).

PLANNED ECONOMY

A Command economy where central decisions answer the basic economic problem.

POSITIVE ECONOMICS

A positive statement is an objective factual statement that can be proved.

PRICE MECHANISM

The interaction of Demand and Supply to determine the price (as a means of resource allocation).

PRICE ELASTICITY OF DEMAND

A numerical measurement of the responsiveness of Demand to a change in price.

PRICE ELASTICITY OF SUPPLY

The responsive of the quantity supplied to a change in price.

PRIVATE BENEFIT

The individual gains from the consumption of a good or service.

PRIVATE COST

The expense incurred by an individual due to the consumption of a good or service.

PRIVATE SECTOR

Is made up of firms and consumers, i.e. the non-Government sector.

PRODUCER SOVEREIGNTY

How firms are very influential in resource allocation using advertising, design, etc.

PRODUCER SURPLUS

A firm may have been willing to supply at a lower price than it is actually receiving, therefore it gains surplus revenue.

PRODUCTIVE EFFICIENCY

To reduce the Average Cost of production (AC) to a minimum.

PRODUCTIVITY

Is measured in terms of output per man (per hour or day).

PRODUCTION POSSIBILITY FRONTIER

Shows the various combinations of two goods that can be produced by an economy fully utilizing its resources.

PROFIT

The reward to enterprise.  A surplus of revenue over costs.

PROGRESSIVE TAXES

Take a larger percentage of income in tax as income rises, e.g. income tax.

PROPERTY RIGHTS

Establish some form of ‘ownership rights’ to ensure the proper use of the environment.

PUBLIC GOODS

Those that are collectively consumed and paid for through general taxation.

PUBLIC SECTOR

The Government sector of the economy.

PUBLIC TRANSPORT

Normally refers to the use of buses and trains instead of cars (private transport).

QUOTAS

A physical limit on the quantity allowed, e.g. of imports.

RATIONING

Goods may need to be shared by the use of vouchers or coupons when a product is in short supply, e.g. following a maximum price.

REGULATION

Laws attempting to overcome undesirable market outcomes, e.g. make compulsory or banned.

RENT

The factor reward or return, on land.

RENEWABLE RESOURCES

Such as solar, wind or tidal power that do not deplete resources available to future generations.

RESOURCES

The factors of production required to produce a good or service, i.e. land, labour, capital and the Entrepreneur.

ROAD PRICING

Attempts to cut traffic congestion and pollution by charging motorists, e.g. motorway tolls and city centre charges.

SCARCITY

Resources are finite so there is a limitation on the quantity of goods and services that can be produced.

SEASONAL DEMAND

Variations of expenditure levels throughout the year on items like foodstuffs, clothing, holidays, etc.

SHIFTS (of Demand and Supply)

A movement of the whole curve caused by a change in any determinant other than price.

SHORTAGES

A situation where Demand exceeds Supply, possibly due to a maximum price being imposed.

SOCIAL BENEFIT

Where the gains to society as a whole exceed the Private Benefit due to Positive Externalities

SOCIAL COST

Due to Negative Externalities the costs to society are greater than to the individual from the usage of a good or service.

SOCIAL OPTIMUM

The best outcome for a society as a whole in terms of the efficient use of resources, e.g. Social Costs and Social Benefits included.

SPECIALISATION

Is a feature of the Division of Labour causing increased productivity in a firm or a country.

SPECIFIC TAX

A flat rate sum of money, e.g. £5.00 / unit causing a parallel shift of the Supply curve.

SPILLOVER EFFECTS

How ‘third-parties’ not directly involved in an economic activity may be affected by its consequences.

STRUCTURAL UNEMPLOYMENT

Job loses due to changes in the structure of the economy, e.g. deindustrialisation.

SUBSIDIES

Government financial assistance to firms designed to reduce costs, encourage output and lower the final price.

SUBSTITUTES

Rival goods with Competitive Demand, e.g. higher Demand for one will reduce the Demand for the other.

SURPLUS

An excess of Supply over Demand. Often caused by a minimum price.

SYMMETRIC INFORMATION

When both parties in a transaction have equal levels of knowledge and information.

TAXES (on producers)

Are designed to discourage consumption following a price rise caused by additional outlay (to the Government).

TOTAL REVENUE

Total income to a producer (calculated by price x quantity) represented by the area below the Demand Curve.

TRADEABLE PERMITS

Allowances on production designed to raise efficiency by forcing large producers to purchase extra permits from under producers.

TRADE DEFICIT

Monetary outflows from international trade in goods exceed monetary inflows – (the opposite for a Trade Surplus).

TRANSITIONAL ECONOMIES

Previous Command economies making the adjustments to market-orientated economies, e.g. Russia.

UNEMPLOYMENT

Resources (e.g. labour) not being fully utilized therefore an economy is producing at less than full capacity.

UNDER PROVISION

When the free market quantity is less than the socially optimum level.

UNITARY

An elasticity coefficient of 1, i.e. the % Δ QD = % Δ p.

Also seen where Total Revenue is constant following a price change.

VALUE JUDGEMENTS

Subjective, opinion based, normative statements.

VARIABLE FACTORS

e.g. wages, raw materials.  Can be easily changed.  (i.e. in the short-run) to enable a change in production levels.

WAGES

The reward to the factor of production labour determined by Demand and Supply in the labour market.

WANTS

The desire for goods and services (which may be infinite).

WELFARE LOSS

When the extra costs to society exceed the extra benefits gained from an activity, i.e. net social cost.

Y ELASTICITY OF DEMAND

The responsiveness of Demand to a change in income.

Y DISTRIBUTION

How the national income is divided between the factors of production, e.g. the richest and poorest in society.

AGGREGATE DEMAND

Total expenditure in the economy,

i.e. A D = C + G + I + (X - M).

AGGREGATE SUPPLY

Total output of goods and services in the economy.

BASE YEAR

The year chosen to compare or begin a series of calculations / data.

BALANCE OF PAYMENTS

Total monetary inflows and outflows to and from a country in a given period.

BASKET OF GOODS

The most important categories of household expenditure, e.g. food, housing.

BLACK ECONOMY

The unmeasured / unofficial economic activity causing understated GDP figures.

BOOM

A period of rapid economic growth, resulting in higher living standards but perhaps inflation.

BOTTLENECKS

Supply restrictions, reducing economic growth

BUSINESS CYCLE

Fluctuations in the level of economic activity, e.g. booms and recessions.

BUDGET

Spending and taxation decisions taken by the government.

BUDGET DEFICIT

When government expenditure exceeds taxation revenues, (G > T).

BUDGET SURPLUS

When taxation revenue exceeds government expenditure, (G < T).

CIRCULAR FLOW OF INCOME

A model of the economy showing the flow of goods, services and factors of production plus their payments.

CLAIMANT COUNT

Measures unemployment levels using the numbers claiming Job Seekers Allowance.

CLASSICAL UNEMPLOYMENT

Lower demand for labour due to large wage increases.

CONSTANT PRICES

Data adjusted for the effects of inflation.

CONSUMER PRICE INDEX (CPI)

Main measure of UK inflation rate.

CORPORATION TAX

Taxation levied on company profits

COST OF LIVING

The rate of inflation, e.g. CPI.

COST-PUSH INFLATION

Higher general level of prices due to increased production costs, e.g. wages and raw materials.

CURRENT ACCOUNT

Part of the balance of payments, measuring trade in goods, services, investment income and transfers.

CURRENT PRICES

Prices existing at the time of measurement, i.e. Nominal prices.

CYCLICAL UNEMPLOYMENT

Job losses caused by a downturn in the business cycle, i.e. lower demand for workers.

DECILE

Each 10% of a population of data.

DEFLATION

Negative inflation, i.e. falling general level of prices.

DEFLATIONARY POLICY

A reduction in total expenditure brought about by, e.g. higher taxes or interest rates.

DEMAND – PULL INFLATION

Rising general level of prices caused by rising expenditure (AD), e.g. Consumer Boom.

DEMOGRAPHIC CHANGES

Changing population level or structure, e.g. ageing population.

DEREGULATION

Less bureaucracy and rules in order to raise competition, e.g. easier entry for new firms.

DISINFLATION

Lower rates of inflation, e.g. CPI drops from 3% to 2.5%.

DISPOSABLE INCOME

Income available for expenditure on goods and services after direct taxation.

DURABLE GOODS

Long-lasting consumer goods like furniture and electricals.

ECONOMIC GROWTH

Higher real GDP (living standards) and expansion of productive potential of the economy.

EMPLOYMENT RATE

Proportion of the Working Population in jobs.

EQUILIBRIUM LEVEL of OUTPUT

Where AD = AS, a stable level of national income is achieved.

EQUILIBRIUM in the CURRENT ACCOUNT

Monetary inflows equal monetary outflows from trade in goods, services, transfers and investment income.

EUROZONE

Countries using the Euro currency.

EXCHANGE RATE

Price / value of one currency expressed in terms of another, e.g. £1 = $2

EXPORTS

Domestic goods and services purchased by overseas buyers.

EXTERNAL SHOCKS

Events outside of domestic economy causing major effects, e.g. oil prices, terrorism, credit crunch.

FAMILY EXPENDITURE SURVEY

Provides information on household spending patterns for inflation calculations.

FISCAL DEFICIT

i.e. Budget Deficit.  Government expenditure greater than tax receipts.

FISCAL POLICY

Use of taxation and government expenditure to regulate the workings of the economy.

FISCAL SURPLUS

i.e. Budget Surplus.  Government revenues exceeding expenditures.

FDI

Foreign Direct Investment = capital flows by multi-national corporations establishing facilities.

FRICTIONAL UNEMPLOYMENT

Temporary unemployment when a person is between jobs.

FULL EMPLOYMENT

All resources are fully utilised so economy reaches full capacity output, i.e. on the Production Possibility Frontier.

GOVERNMENT EXPENDITURE

Spending by central and local government, e.g. on merit goods or general macro-economic management.

GDP

Gross Domestic Product = the value of all goods and services produced in the economy.

HOT-MONEY FLOWS

Short-term, volatile; speculative monetary deposits from overseas, affected by interest rates changes.

HUMAN CAPITAL

The quantity and quality of the workforce affected by investment in education.

HDI

A measure of Economic Development or quality of life comprising data on Health, Education and GDP / capita.

HYPERINFLATIION

Extremely high rates of inflation e.g. 1,000% causing a loss of confidence in the currency and possibly leading to a replacement currency.

ILO

International Labour Organisation measurement of unemployment based on the numbers available for work.

IMPORTS

Monetary outflows from a country due to the purchase of goods and services from overseas.

INCOME INEQUALITY

The gap between rich and poor due to GDP being unequally distributed.

INDEX NUMBERS

Original values being given a Base Year measure of 100, allowing easier statistical comparisons and calculations, e.g. CPI.

INFLATION

A persistent rise in the general level of prices.

INFLATION TARGETING

Attempts to keep inflation within limits, e.g. MPC targets CPI at 2%, ± 1.

INJECTIONS

Monetary additions to Circular Flow of national income, i.e. (G + I + X).

INTEREST RATE

The cost of borrowing money or returns on savings.

INVESTMENT

Additions to a country’s stock of capital thus raising its productive potential.

JOB-SEEKERS’ ALLOWANCE

Benefit given to the unemployed workforce (if claimed).

LONG-TERM UNEMPLOYMENT

Those out of work for a continuous period of 12 months or more.

MONETARY POLICY

Use of Interest rates and credit availability in order to influence the macro-economy.

MONETARY POLICY COMMITTEE

Established in 1997 to target inflation rate at 2% using interest rates (independent of the Government).

MNC’s

Multi National Corporations produce goods and services outside of their country of origin.

MISMATCH of SKILLS

Occurs when the unemployed lack the necessary skills to fill the available vacancies.

MULTIPLIER

How and increase in expenditure causes a larger increase in national income, e.g. extra income ÷ extra injection expenditure.

NATIONAL INCOME

Total output / income / expenditure generated by individuals, firms, governments and trade.

NOMINAL VALUES

Measurements, e.g. Income, not adjusted for the effects of inflation.

NON-DURABLE GOODS

Are quickly consumed, e.g. foodstuffs.

OPEC

Organisation of Petroleum Exporting Countries formed a cartel to restrict output, raising prices and profits.

OUTPUT GAP

Where the actual output of the economy differs from the long-term growth potential.

PER CAPITA / HEAD

Measurements expressed per person in the whole population, e.g. GDP per capita.

PHILLIPS CURVE

Shows the often seen inverse relationship or trade-off between Unemployment and Inflation.

POLICY CONFLICTS

A trade-off between an improvement in one macro-economic indicator at the expense of another one deteriorating as a result of a change in economic policy.

PRIVATISATION

Selling public-sector (government) industries into the private-sector through share sales, creating PLC’s and increased government revenue.

PRODUCTIVITY

Output per worker per time period, e.g. hour.

PRODUCTIVITY GAP

Productivity rates in one country may lag behind those in others thus impacting on international competitiveness.

PROTECTIONISM

Restrictions on international trade often used to protect the domestic economy, e.g. tariffs and quotas.

QUOTAS

Quantity restrictions on imports from overseas.

RATE of INTEREST

Cost of borrowing money for households and firms and the reward for savings.

REAL INCOME

Incomes adjusted for the effects of inflation, e.g. purchasing power.

REAL VALUES

Nominal statistics adjusted for the effects of inflation.

RECESSION

2 consecutive quarters, i.e. 6 months of negative economic growth in a country.

REFLATION

An expansionary boost to the economy causing higher expenditure (A D) due to fiscal and monetary policies.

SAVINGS RATIO

The proportion of disposable income that is not spent, e.g. savings ÷ income.

SHARE CAPACITY

Unutilised production capability in a firm or economy.

STANDARD OF LIVING

The GDP / capita data indicative of rich and poor nations.

STRUCTURAL UNEMPLOYMENT

Job losses due to changes in the structure of the economy, e.g. deindustrialisation.

SUBSIDIES

Government financial assistance to firms which allows increased output and lower prices.

SUPPLY-SIDE POLICIES

Ways of raising efficiency, competition and productivity causing a long-term rise in Aggregate Supply.

TARIFFS

A form of taxation on imports, raising their prices and reducing their competitiveness.

TECHNOLOGICAL UNEMPLOYMENT

Jobs may be lost due to innovations and new equipment e.g. computers.

TRADE DEFICIT

Balance of Trade deficit = values of imported goods exceed values of exported goods.

UNEMPLOYMENT RATE

Percentage of the Working Population that are currently not in work.

WAGE RISE SPIRAL

Higher prices cause bigger wage demands causing even higher rates of inflation.

VISIBLE TRADE

International trade in goods.

VOLUME / VALUE

Quantity / Quantity x price.

WEALTH EFFECT

Changing asset values, e.g. shares / housing can influence consumer expenditure.

WEIGHTINGS

% of income spent on categories of household expenditure, e.g. food, transport, housing.

WITHDRAWALS

Money subtracted from the circular flow of income, i.e.

S + M + T.

ALLOCATIVE EFFICIENCY

P = MC (AR = MC).  The correct amount of a good or service is being produced.

AVERAGE COST

The cost per unit made (unit cost) AC = TC ÷ Q.

AVERAGE REVENUE

The revenue per unit of output AR = TR ÷ Q.  AR = the Demand curve.

BARRIERS TO ENTRY / EXIT

Obstacles creating difficulties for firms to join or leave an industry e.g. Economies of Scale or Sunk Costs.

BRAND PROLIFERATION

Many brands produced by one firm (as a barrier to entry) e.g. chocolate bars, soap powders.

CARTEL

A formal agreement by producers to cut supply and raise prices to increase profits e.g. OPEC.

COLLUSION

An informal tacit agreement between producers to not compete on price e.g. Oligopolists acting as one.

COMPETITION COMMISSION

May investigate monopolies, mergers and anti-competitive practices like collusion that may operate against the public interest.

CONCENTRATION RATIO

A numerical measurement of domination in an industry, shown by a combined market share of the largest 3, 4 or 5 firms.

CONTESTABLE MARKET

A competitive market i.e. no significant entry or exit barriers exist therefore creating normal profits in the long run.

COST-PLUS PRICING

Where firms set price at AC plus a profit margin (without reference to the demand level).

FIXED COST

A cost that is independent of output in the short run e.g. rent.

GAME THEORY

Explores the reactions of one firm to changes in strategy by another firm.

HIT AND RUN TACTICS

A firm enters an industry only for the short-run to gain profits before exiting the industry again.

HORIZONTAL INTEGRATION

Mergers between firms in the same industry and at the same stage of production e.g. 2 manufacturers of cars.

KINKED DEMAND CURVE

Elastic demand if price is raised but inelastic if dropped by the market leader.

LAW OF DIMINISHING RETURNS

The fall in marginal product that eventually results as extra units of the variable factor of production are added to the fixed factors.

LIMIT PRICING

Existing firms keep prices low to deter new entrant by keeping profit low.  Therefore acts as a barrier to entry.

LONG RUN

The time period in which all factors are variable.

MARGINAL COST

The addition to total cost of producing an extra unit of output, MC = ∆TC ÷ ∆Q e.g. marginal cost pricing = p = MC (AR = MC).

MARGINAL REVENUE

The addition to total revenue of selling an extra unit of output, MR = ∆TR ÷ ∆Q?

MERGER

The joining of two firms into one.

MONOPOLY

A single firm industry, (25% + market share gives some monopoly power as viewed by the Competition Commission).

MULTINATIONAL CORPORATIONS

Large companies with production facilities based in several countries e.g. Sony.

NON-PRICE COMPETITION

Includes advertising, branding and product diversification used in order to avoid price wars.

OLIGOPOLY

A market structure that is highly concentrated i.e. dominated by few, large firms e.g. petrol companies, banks and supermarkets.

PERFECT COMPETITION

A market structure consisting of many small firms operating with no barriers to entry and acting as price takers.

PREDATORY PRICING

A firm undercuts rivals on price to below cost levels to drive opposition out of the markets.

PRICE CAP FORMULA 

e.g. RPI – X set by regulators of privatised industries where RPI is inflation rate and X is the expected efficiency gains.

PRICE DISCRIMINATION

Where a (monopoly) firm sells identical products at different prices to different buyers.  Achieved by separation of overall market into segments with differing elasticity of demand.

PRIVATISATION

The sale of state-owned industries into the private sector creating profit motivation and accountability to shareholders.

PRODUCTIVE EFFICIENCY

Where goods are produced at the minimum average cost level (technical optimum).

REGULATOR

e.g. OFTEL – responsibility for setting price (and investment) limits for privatised utilities in order to prevent abuse of monopoly power.

REGULATORY CAPTURE

Overly sympathetic treatment by the regulator towards the privatised firm and its shareholders (to the detriment of the consumers).

RESTRICTIVE PRACTICES

Anti-competitive measures such as withholding supplies or predatory pricing.

REVENUE MAXIMISATION

If the output level is where M R= O, the total revenue received will be maximised.

SALES MAXIMISATION

The largest output achievable without making a loss i.e. AR = AC, therefore increasing market share.

SATISFICING

A satisfactory level of profit below the maximum in order to accommodate other objectives of the firm.

SHORT-RUN

The period of time in which at least one factor of production is fixed.

SMALL FIRMS

Under 200 workers if a manufacturing firm.

SUNK COSTS

A cost that cannot be recouped when the firm exits the industry e.g. advertising.

SUPER NORMAL PROFIT

Profit exceeding normal profit, i.e. more than the minimum profit required to encourage the firm to keep its resources in their present usage.

VERTICAL INTEGRATION

Mergers between firms in the same industry but in different stages of production e.g. manufacturer with retail outlet or producer of its raw-material.

X INEFFICIENCY

The rise of AC due to the absence of competition in a monopoly industry.

ABSOLUTE POVERTY

The inability to purchase the basic necessities for civilised life e.g. living on less than $1 per day.

AID

Monetary transfers to LDC's to promote economic development.

AUTOMATIC STABILISER

Helps to stabilise the trade cycle through increased Aggregate Demand in a recession and reduced Demand in a boom without the need for discretionary government policies.

BRAIN DRAIN

The emigration of skilled domestic workers seeking higher reward overseas, thus restricting growth in poorer countries.

CAPITAL FLIGHT

Withdrawal of funds from a country due to speculative fears of a devaluation of the currency thereby causing a further fall in its value.

CASH CROP

Agricultural crop produced for export as a major earner of foreign currency.

COMMON EXTERNAL TARIFF

A unified tax on goods imported into a customs union e.g. the EU, as a form of protectionism.

COMMON MARKET

A customs union which reduces barriers to the movement of capital and labour, which can lead on to a single currency.

COMPETITIVENESS

The ability of domestic firms to sell their products in the global market, based on price and non-price factors such as design and reliability.

CONVERGENCE CRITERIA

Conditions that must be met before a country is allowed to join an Economic and Monetary Union (i.e. single currency).  e.g. low levels of inflation, debt, budget deficits plus exchange rate stability.

CUSTOMS UNION

A group of countries without internal trade barriers between members but with a Common External Tariff faced by non-members e.g. EU.

DEBT CRISIS

A restraint on LDC growth rates caused by the growing proportion of national income required to service the debt owed to richer nations.

DEBT FOR EQUITY SWAP

An exchange of foreign debt for shares in domestic LDC firms in an attempt to break the vicious circle of rising indebtedness.

DEFLATIONARY POLICY

Government measures to reduce aggregate demand through tighter fiscal and monetary measures, in order to reduce inflation and trade deficits.

DEMOGRAPHIC TRANSITION

From high BR and high DR ®falling DR®falling BR to low BR and DR as an economy develops.

DEVALUATION

A fall in the value of a (fixed) exchange rate announced by a government in order to raise export competitiveness and boost growth and jobs.

DEVELOPMENT

How rising national income can lead to improved social and economic welfare e.g. better standards of health and education.

DIRECT TAX

Tax levied on the income or wealth of an individual or company e.g. Income-tax and Corporation tax.

DISCRETIONARY FISCAL POLICY

Deliberate changes to tax or government spending to affect the macro economy, through changes in Aggregate Demand.

DUALISTIC ECONOMY

A split between a successful manufacturing sector and a backward agricultural sector within one LTC economy.

ECONOMIC AND MONETARY UNION (EMU)

The single (Euro) currency within the EU which replaces national currencies (and requires a single interest rate set by the European Central Bank).

EFFECTIVE EXCHANGE RATE

An exchange rate that reflects a weighted average of a country's major trading partners’ currencies.

EXCHANGE RATE MECHANISM (ERM)

A forerunner of the single currency in which EU currencies were locked together.  The UK was a member from 1990 to 1992 when the pound was suspended from the ERM.

FISCAL DRAG

A rising tax burden due to the effects of inflation or increased earnings as people enter higher tax brackets if the government fails to adjust tax brackets in line with the RPI.

FISCAL POLICY

The use of government spending and taxation to influence the economy.

FIXED EXCHANGE RATE

The value of the currency is kept at a target level by government intervention.

FLOATING EXCHANGE RATE

The currency is determined by market forces of demand and supply with no government intervention.

FOREIGN DIRECT INVESTMENT

Inward investment to a LDC from MNC’s (creating jobs and growth) perhaps due to lower labour costs.

FREE TRADE AREA

A group of countries reducing trade barriers amongst themselves without using a Common External Tariff for non-members.

GLOBALISATION

The growing integration and interdependence of the world economy e.g. movement of output, capital and investment overseas.

GROWTH STAGES

Traditional rural  ® pre-conditions for take-off ® take-off ® drive to maturity ® mass consumption.

HARROD DOMAR GROWTH MODEL

States that growth depends on a rising savings ratio leading to increased investment.  Technological advances may also decrease the capital: output ratio.

HOT MONEY FLOWS

Volatile short-term capital movements between countries responding to changes in relative interest rates.

HUMAN DEVELOPMENT INDEX (HDI)

Measures the relative socio-economic progress of a country using a series of health and educational indicators.

IMPORT SUBSTITUTION

Raised domestic output of manufactured goods in LDC’s may reduce dependency on imports in combination with tariff imposition.

INDIRECT TAX

Tax levied on expenditure e.g. Vat and excise duties on petrol, alcohol and tobacco.

INDUSTRIALISATION

As agriculture declines as a share of national output, manufacturing grows rapidly, thus contributing to economic growth.

INFANT INDUSTRY

A new industry yet to develop economies of scale may require protection in the short run to compete against larger foreign rivals.

INFRASTRUCTURE

Social capital forming transport and communications networks, power supplies plus schools and hospitals – all vital for growth.

INTERMEDIATE TECHNOLOGY

Technology appropriate to LTC’s e.g. less capital intensive than in DC's to protect jobs.

INTERNATIONAL MONETARY FUND (IMF)

Makes loans to countries with trade deficits and exchange rate problems.  Conditions known as Stabilisation Programme are imposed on LDC's such as tighter fiscal and monetary policies which can cause economic deterioration in the short run.

J-CURVE

A devaluation may worsen a current account in the short run (due to inelastic demand initially) before a long term improvement.

KEYNESIAN POLICY

The emphasis on fiscal policy usage of government spending and taxation to regulate the macro-economy e.g. to reduce unemployment.

LAFFER CURVE

Shows the relationship between the average rate of income tax and tax revenue.  Tax rises may, after a point, reduce revenues due to lower work incentives.

LESS DEVELOPED COUNTRIES (LDC'S)

Have relatively low national income per capita – sometimes referred to as ‘Third World countries’.

MARGINAL RATE OF TAX

The proportion of an extra pound of income that is taken in the form of extra taxation.

MARSHALL-LERNER CONDITION

The sum of the price elasticity of demand for exports and imports must exceed one if a devaluation is to improve the current account of the country.

MONETARISM

The belief that a monetary policy, especially the use of interest rate changes, is the main way for the government to influence the macro-economy.

NATIONAL DEBT

Total government debt often expressed as a percentage of national income, usually borrowed from domestic institutions and individuals.

NAIRU

Non Accelerating Inflation Rate of Unemployment.

NEW PROTECTIONISM

More subtle forms of import restrictions such as safety standards etc.

NEWLY INDUSTRIALISED COUNTRIES (NIC’S)

Originally Asian ‘tiger’ economies like South Korea; Hong Kong; Singapore and Taiwan plus China more recently (amongst others).

NON-GOVERNMENTAL ORGANISATIONS (NGO’S)

Private sector assistance to LDC's - mainly charities like Oxfam to complement aid from governments.

OECD

Organisation for Economic Co-operation and Development – designed to promote growth in the 20 + richest economies e.g. G7, also gives assistance to LDC s.

PHILLIPS CURVE

The inverse relationship between wage inflation and unemployment (especially in the short term).

PREBISCH-SINGER HYPOTHESIS

LDC’s dependent on primary products suffer worsening terms of trade or over time due to price and income inelastic trade and the development of substitutes.

PROGRESSIVE TAX

A tax which takes a higher proportion of income as income rises e.g. income tax.

PROTECTIONISM

Raising trade barriers against imports (to assist the trade balance and save jobs) e.g. tariffs and quotas.

PSNCR

Public Sector Net Cash Requirement: also known as a Budget Deficit i.e. government spending exceeds tax revenue.  (Budget surplus create a Public Sector Debt Repayment).

PURCHASING POWER PARITY (PPP)

The exchange rate that reflects the relative price levels of an identical product in the two countries e.g. a Big Mac.

QUOTA

A physical restriction on the quantity of good that may be imported (in an attempt to save jobs and improve the trade balance).

REAL EXCHANGE RATE

Measures international competitiveness as affected by movement in nominal exchange rates and relative inflation.

REGRESSIVE TAX

Where the proportion of income taken in tax falls as income rises, e.g. VAT.

RURAL-URBAN MIGRATION

Creates economic growth by raising output in higher productivity manufacturing industry although creating pressure on urban infrastructure e.g. housing.

SOFT LOANS

A loan provided to a LDC at a lower rate of interest or with longer repayment periods.

STABILITY AND GROWTH PACT

Places a limit of 3% of GDP for a Euro country's budget deficit.

STRUCTURAL ADJUSTMENT PROGRAMME

Conditions attached to IMF loans designed to strengthen the macro-economy, usually involving fiscal and monetary restrictions plus privatisation programmes.

SUBSISTENCE

Production of food for one’s own consumption thereby causing GNP figures to underestimate living standards.

SUSTAINABLE DEVELOPMENT

Development which meets the needs of the present without reducing the ability of future generations to meet theirs.

TARIFF

A form of tax on an import that raises its price and reduces the demand for it.

TAX BURDEN

The proportion of GDP taken in taxes by the government.

TERMS OF TRADE

The ratio of an index of a country's export prices to an index of its import prices.  Income inelastic demand for primary product exports from LDC’s may cause a ‘deterioration’ in terms of trade i.e. a larger quantity is needed to pay for the same level of imports as before.

TIED AID

Aid provided by developed countries on condition that the recipient country uses the funds to buy products from the donor country, although it may be less useful than unconditional aid.

TODARO’S OBJECTIVES

Assessment of development using sustenance, self-esteem (equality) and freedom to supplement GNP figures.

TRADE CREATION

The benefits from an increased trade with other members of a customs union.

TRADE DIVERSION

The welfare loss of customs union membership due to the loss of cheap imports from non-member countries now facing a Common External Tariff.

TRADING BLOC

A group of countries forming a free-trade area, customs union or, common market which includes the reduction of trade barriers between member countries.

TRANSITIONAL ECONOMIES

e.g. Eastern European economies having abandoned state planning of the economy for market-based economies since 1989.

TRICKLE-DOWN EFFECT

The belief that when the rich get richer, the poor will experience some improvement in living standards as a result.

UNDEREMPLOYMENT

Disguised unemployment as workers are in low-pay, low-productivity jobs.

UNCTAD

United Nations Conference on Trade and Development aims to promote world trade but benefiting LDC’s.

UNDP

United Nations Development programme finances and implements development projects in LDC’s.

WTO

World Trade Organisation: promotes reduction in trade barriers in order to boost the advantages of free trade (replaced GATT in 1995).

WORLD BANK (IBRD)

Provides funds for development projects usually at market interest rates, although power lies with the richer contributor nations.