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 people who undertake economic activities and make economic decisions
Economic systems
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
Mixed economic system
an economy in which both the private and public sectors play an important role
Market economic system
an economic system where 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
Market equilibrium
a situation where demand and supply are equal at the current price
Market disequilibrium
a situation where demand and supply are not equal at the current price
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.
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
Birth rate
the number of live births per thousand of the population in a year
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.
Changes 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
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 the government to encourage the production or consumption of a product
Equilibrium price
the price where demand and supply are equal
Disequilibrium
a situation where demand and supply are not equal
Excess supply
the amount by which supply is greater than demand
Excess demand
the amount by which demand is greater than supply
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 total revenue unchanged.
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
Inelastic supply
when the quantity supplied changes by a smaller percentage than the change in price
Perfectly elastic supply
when a change in price causes a complete change in the quantity supplied
Perfectly inelastic supply
when a change in price has no effect on the quantity supplied
Unit elasticity of supply
when a change in price causes an equal change in the quantity supplied
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 assets to the private sector
Price mechanism
the system by which the market forces of demand and supply determine prices
Market failure
market resources resulting in an inefficient allocation of resources
Free rider
someone who consumes a good or service without paying 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
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 by those directly consuming or producing a product
External benefits
benefits enjoyed by those who are not involved in the consumption and production activities of others directly
External costs
costs imposed on those who are not involved in the consumption and production activities of others directly
Socially optimum output
the level of output where social cost equals social benefit and society's welfare is maximised
Merit goods
products which the government considers consumers do not fully appreciate how beneficial they are and so they will be under- consumed if left to market forces. Such goods generate positive externalities.
Demerit goods
products which the government considers consumers do not fully appreciate how harmful they are and so they 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 hence needs to be financed by taxation.
Private goods
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
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