Model
A simplified representation of reality used to provide insight into economic decisions and events
Ceteris Paribus
A Latin phrase meaning 'other things being equal'; it is used in economics when we focus on changes in one variable while holding other influences constant.
Positive Statement
A statement about what is. It can be scientifically proven.
Normative Statement
A statement that involves a value judgement about what ought to be. It is impossible to test scientifically.
Scarcity
A situation that arises when people have unlimited wants in the face of limited resources.
Opportunity Cost
The next best alternative foregone when a decision is made.
Marginal Analysis
An approach to economic decision making based upon consideration of the change which results from the addition of one more item (e.g. one more worker is added to a team)
Factors of Production
The resources used in the production process. Land
Production Possibility Frontier (PPF)
A diagram showing a line which represents the maximum combination of goods and services which can be produced in a given period with available resources.
Potential Economic Growth
An expansion in the productive capacity of the economy
Gross Domestic Product (GDP)
A measure of the economic activity carried out in an economy over a period of time.
Division of Labour
A process whereby the production process is broken down into a sequence of stages
Market
A set of arrangements that allows transactions between buyers and sellers to take place
Market Economy
An economy in which market forces are allowed to guide the allocation of resources.
Command Economy
An economy in which decisions on resource allocation are guided by the state.
Mixed Economy
An economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state.
Microeconomics
The study of economic decisions taken by individual economic agents
Macroeconomics
The study of the interrelationships between economic variables at an aggregate (economy-wide) level.
Demand
The quantity that consumers are willing and able to buy of a product at a given price.
Law of demand
A law that states that there is an inverse relationship between quantity demanded and the price of a good or service
Demand curve
A graph showing how much of a good will be demanded by consumers at any given price.
Diminishing marginal utility
The concept which explains how satisfaction gained through the consumption of one additional unit of a product reduces as more units are consumed.
Extension of demand
An increase in quantity demanded as a result of a reduction in price
Contraction of demand
A fall in quantity demanded as a result of an increase in price.
Population
The size of the potential market for a product
Normal good
A good where quantity demanded increases in response to an increase in consumer income
Inferior good
A good where quantity demanded decreases in response to an increase in consumer income
Substitute goods
Two goods which perform a similar function. They are said to be in competitive demand and as the price of one rises
Complementary goods
Two goods which are often bought or used together. They are said to be in joint demand and as the price of one rises
Elasticity
A measure of the responsiveness of one variable to a change in another
Price elasticity of demand
A measure of the responsiveness of quantity demanded to a change in the market price.
Elastic
A change in one variable causes a more than proportional change in the other variable. E.g. an increase in price of 5% causes quantity demanded to fall by 10%.
Inelastic
A change in one variable causes a less than proportional change in the other variable. E.g an increase in price of 5% causes quantity demanded to fall by 1%
Unitary
A change in one variable causes a proportional change in the other variable. E.g. an increase in price of 5% causes quantity demanded to fall by 5%.
Revenue
The amount made by firms selling product. It is calculated by multiplying the price of each unit by the amount sold.
Income elasticity of demand
A measure of the responsiveness of quantity demanded to a change in income of consumers
Luxury good
A good which demonstrates a normal
Necessity
A good which demonstrates a normal
Cross (price) elasticity of demand
A measure of the responsiveness of quantity demanded of one good to a change in the price of another.
Consumer surplus
The difference between the price that a consumer actually pays (the market price) and the amount that they would be willing to pay.
Supply
The amount of a good or service that firms are willing and able to sell at a given price.
Firm
An organization that brings together the factors of production in order to produce output.
Competitive market
A market in which individual firms cannot influence the price of the product being sold because of competition from other firms.
Supply curve
A graph showing the quantity supplied at any given price
Costs of production
The costs incurred by a business as a result of their operations. Examples would be rent
Indirect taxation
A tax applied to a product by increasing the costs of production of firms which produce it.
Subsidy
Money provided by government to reduce the costs of production of a product
Productivity
The output produced per unit of input. It is normally expressed in the form of output per worker.
Cartel
An agreement between firms in a market on price and output with the aim of increasing profits.
Extension of supply
An increase in quantity supplied as a result of higher prices and an increased profit incentive.
Contraction of supply
A decrease in the quantity supplied as a result of lower prices and a reduced profit incentive.
Price elasticity of supply
A measure of the responsiveness of quantity supplied to changes in the market price.
Producer surplus
The difference between the price a firm actually receives for a product (the market price) and the amount that the firm would be willing to accept.
Market equilibrium
The price at which the quantity demanded and the quantity supplied are equal and the market clears
Comparative static analysis
Examines the before and after effect on equilibrium of a change in the external conditions affecting a market
Surplus
A situation where the quantity supplied is greater than the quantity demanded as a result of the price being above the equilibrium price.
Shortage
A situation where the quantity demanded is greater that the quantity supplied as a result of the price being below the equilibrium price.
Disequilibrium
A situation where the price is not at the equilibrium level and there is a shortage or surplus.
Price mechanism
The method by which a market will move towards the equilibrium price.
Price signals
The process by which changes in demand are communicated to firms by the price consumers are willing to pay.
Price incentives
The process by which changes in price cause a change in the quantity being supplied.
Marginal cost
The cost of producing one additional unit of output.
Allocative efficiency
A situation where society is producing an appropriate bundle of goods and services to meet consumer preferences.
Cartel
An agreement between firms in a market on price and output with the intention of maximising their joint profits
Indirect tax
A tax levied on expenditure on goods or services
Direct tax
A tax charged directly to an individual based on a component of income
Incidence of a tax
The way in which the burden of paying a sales tax is divided between buyers and sellers
Subsidy
A grant given by the government to producers to encourage production of a good or service
Ad valorem tax
An indirect tax as a percentage of the price
Graph of ad valorem tax
Graph of subsidy
Graph of indirect tax