Economic Terms for Review

Grade : Name:
Class:

Absolute advantage: Ability to produce a product with fewer resources than other

country, region firm or person

Aggregate demand: Total planned spending at a given price level

Aggregate supply: Total output all firms are willing and able to supply at a given price level

Average cost: Total cost divided by output, also called unit cost

Average revenue: Total revenue divided by out put

Balance of payments: A record of countries trade and financial transactions with other countries

Barriers to entry & restrictions on the entry and exit of new firms in to a market

Exit (especially in a monopoly market)

Black economy: undeclared economic activity

Business cycles: fluctuations in economic activity (Booms and depressions)

Break-even point: the level of output and sales where no profit no loss made in the business.

Capital goods: products which produce other goods and services

Cartel: a group of countries or firms which fix output and price in order to increase

profits (OPEC)

Circular flow of income: the flow of income and expenditure between households, firms and

government

Comparative advantage: ability to produce a product at a lower opportunity cost than other countries,

region, firms or people

Complimentary goods: products which are bought to be used together

Conglomerate integration: a merger between two firms making different products

Consumer goods: products which satisfy peoples want directly

Consumer sovereignty: consumers ability to determine what is produced by means of their purchase

Consumption: Using up of goods and services to satisfy our wants

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Cost benefit analysis: a method of assessing investment projects which takes in to account social

costs and benefits

Cost push inflation: raises the general price level resulting from increases in the cost of production

Credit creation: the process whereby banks increase the money supply by making loans

Cross elasticity of demand: a measure of responsiveness of demand for one product to changes in the price

of another product

Customs unions: group of countries practicing free trade and agree to impose a common

external tariff on imports from other countries

Cyclical unemployment: unemployment resulting from a lack of aggregate demand

Demand: willingness and ability to buy a product

Demand pull inflation: increase in the general price level resulting from increases in aggregate

demand

Demand side policies: government policies designed to influence aggregate demand

Demerit goods: products which the government regards as harmful and which will be

over- consumed if left to market forces

Developed countries: Countries which average standard of living is high

Direct taxes: taxes on income and wealth

Diseconomies of scale: the advantages, in the form of higher average costs of production, of

producing larger scale

Disposable income: income after the deduction of direct taxes and the addition of state benefits

Division of labour: the specialization of workers on particular tasks in the production process

Earned income: money paid to people for the work they do

Economic development: improvements in the quality of life of a countrys population

Economic goods: products which use resources to produce them

Economies of scale: the advantages of producing on a large scale in the form of lower average

costs

Economic rent: payment above that necessary to keep a factor of production in its current use

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Economic system: Traditional, Command, Market and Mixed Economies are called economic

systems

Elasticity of demand: a measure of the responsiveness of demand to a change in a key influence on

demand

Equilibrium price: (market price) a situation of balance where demand equals supply

External benefits: beneficial effects on third parties from the economic activities of others

External costs: harmful effects on third parties from the economic activities of others

Factors of production: the economic resources of land, labour, capital and entrepreneur used to

produce goods and services

Fiscal policy: government policy on spending and taxation

Fixed costs: costs which do not change when out put changes

Fixed exchange rate: an exchange rate which is fixed at a given rate and maintained by government

Floating exchange rate: an exchange rate determined by market forces

Free goods: product that do not require resources to produce them (gift of nature)

Free trade areas: group of countries practicing free trade and free to set its own trade

restrictions with the rest of the world

Frictional unemployment: unemployment which arises when workers are in between jobs (short term

unemployment)

Gross domestic product: total output produced in a country

HDI: human development index-a composite index based on GDP per head, life

expectancy and educational attainment

Horizontal integration: the merger of firms producing same product and at the stage of production

Immobility: barriers to the mobility of factors of production

Income elasticity of demand: a measure of the responsiveness of demand to a change in income

Indirect taxes: taxes on spending

Inferior goods: products which negative income elasticity of demand

Inflation: a persistent rise in the general price level

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Injections: spending on domestic output which occurs outside the circular flow of income

Interests: the price for borrowing and the reward for lending

Less developed countries: average standard of living less compared to developed countries

Long run: period of time which all the factors can be changed /variable (fixed factors and

variable factors)

Managed exchange rate: exchange rate system which move with in margins

Marginal cost: change in total cost when one more unit is produced

Marginal product: the change in total output resulting from the employment of one more unit of

variable product

Marginal revenue: change in total revenue resulting from selling one more unit

Market economy: an economy in which consumers determine what is produced and resources

are owned by individuals and groups of individuals

Market failure: the failure of market forces to achieve an efficient allocation of resources

Market forces: The main forces in the market that is demand and supply

Merit goods: products which the government regards as beneficial and which will be under

consumed if left to the market forces

Mixed economy: an economy with a public and private sector

Monetary policy: changes in rate of interest, money supply and the exchange rate

Money: items which are generally acceptable in exchange of goods and services

Monopolistic competition: a market structure in which there is large number of firms producing slightly

differentiated products

Monopoly: a single supplier of a product, or according to governments definition a firm

with 25% or more share of the market

MNC: Multi national companies which are firms with plants in more than one

country

Nationalization: taking private sector firms in to state ownership

Needs: basic requirements such as food, loathing, shelter and air to survive

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Negative externalities: External costs

Net investment: gross investment minus depreciation

Normal goods: goods which positive income elasticity of demand

Normal profit: minimum level of profit needed to keep a firm in the industry in the long run

Oligopoly: a market structure dominated by a few large firms

Open market operations: the purchase and sale of government securities by a central bank to influence

the money supply

Opportunity cost: the best alternative that must be forgone. For example, the opportunity cost of

a new economics text book might be the cinema ticket which you could have

had instead

Over population: too many people too few resources

Perfect competition: a market structure with no barriers to entry and exit. Consisting many firms

producing a homogeneous product

Planned economy: Command economy. An economy where the government makes the decisions

on what to produce, how to produce and for whom to produce

Population: the number of people who live in a country or in town in a particular period of

time

Positive externalities: external benefits

Predatory pricing: setting a price low enough to drive competitors out of the market

Price mechanism: a system in which decisions about production, quantities and selling price are

determined by buyers and sellers in a market.

Price elasticity of supply: responsiveness to of supply to a change in the price of the product

Price elasticity of demand: responsiveness of the quantity demanded to change in the price

Primary sector/industries: the first stage of production. Also known as extractive industries

Private benefits: benefits received by those who produce or consume a product

Private costs: cost incurred by those who produce ore consume a product

Privatization: transfer of asset from the public to the private sector

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Production possibility curve: a diagram showing the maximum combination of the out put of two types of

products with a given level of resources and technology

Productivity: output per factor of production (output divided by input)

Profit: Money gained from a sale which is more than the money spent

Profit maximization: achieving highest level of profit possible by producing where MC=MR

Progressive taxes: taxes that takes greater percentage of the income of the rich

Proportional taxes: taxes that make the same percentage of income of all income groups

Protectionism: restriction of international trade

Public goods: items which must be provided by society as a whole. No one can be excluded

from benefiting from them and their consumption, by one person does not

prevent their consumption by some one else. Ex: defense, law and order, street

light etc.

Public sector net cash Requirement: the amount the government has to borrow to cover the gap between

government expenditure and tax revenue

Quota: Government putting a limit on the number of goods that can be imported to the

country with in a given period

Regressive taxes: taxes that take a greater percentage of the income of the lower income people

Relative price: price of a product in comparison to the price of another product

Resources: such as factors of production, which can be used effectively to produce a good

or service. (Natural, Human and Man maid resources)

Restrictive practices: anti competitive behavior of a firm or groups of firms

Retail price index: a weighted measure of changes in consumer prices

Saving: income minus consumption

Scarcity: resources being insufficient to satisfy all peoples wants

Secondary sector: converting raw materials to finished goods/second stage of production

Self-sufficient: person or community produces all things they needed and wanted for

themselves

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Short run: period of time where only variable factors can be changed/short period of time

Social benefits: the total benefits to society of the production or consumption of a product

(Private benefits + external benefits)

Social costs: the total cost to society of the production or consumption of a product

(Private costs + external costs)

Specialization: concentration on particular tasks or products

Structural unemployment: unemployment that result from the changes in the structure of industry due to

changes in demand and supply conditions

Subsidies: grants paid to encourage production or consumption

Substitute: products which are seen as alternatives to each other. They are in competitive

demand

Super normal profit: profit above the normal profit level

Supply: willingness and ability to sell a product

Sustainable economic growth: economic growth achieved in a way that does not endanger the countrys

ability to achieve economic growth in the future

Tariffs: taxes on imports

Terms of trade: ratio of export prices to import prices

Tertiary sector: sector which provide services like banking, transportation and insurance etc.

Trade blocs: groups of countries with preferential trade agreements

Transfer earnings: minimum payment required to keep a factor of production in its current use

Transfer payments: money transferred from one group (government) to another not in return for

providing a good or service

Utility: satisfaction gained from the consumption of a product

Unearned income: Money gained from owning assets or wealth

Variable costs: costs that change with output

Vertical integration: the merger of firms at different stages of production

Withdrawals: parts of income which are not passed on the circular flow of income (leakages)

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