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Abnormal profit

The profit over and above normal profit (i.e. the profit over and above the opportunity cost of the resources used in production by the firm).

 

Absolute advantage

Exists when a country is able to produce a good more cheaply in absolute terms than any other country.

 

Ad velorem tax

A tax that is levied as a percentage of the price of the good (e.g., 17.5% VAT)

Allocative efficiency

Occurs when nobody can be made better off by transferring resources from one industry to another without making somebody worse off.

 

Average cost

The average cost of production per unit. It is calculated by dividing the total cost by the quantity produced. It is equal to the total variable cost + the total fixed cost.

 

Average fixed cost

The average fixed cost of production per unit. It is calculated by dividing the total fixed cost by the quantity produced. It falls as quantity produced rises.

 

Average product

The quantity of output per unit of input.

 

 

Average revenue

Is calculated by dividing total revenue by the quantity produced. It is equal to the price paid for the good (so long as the price is the same for all consumers).

 

Average variable cost

The average variable cost of production per unit. It is calculated by dividing the total variable cost by the quantity produced.

 

Barriers to entry

Factors which make it difficult or impossible for a firm to enter a particular market and compete with existing firms.

 

Barriers to exit

These can occur if there are high sunk costs that can not be recovered if the firm leaves the industry.

 

Capital

One of the factors of production. It includes all buildings and machinery.

 

Cartels

A group of producers that attempt to increase the price of their good by limiting output or agreeing upon a price to sell their goods at.

 

Ceteris paribus

All other things remaining equal.

 

Choices

Economic choices have to be made regarding the use of scare economic resources

 

Collective bargaining

Bargaining between a group of managers and a union for the purpose of agreeing upon new conditions/ contracts etc. for the staff.

 

Command economy

An economic system where the government controls all of the factors of production.

 

Comparative advantage

This advantage is measured in terms of other goods a nation could produce.

 

Complementary goods

A good which is usually purchased with another (e.g., bread and butter).

 

Composite demand

A good that is demanded for two or more distinct choices (e.g., oil is used for petrol and the production of chemicals).

 

Consumer surplus

The difference between what consumer are prepared to pay for a good and what they actually have to pay for a good.

 

Cost benefit analysis

It is a method of appraising an investment project. It involves placing a financial value on aspects such as leisure and pollution.

 

Cross elasticity of demand

Measures the responsiveness of demand of one good to a change in the price of another good.

 

Demand

The quantity purchased at any given price.

 

Demand curve

Shows the effective demand at any given price level.

 

Demerit good

A good that is deemed to be socially unacceptable and is over provided by the market mechanism (e.g., cigarettes)

 

Derived demand

The demand for one good results (is derived) from another good (e.g., the demand for steel will increase if the demand for cars increases).

 

Diminishing returns

If increasing quantities of a variable input (e.g., labour) are combined with a fixed input (e.g., capital) eventually the marginal product and then the average product will fall.

 

Diseconomies of scale

A rise in the longrun average costs as production rises.

 

Division of labour

Happens when specialisation takes place (e.g., on a production line).

 

Economic efficiency

The use of resources that leads to the highest possible value of output.

 

Economic goods

These goods are scare and they have an opportunity cost

 

Economic problem

Resources are scarce, however wants are infinite.

 

Economic resources

These are the inputs necessary for production to take place; land, labour, capital and enterprise (entrepreneurial activity).

 

Economies of scale

A fall in the longrun average costs as production rises.

 

Effective demand

A want for a good or service that is backed up by the money to purchase it.

 

Elastic

A percentage change in a variable leads to a larger percentage change in the quantity demanded or supplied (an elastic band!).

 

Enterprise

One of the factors of production that is carried out by an entrepreneur.

 

Entrepreneur

Is the person who thinks of a business idea, raises the capital and then organises the other three factor of production.

 

Equilibrium

A situation of rest where there is no desire to move from the current position.

 

Equilibrium price and quantity

The price and quantity at which there is no tendency to change as demand is equal to supply.

 

European Union

A customs union of European nations formed in 1991 by the Maastricht Treaty. It aims to promote trade and movement of resources without any barriers.

 

Excess demand

Where demand is greater than supply

 

Excess supply

Where supply is greater than demand.

 

Excise duties

Taxes on a specific product (e.g., on beer).

 

External economies of scale

Arise when there is an increase in the size of the industry the firm operates in.

 

Externalities

Occur when the actions of a firm lead to a variety of effects that they do not charge for. They can be positive externalities (e.g., extra healthcare is better for the community as a whole) or negative externalities (e.g., pollution).

 

Factors of production

These are the inputs necessary for production to take place; land, labour, capital and enterprise (entrepreneurial activity).

 

Financial economies of scale

Large firms are able to borrow money cheaper than small ones, as they are more likely to be able to repay the loan (less chance of bankruptcy).

 

Fixed capital

Is the capital that will not be converted into the final product (e.g., factories and machinery).

 

Fixed costs

These are costs that do not vary with the level of output (e.g., rent, advertising campaigns and utility standing charges).

 

Free goods

These are gods that are unlimited in supply and have no opportunity cost (e.g., air).

 

Immobility of labour

When workers are unable to move to a different area to take new jobs. This might be due to personal reasons or not being able to sell a property.

 

Imperfect competition

A market structure where there are several firms in the industry, each of which has some ability to control the price they set for their product.

 

Incidence of tax

Measures the burden of tax on the taxpayer.

 

Income elasticity of demand

Shows how the quantity demanded will change in response to fluctuations in income.

 

Indirect tax

Is a tax levied on goods or services (e.g., VAT or excise duties).

 

Inelastic

A percentage change in a variable leads to a smaller percentage change in the quantity demanded or supplied (an inelastic band!).

 

Inferior good

Demand for the good falls when incomes, i.e., it has a negative income elasticity (e.g., margarine or no frills goods).

 

Interest

It is the cost of obtaining credit or the return paid to owners of capital.

 

Internal economies of scale

Are economies of scale that arise due to an increase in the scale of production of a firm.

 

Joint Supply

Two or more goods are produced together, so a change in the quantity supplied of one good will lead to a change in the supply of another good (e.g., an increase in the supply of beef will lead to an increase in the supply of leather).

 

Labour

One of the factors of production, it is the workforce.

 

Land

One of the factors of production, it includes all raw materials as well as the land.

 

Longrun

The period of time where all the factors of production can be varied. Only the level of technology can not be changed

 

Macroeconomics

Looks at the economy as a whole.

 

Marginal cost

This is the cost of producing one extra unit of output.

 

Marginal revenue

This is the extra revenue gained from selling an extra unit of output.

 

Marginal utility

The satisfaction gained from consuming one extra unit of a good or service.

 

Market

Any way that buyers and sellers are able to communicate and exchange goods and services (e.g., shop, mail order and telephone).

 

 

Market economy

An economic system which aims to resolve the basic economic problem via the workings of the market mechanism (prices are set through the interactions of buyers and sellers).

 

Market failure

Where resources are allocated inefficiently.

 

Marketing economies

As output grows advertising per pound of sales will be reduced.

 

Merit goods

A good that is deemed to be socially acceptable and is under provided by the market mechanism (e.g., health and education)

 

Microeconomics

Deals with the economic behaviour or individuals or groups within the economy.

 

Mixed economy

An economy where both the free market mechanism and the government planning process allocate resources (e.g., UK)

 

Mobility of labour

The ease to which labour is able to move regions or countries.

 

Monopolies and mergers commission

Investigates potential monopoly situations (e.g., British Gasís hold over the gas market).

 

Monopolistic competition

A market structure where a large number of small firms produce a non-homogeneous product and there are no barriers to entry or exit

 

Monopoly

A market structure where one firm supplies all output in the industry without facing competition due to the high barriers to entry that exist.

 

Nationalisation

Taking a firm into public ownership (e.g., the government buying Rolls Royce in 1971).

 

Needs

The minimum item that a person needs for survival

 

Non-excludability

Once a good is provided, no person can be excluded from using it (e.g., street lighting and defence).

 

Non-price competition

Any other way of selling more of a good apart from lowering the price (e.g., advertising and free gifts).

 

Non-rivalness

Consumption of a good by one person does not reduce the amount available for consumption by another person (e.g., street lighting and defence).

 

Normal good

Demand for these goods increase when income rises, i.e., it has a positive income elasticity.

 

Normal profit

The profit that a firm could make by putting its resources in their next best use.

 

 

Occupational mobility

The ease by which a worker can change jobs.

 

Office of Fair Training (OFT)

Investigates potential or actual abuse of monopoly power (e.g., the OFTís investigation of the proposed take-over of Manchester United by Sky television).

 

Opportunity cost

The benefits foregone of the next best alternative.

 

Optimum output

The level of output where longrun average costs are lowest (minimum efficient scale).

 

Optimum resource allocation

Occurs when resources are efficiently used in such a way as to maximise the welfare or utility of consumers.

 

Perfect competition

A market structure where there are many buyers and sellers, where there is freedom of entry and exit, where there is perfect knowledge and where all firms produce a homogeneous product.

 

Perfectly price elastic

Buyers are prepared to buy any amount at a given price, but demand falls to zero if the price rises.

 

Perfectly price inelastic

The quantity demanded does not change in response to price changes.

 

Planned economy

An economic system where the government controls all of the factors of production.

 

Price discrimination

Charging a different price for the same good or service in different markets (e.g., rail traveller being charged higher prices when travelling in the morning).

 

Price elasticity of demand

Shows how the quantity demanded will change in response to movement in price.

 

Price elasticity of supply

Shows how the quantity supplied will change in response to movement in price.

 

Price taker

A firm is forced to accept the prevailing market price for the sale of its product.

 

Private goods

Goods that can only be consumed by one person at a time. The principles of non-excludability and non-rivalry do not apply

 

Privatisation

The sale of government owned (nationalised) industries to the private sector (e.g., sale of British Telecom in 1984).

 

Production possibility curve

This shows the maximum potential level of output for goods within an economy.

 

Productive efficiency

Is achieved when production is at its lowest cost.

 

Profit

The difference between total revenue and total cost.

 

 

Profit maximisation

Occurs where MC=MR

 

Public goods

A good where consumption by one person does not reduce the amount available for consumption by another person and where once provided, all individuals benefit or suffer whether they wish to or not (e.g., street lighting and defence).

 

Rationing

The distribution of restricted supplies by the government. It tries to effect a fair distribution of the limited supplies of basic necessities (e.g., during wartime).

 

Rectangular hyperbola

A demand curve that displays unitary elasticity along its length.

 

Rent

The payment received for land.

 

Sales maximisation

A managerial theory of the firm that suggests firms will aim to maximise their level of sales as this will often lead to higher salaries for the workers. This can sometimes lead to losses for the firm as the price is continually lowered to encourage sales.

 

Sales revenue maximisation

A managerial theory where the level of production occurs where MR=0.

 

Satisficing profits

A managerial theory that suggests managers will only make sufficient profits to satisfy the demands of the shareholders.

 

Scarcity

Refers to the fact that resources are limited in their supply

 

Services

Things that are purchased by consumers that do not have physical characteristics (e.g., doctors and housecleaners).

 

Shortrun

A period of time where at least one factor of production must be fixed (it is usually capital).

 

Specialisation

Economic units (individuals, firms, nations etc.) concentrate on producing certain goods and services.

 

Specific tax

A tax levied on a volume of goods (e.g., £2.35 on a pack of cigarettes).

 

Subsidy

This is money given to firms which lowers the price of a good.

 

Substitute goods

A good that can replaced by another (e.g., a mars bar can be replaced by a snickers)

 

Supply

The quantity of goods that suppliers are willing to sell at any given price over a specified period of time.

 

Supply curve

Shows the level of supply at any given price.

 

Technical economies

Arise because larger factories can be productively more efficient or purchase large expensive pieces of equipment.

 

Terms of trade

The ratio of export prices to import prices.

 

Total revenue

The total amount received from the sales of a product.

 

Total utility

The total satisfaction gained from consuming an amount of a good or service.

 

Trade unions

Organisations of workers that seek to improve the welfare of the workforce.

 

Unitary price elasticity of demand

Elasticity equals one. A percentage change in price leads to an exact and opposite change in quantity demanded.

 

Utility

The satisfaction gained from consuming a good or service. It is often expressed as utils.

 

Variable costs

Costs that vary directly with the level of output (e.g., raw materials).

 

Very longrun

The time period during which all factors of production and level of technology can be varied.

 

Wages

Payment received for labour.

 

 

Wants

The desired purchases of goods and services by consumers.

 

Working capital

Stocks of raw materials, semi-manufactured and finished goods.

 

 

 

 

E-mail Steve Margetts