Definitions economics A

level
(Made by Esha Habib)

(A2 definitions only)

● Economic efficiency: where scarce resources are used in

the most efficient way to produce maximum output.
Productive efficiency: when a firm is producing at the
lowest possible cost.
● Allocative efficiency: where price is equal to marginal
cost; firms are producing those goods and services most
wanted by consumers.
● Pareto optimality: where it is impossible to make
someone better off without making someone else worse of
● Externality: where the actions of producers or
consumers give rise to side effects on third parties who
are not involved in the action; sometimes referred to as
spillover effects.
● Negative externality: where the side effects have a
negative impact and impose costs to third parties.
Positive externality: where the side effects have a positive
impact and provide benefits to third parties.
● Social costs: the total costs of a particular action.
● Private costs: those costs that are incurred by an
individual who produces a good or service.
 ● External costs: those costs incurred and paid for by third
parties not involved in the action.
● Social benefits: the total benefits arising from a particular
action.
● Private benefits: benefits that accrue to individuals who
produce or consume a particular good.
● External benefits: benefits that that are received by third
parties not involved in the action.
● Cost–benefit analysis (CBA): a method for assessing the
desirability of a project taking into account the costs and
benefits involved.
● Shadow price: one that is applied where there is no
recognised market price available.

CHAPTER 2
price system and the microeconomy
● Utility: the satisfaction received from consumption.
● Total utility: the total satisfaction received from consumption.
● Marginal utility: the utility derived from the consumption
● of one more unit of the good or service.
● Diminishing marginal utility: the fall in marginal utility as
● consumption increases.
● equimarginal principle and can be

● Equimarginal principle: consumers maximise their utility

where their marginal valuation for each product consumed
is the same
● Budget line: the combinations of two products obtainable
with given income and prices.
● Substitution effect: where following a price change, a
consumer will substitute the cheaper product for the one
that is now relatively more expensive.
● Income effect: where following a price change, a consumer
has higher real income and will purchase more of this product.

● Indifference curve: this shows the diff erent combinations

of two goods that give a consumer equal satisfaction.

● Marginal rate of substitution: the rate at which a consumer is willing to

substitute one good for another.
● Production function: this shows the maximum possible
output from a given set of factor inputs.
● Marginal product: the change in output arising from the
use of one more unit of a factor of production.
● Diminishing returns: where the output from an additional
unit of input leads to a fall in the marginal product.
Firm: any business that hires factors of production in order
to produce goods and services.
Profit maximisation: the assumed objective of a firm
where the diff erence between total revenue and total cost is
at a maximum.
Fixed costs: those costs that are independent of output in
the short run.
Variable costs: those that vary directly with output; all
costs are variable in the long run
Increasing returns to scale: where output increases at a
proportionately faster rate than the increase in factor inputs.
Decreasing returns to scale: where factor inputs increase
at a proportionately faster rate than the increase in output.
Economies of scale: the benefits gained from falling long-
run average costs as the scale of output increases.
Diseconomies of scale: where long-run average costs
increase as the scale of output increases.
External economies of scale: cost savings accruing to all
firms in an industry as the scale increases.
Minimum efficient scale: lowest level of output at which costs are
minimised.
Abnormal profit: that which is earned above normal profit.
Abnormal profit: that which is earned above normal profit.
Normal profit: a cost of production that is just sufficient for
a firm to keep operating in a particular industry.
Industry: all firms making the same product or in the same
line of business.
Multinational corporations (MNCs): firms that operate in
diff erent countries.Perfect competition: an ideal market structure that
has many buyers and sellers, identical or homogeneous
products, no barriers to entry.
Monopoly: a pure monopoly is just one firm in an industry
with very high barriers to entry.
Monopolistic competition: a market structure where
there are many firms, diff erentiated products and few
barriers to entry.
Oligopoly: a market structure with few firms and high
barriers to entry.
Imperfect competition: any market structure except for
perfect competition.
Small and medium enterprises (SMEs): firms with fewer
than 250 employees; small firms have fewer than 50 employees.
Market structure: the way in which a market is organised
in terms of the number of firms and the barriers to the entry
of new firms.
Barriers to entry: any restrictions that prevent new firms
from entering an industry.
Barrier to exit: any restriction that prevents a firm leaving
a market.
Market structure: the way in which a market is organised
in terms of the number of firms and the barriers to the entry
of new firms.
Barriers to entry: any restrictions that prevent new firms
from entering an industry.
Natural monopoly: where a single supplier has substantial
cost advantages such that competing producers would raise
costs and where duplication will produce an ineff icient use
of resources.
Limit pricing: where firms deliberately lower prices and
abandon a policy of profit maximisation to stop new firms
entering a market.
Limit pricing: where firms deliberately lower prices and
abandon a policy of profit maximisation to stop new firms
entering a market.
Horizontal integration: where a firm grows through a
merger or acquisition of another firm in the same sector of
an industry
Price leadership: a situation in a market whereby a
particular firm has the power to change prices, the result of
which is that competitors follow this lead.
Cartel: a formal agreement between firms to limit
competition by limiting output or fixing prices.
Contestable market: any market structure where there
is a threat that potential entrants are free and able to enter
this market
X-inefficiency: where the typical costs are above those
experienced in a more competitive market.
Diversification: where a firm grows through the
production or sale of a wide range of different products.
Sales revenue maximisation: a firm’s objective to
maximise turnover.
Sales maximisation: a firm’s objective to maximise the
volume of sales.
Satisficing: a firm’s objective to make a reasonable level
of profit.
CHAPTER 3
Deadweight loss: the welfare loss when due to market failure
desirable consumption and production does not take place.
Kinked demand curve: a means of analysing the behaviour of firms in
oligopoly where there is no collusion.

Regulations: a wide range of legal and other requirements that come

from governments and other organisations.
Pollution permits: a form of licence given by governments that allows
a firm to pollute up to a certain level.
Property rights: where owners have a right to decide how their assets
may be used.

Privatisation: where there is a change in ownership from the public to

the private sector.Lorenz curve: a graphical representation of
inequality.
Gini coefficient: a numerical measure of inequality.
Wealth: an accumulated stock of assets.
Equity: where the distribution of, say, income or wealth is fair.
Negative income tax: a unified tax and benefits system where people
are taxed or receive benefits according to a single set of rules.
Intergenerational equity: the responsibility that government has to
provide for a more equitable future distribution of income and
wealth.Means-tested benefits: benefits that are paid only to those
whose incomes fall below a certain level.
Poverty trap: where an individual or a family are better off on means-
tested benefits rather than working.
Universal benefits: benefits that are available to all
irrespective of income or wealth Progressive tax: one where the rate
rises more than proportionately to the rise in income.
Regressive tax: one where the ratio of taxation to income falls as
income increases.
Transfer earnings: the amount that is earned by a factor of production
in its best alternative use.
 Economic rent: a payment made to a factor of production above that
which is necessary to keep it in its current use.

Marginal revenue product: the addition to total revenue as a result of

employing one more worker.
Derived demand: where the demand for a good or service depends
upon the use that can be made from it.
Monopsony: where there is a single buyer in a market
Government failure: where government intervention to correct market
failure causes further inefficiencies

CHAPTER 3 AND 5 COMBINED

Economic growth: in the short run an increase in a
country’s output and in the long run an increase in a
country’s productive potential.
Economic development: an increase in welfare and the
quality of life.
Actual economic growth: an increase in real GDP.
Output gap: a gap between actual and potential output.
Negative output gap: a situation where actual output is below potential
outputPositive output gap: a situation where actual output is above
potential output.
Trade cycle: fluctuations in economic activity over a period of years.
Economic growth: in the short run an increase in a country’s output and in
the long run an increase in a country’s productive potential.
Economic development: an increase in welfare and the quality of life.

Average propensity to consume: the proportion of income that is

consumed.
Dissaving: spending financed from past saving or from borrowing.
Saving: income minus consumption.
Marginal propensity to consume: the proportion of extra income that is
spent.

Aggregate expenditure: the total amount spent in the economy at diff erent
levels of income
.Consumption: spending by households on goods and services.
Disposable income: income minus direct taxes plus state benefits
Consumption function: the relationship between income and consumption.

Saving function: the relationship between income and saving.

Average propensity to save: the proportion of income that is saved.
Government spending: the total of local and national government
expenditure.

Investment: spending by firms on capital goods.

Net exports: exports minus imports

.Injections: additions to the circular flow of income.

Withdrawals: leakages from the circular flow of income.
Paradox of thrift : where the fact of people saving more results in a fall in
saving due to lower spending and income.
Inflationary gap: the excess of aggregate expenditure over potential output
(equivalent to a positive output gap).

Deflationary gap: a shortage of aggregate expenditure so that potential

output is not reached (equivalent to a negative output gap)
Autonomous investment: investment that is made independent of income.

Induced investment: investment that is made in response to changes in

income.

Accelerator theory: a model that suggests investment depends on the rate

of change in income
Quantity Theory of Money: the theory that links inflation in an economy to
changes in the money supply.
Fisher equation: the statement that MV = PY.

Capital-output ratio: a measure of the amount of capital used to produce a

given amount, or value, of output
Narrow money: money that can be spent directly.
Broad money: money used for spending and saving.
Liquidity ratio: the proportion of a bank’s assets held in liquid form.
Government securities: bills and bonds issued by the
government to raise money
Credit multiplier: the process by which banks can make more loans than
deposits available.
Liquidity preference: a Keynesian concept that explains why people
demand money.
Transactions motive: the desire to hold money for the day-to-day buying of
goods and services
Total currency flow: the current plus capital plus financial balances of the
balance of payments.
Quantitative easing: a central bank buying government bonds from the
private sector to increase the money supply.
Keynesians: economists who think that government intervention is needed
to achieve full employment.Precautionary motive: a reason for holding
money for unexpected or unforeseen events.
Active balances: the amount of money held by households or firms for
possible future use.
Speculative motive: a reason for holding money with a view to make future
gains from buying financial assets.

Idle balances: the amount of money held temporarily as the returns from
holding financial assets are too low.
Monetarists: economists who argue that control of the money supply is
essential to avoid inflation.
Liquidity trap: a situation where interest rates cannot be reduced any more
in order to stimulate an upturn in economy activity.
International Monetary Fund (IMF): an international organisation that
promotes free trade and helps countries in balance of payments diff
iculties.
Dependence: a situation where the economic development of a developing
economy is hindered by its relationships with developed economies.
Foreign direct investment (FDI): the setting up of production units or the
purchase of existing production units in other countries.
Foreign aid: assistance given to developing economies on favourable
terms.
Virtuous cycle: the links between, for example, an increase in investment,
increase in productivity, increase in income and increase in saving.
Phillips curve: a curve that shows the relationship between the
unemployment rate and the inflation rate over a period of timeInflation
target: the rate a central bank is set to achieve.

Expectations-augmented Phillips curve: a diagram that shows that while

there may be a trade-off between unemployment and inflation in the short
run, there is no trade-off in the long run.
Tinbergen’s rule: for every policy aim there must be at least one policy
measure.

Government macroeconomic failure: government intervention reducing

rather than increasing economic performance

.Laffer curve: a curve showing tax revenue rising at first as the tax rate is
increasing and then falling beyond a certain rate.

Counter-cyclically: going against the fluctuations in economic activity

CHAPTER 4
Economic growth: in the short run an increase in a country’s output and in
the long run an increase in a country’s productive potential.
Economic development: an increase in welfare and the quality of life.
Sustainable development: development that ensures that the needs of the
present generation can be met without compromising the well-being of
future generations.
Actual economic growth: an increase in real GDP.
Positive output gap: a situation where actual output is above potential
output.
Trade cycle: fluctuations in economic activity over a period of years
Potential economic growth: an increase in the productive capacity of the
economy.

Output gap: a gap between actual and potential output.

Negative output gap: a situation where actual output is below potential
output.
Gross national income (GNI): the total output produced by a country’s
citizens wherever they produce it.

National income: the total income for an economy

Purchasing power parity (PPP): a way of comparing international living
standards by using an exchange rate based on the amount of each
currency need

Shadow economy: the output of goods and services not included in off icial
national income figures.
Money GDP: total output measured in current prices.
Real GDP: total output measured in constant prices.
National debt: the total amount of government debt.
Measurable Economic Welfare (MEW): a composite measure of living
standards that adjusts GDP for factors that reduce living standards and
factors that improve living standards.
Human Development Index (HDI): a composite measure of living standards
that includes GNI per head, education and life expectancy

Multidimensional Poverty Index (MPI): a composite measure of deprivation

in terms of the proportion of households that lack the requirements for a
reasonable standard of living
Developed economies: economies with high GDP per head.
Developing economy: an economy with a low GDP per head.
Kuznets curve: a curve that shows the relationship between economic
growth and income inequality.
Poverty cycles: the links between, for example, low income, low savings,
low investment and low productivity.
Development traps: restrictions on the growth of developing economies that
arise from low levels of savings and investment.
Emerging economies: economies with a rapid growth rate and that provide
good investment opportunities.
Primary sector: industries involved in farming and extracting natural
resources.
Secondary sector: industries that manufacture products.
Tertiary sector: industries that produce services.
Quaternary sector: industries involved in providing knowledge-based
services.
World Bank: an international organisation that lends
money to developing economies for projects that will
promote development
.Malthusian theory: the view that population grows in geometric progression
whereas the quantity of food grows in arithmetic progression.
Dependency ratio: the proportion of the economically inactive to the labour
force.
Prebisch-Singer hypothesis: a theory that suggests that the terms of trade
tend to move against developing economies so that developing economies
have to export
more to gain a given quantity of imports
Optimum population: the size of population that maximises GDP per head.
Labour productivity: output per worker hour.
Unemployment: the state of being willing and able to work
but without a job
Frictional unemployment: unemployment that is temporary and arises
where people are in-between jobs.
Structural unemployment: unemployment caused as a result of the
changing structure of economic activity.
Full employment: the level of employment corresponding to where all who
wish to work have found jobs, excluding
frictional unemployment.
Natural rate of unemployment: the rate of unemployment that exists when
the aggregate demand for labour equals the aggregate supply of labour at
current wage rate and price level
Claimant count: a measure of unemployment based on those claiming
unemployment benefits.
Multiplier: a numerical estimate of a change in spending in relation to the
final change in spending.
Cyclical unemployment: unemployment that results from a lack of
aggregate demand.
Labour force survey: a measure of unemployment based on a survey that
identifies people who are actively seeking a job
Reflationary fiscal or monetary policy measures: policy measures designed
to increase aggregate demand.

Open economy: an economy that is involved in trade with other economies.

Closed economy: an economy that does not trade with other economies.
Marginal rate of taxation: the proportion of extra income taken in tax.
Marginal propensity to import: the proportion of extra income spent on
imports.
Marginal propensity to save: the proportion of extra income which is saved.
Aggregate expenditure: the total amount spent in the economy at different
levels of income.

Aggregate expenditure: the total amount spent in the

economy at diff erent levels of income.
Average propensity to consume: the proportion of income that is
consumed.
Dissaving: spending financed from past saving or from borrowing.
Saving: income minus consumption.
Marginal propensity to consume: the proportion of extra income that is
spent.
Consumption: spending by households on goods and services.
Disposable income: income minus direct taxes plus
state benefits.
Saving function: the relationship between income and saving.
Average propensity to save: the proportion of income that is saved

Consumption function: the relationship between income and consumption.

Saving function: the relationship between income and saving.
Average propensity to save: the proportion of income
that is saved
Government spending: the total of local and national
government expenditure

Net exports: exports minus imports

Investment: spending by firms on capital goods.
Deflationary gap: a shortage of aggregate expenditure so
that potential output is not reached (equivalent to a negative
output gap).
Injections: additions to the circular flow of income.
Withdrawals: leakages from the circular flow of income.
Paradox of thrift : where the fact of people saving more
results in a fall in saving due to lower spending and income.
Inflationary gap: the excess of aggregate expenditure over
potential output (equivalent to a positive output gap).
Accelerator theory: a model that suggests investment
depends on the rate of change in income.
Autonomous investment: investment that is made
independent of income.
Induced investment: investment that is made in response
to changes in income
Quantity Theory of Money: the theory that links inflation
in an economy to changes in the money supply.
Fisher equation: the statement that MV = PY.
Capital-output ratio: a measure of the amount of capital
used to produce a given amount, or value, of output.
Capital-output ratio: a measure of the amount of capital
used to produce a given amount, or value, of output.
Narrow money: money that can be spent directly.
Broad money: money used for spending and saving.
Total currency flow: the current plus capital plus financial
balances of the balance of payments.
Liquidity ratio: the proportion of a bank’s assets held in
liquid form.
Government securities: bills and bonds issued by the
government to raise money.
Credit multiplier: the process by which banks can make
more loans than deposits available
Keynesians: economists who think that government
Liquidity preference: a Keynesian concept that explains
why people demand money.
Transactions motive: the desire to hold money for the
day-to-day buying of goods and services.
Quantitative easing: a central bank buying government
bonds from the private sector to increase the money supply.
Liquidity trap: a situation where interest rates cannot
be reduced any more in order to stimulate an upturn in
economy activity.
International Monetary Fund (IMF): an international
organisation that promotes free trade and helps countries in
balance of payments diff iculties.

Dependence: a situation where the economic

development of a developing economy is hindered by its
relationships with developed economies.
Virtuous cycle: the links between, for example, an increase
in investment, increase in productivity, increase in income and increase in
saving.

Foreign direct investment (FDI): the setting up of production units or the

purchase of existing production units in other countries.
Foreign aid: assistance given to developing economies on favourable
terms.