ZNOTES.

ORG

UPDATED TO 2022 SYLLABUS

CAIE A2 LEVEL
ECONOMICS
(9708)
SUMMARIZED NOTES ON THE DEFINITIONS SYLLABUS
CAIE A2 LEVEL ECONOMICS (9708)

24. Indifference curve – this shows the different

combinations of two goods that give a consumer equal
1. Definitions satisfaction
25. Marginal rate of substitution – the rate at which a
1. Economic efficiency – where scarce resources are consumer is willing to substitute one good for another
used in the most efficient way to produce maximum 26. Isoquant – a curve showing a particular level of output
output 27. Production function – this shows the maximum
2. Productive efficiency – when a firm is producing at the possible output from a given set of factor inputs
lowest possible cost 28. Marginal product – the change in output arising from
3. Allocative efficiency – where price is equal to marginal the use of one more unit of factor of production
cost; firms are producing those goods and services 29. Diminishing returns – where the output from an
most wanted by consumers additional unit of input leads to a fall in the marginal
4. Pareto optimality – where it is impossible to make product
someone better off without making someone else 30. Firm – any business that hires factors of production in
worse off order to produce goods and services
5. Externality – where the actions of producers or 31. Profit maximization - the assumed objective of a firm
consumers give rise to side effects on third parties where the difference between total revenue and total
who are not involved in the action, sometimes cost is at a maximum
referred to as spill over effects 32. Fixed costs – those costs that are independent of
6. Negative externality – where the side effects have a output in the short run
negative impact and impose costs to third parties 33. Variable costs – those that vary directly with output, all
7. Positive externality – where the side effects have a costs are variable in the long run
positive impact and provide benefits to third parties 34. Increasing returns to scale – where output increases
8. Social costs – the total costs of a particular action at a proportionately faster rate than the increase in
9. Private costs – those costs that are incurred by an factor inputs
individual who produces a good or service 35. Decreasing returns to scale – where factor inputs
10. External costs – those costs incurred and paid for by increase at a proportionately faster rate than the
third parties not involved in the action increase in output
11. Social benefits – the total benefits arising from a 36. Economies of scale – the benefits gained from falling
particular action long run average costs as the scale of output
12. Private benefits – benefits that accrue to individuals increases
who produce or consume a particular good 37. Diseconomies of scale – where long-run average costs
13. External benefits – benefits that are received by third increase as the scale of output increases
parties not involved in the action 38. External economies of scale – cost savings accruing to
14. Cost benefit analysis (CBA) – a method for assessing all firms in an industry as the scale increases
the desirability of a project taking into account the 39. Minimum efficient scale – lowest level of output at
costs and benefits involved which costs are minimised
15. Shadow price – one that is applied where there is no 40. Normal profit – a cost of production that is just
recognised market price available sufficient for a firm to keep operating in a particular
16. Utility – the satisfaction received from consumption industry
17. Total utility – the total satisfaction received from 41. Abnormal profit – that which is earned above normal
consumption profit
18. Marginal utility – the utility derived from the 42. Industry – all firms making the same product or in the
consumption of one more unit of the good or service same line of business
19. Diminishing marginal utility – the fall in marginal utility 43. Multinational corporations (MNCs) – firms that
as consumption increases operate in different countries
20. Equimarginal principle – consumers maximise their 44. Small and medium enterprises (SMEs) – firms with
utility where their marginal valuation for each product fewer than 250 employees, small firms have fewer
consumed is the same than 50 employees
21. Budget line – the combinations of two products 45. Market structure – the way in which a market is
obtainable with given income and prices organised in terms of the number of firms and the
22. Substitution effect – where following a price change, a barriers to the entry of new firms
consumer will substitute the cheaper product for the 46. Barriers to entry – any restrictions that prevent new
one that is now relatively more expensive firms from entering an industry
23. Income effect – where following a price change, a 47. Perfect competition – an ideal market structure that
consumer has higher real income and will purchase has many buyer and seller, identical or homogeneous
more of this product products, no barriers to entry

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CAIE A2 LEVEL ECONOMICS (9708)

48. Monopoly – a pure monopoly is just one firm in an 71. Pollution permits – a form of licence given by
industry with very high barriers to entry governments that allows a firm to pollute up to a
49. Monopolistic competition – a market structure where certain level
there are many firms, differentiated products and few 72. Property rights – where owners have a right to decide
barriers to entry how their assets may be used
50. Oligopoly – a market structure with few firms and high 73. Privatisation – where there is a change in ownership
barriers to entry from the public to the private sector
51. Imperfect competition – any market structure expects 74. Equity – where the distribution of, say, income or
for perfect competition wealth is fair
52. Natural monopoly – where a single supplier has 75. Wealth – an accumulated stock of assets
substantial cost advantages such that competing 76. Lorenz curve – a graphical representation of inequality
producers would raise costs and where duplication will 77. Gini coefficient – a numerical measure of inequality
produce an inefficient use of resources 78. Progressive tax – one where the rate rises more than
53. Barrier to exit – any restriction that prevents a firm proportionately to the rise in income
leaving a market 79. Regressive tax – one where the ratio of taxation to
54. Limit pricing – where firms deliberately lower prices income falls as income increases
and abandon a policy of profit maximisation to stop 80. Means-tested benefits – benefits that are paid only to
new firms entering a market those whose incomes fall below a certain level
55. Horizontal integration – where a firm grows through a 81. Poverty trap – where an individual or a family are
merger or acquisition of another firm in the same better off on means-tested benefits rather than
sector of an industry working
56. Price leadership – a situation in a market where by a 82. Universal benefits – benefits that are available to all
particular firm has the power to change prices, the irrespective of income or wealth
result of which is that competitors follow this lead 83. Negative income tax – a unified tax and benefits
57. Cartel – a formal agreement between firms to limit system where people are taxed or receive benefits
competition by limiting output or fixing prices according to a single set of rules
58. Contestable market – any market structure where 84. Intergenerational equity – the responsibility that
there is a threat that potential entrants are free and government has to provide for a more equitable
able to enter this market future distribution of income and wealth
59. X-inefficiency – where the typical costs are above 85. Derived demand – where the demand for a good or
those experienced in a more competitive market service depends upon the use that can be made from
60. Economies of scope – reduction in ATC made possible it
by a firm increasing the different goods it produces 86. Marginal revenue product – the addition to total
61. Diversification – where a firm grows through the revenue as a result of employing one more worker
production or sale of a wide range of different 87. Transfer earnings – the amount that is earned by a
products factor of production in its best alternative use
62. Vertical integration – where a firm grows by producing 88. Economic rent – a payment made to a factor of
backwards or forwards in its supply chain production above that which is necessary to keep it in
63. Horizontal integration – where a firm merge or its current use
acquires another in the same line of business 89. Monopsony – where there is a single buyer in a
64. Sales revenue maximisation – a firm’s objective to market
maximise turnover 90. Government failure – where government intervention
65. Sales maximisation – a firm’s objective to maximise to correct market failure causes further inefficiencies
the volume of sales 91. Economic growth – in the short run an increase in a
66. Satisficing – a firm’s objective to make a reasonable country’s output and in the long run an increase in a
level of profit country’s productive potential
67. Game theory – where competing firms exhibit 92. Economic development – an increase in welfare and
interdependent behaviour whereby the actions of one the quality of life
will impact on all other firms 93. Sustainable development – development that ensures
68. Kinked demand curve – a means of analysing the that the needs of the present generation can be met
behaviour of firms in oligopoly where there is no without compromising the well-being of future
collusion generations
69. Deadweight loss – the welfare loss when due to 94. Actual economic growth – an increase in real GDP
market failure desirable consumption and production 95. Potential economic growth – an increase in the
does not take place productive capacity of the economy
70. Regulations – a wide range of legal and other 96. Output gap – a gap between actual and potential
requirements that come from governments and other output
organisations

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CAIE A2 LEVEL ECONOMICS (9708)

97. Negative output gap – a situation where actual output 122. Optimum population – the size of population that
is below potential output maximises GDP per head
98. Positive output gap – a situation where actual output is 123. Dependency ratio – the proportion of the economically
above potential output inactive to the labour force
99. Trade cycle – fluctuations in economic activity over a 124. Prebisch-Singer hypothesis – a theory that suggests
period of years that the terms of trade tend to move against
100. National income – the total income for an economy developing economies so that developing economies
101. Gross national income (GNI) – the total output have to export more to gain a given quantity of
produced by a country’s citizens wherever they imports
produce it 125. Labour productivity – output per worker hour
102. Money GDP – total output measured in current prices 126. Unemployment – the state of being willing and able to
103. Real GDP – total output measured in constant prices work but without a job
104. Shadow economy – the output of goods and services 127. Full employment – the level of employment
not included in official national income figures corresponding to where all who wish to work have
105. Purchasing power parity (PPP) – a way of comparing found jobs, excluding frictional unemployment.
international living standards by using an exchange 128. Natural rate of unemployment – the rate of
rate based on the amount of each currency needed to unemployment that exists when the aggregate
purchase the same basket of goods and services. demand for labour equals the aggregate supply of
106. National debt – the total amount of government debt labour at current wage rate and price level
107. Multidimensional Poverty Index (MPI) – a composite 129. Frictional unemployment – unemployment that is
measure of deprivation in terms of the proportion of temporary and arises where people are in-between
households that lack the requirements for a jobs
reasonable standard of living. 130. Structural unemployment – unemployment caused as
108. Measurable Economic Welfare (MEW) – a composite a result of the changing structure of economic activity
measure of living standards that adjusts GDP for 131. Cyclical unemployment – unemployment that results
factors that reduce living standards and factors that from a lack of aggregate demand
improve living standards. 132. Claimant count – a measure of unemployment based
109. Human Development Index (HDI) – a composite on those claiming unemployment benefits
measure of living standards that includes GNI per 133. Labour force survey – a measure of unemployment
head, education and life expectancy based on a survey that identifies people who are
110. Kuznets curve – a curve that shows the relationship actively seeking a job
between economic growth and income inequality 134. Multiplier – a numerical estimate of a change in
111. Developed economies – economies with high GDP per spending in relation to the final change in spending
head 135. Reflationary fiscal or monetary policy measures –
112. Developing economy – an economy with a low GDP policy measures designed to increase aggregate
per head demand
113. Poverty cycles – the links between, for example, low 136. Open economy – an economy that is involved in trade
income, low savings, low investment and low with other economies
productivity 137. Closed economy – an economy that does not trade
114. Development traps – restrictions on the growth of with other economies
developing economies that arise from low levels of 138. Circular flow of income – a simple model of the
savings and investment process by which income flows around the economy
115. Emerging economies – economies with a rapid growth 139. Marginal rate of taxation – the proportion of extra
rate and that provide good investment opportunities income taken in tax
116. World Bank – an international organisation that lends 140. Marginal propensity to import – the proportion of
money to developing economies for projects that will extra income spent on imports
promote development 141. Marginal propensity to save – the proportion of extra
117. Primary sector – industries involved in farming and income which is saved
extracting natural resources 142. Aggregate expenditure – the total amount spent in the
118. Secondary sector – industries that manufacture economy at different levels of income
products 143. Average propensity to consume – the proportion of
119. Tertiary sector – industries that produce services income that is consumed
120. Quaternary sector – industries involved in providing 144. Dissaving – spending financed from past saving or
knowledge-based services from borrowing
121. Malthusian theory – the view that population grows in 145. Saving – income minus consumption
geometric progression whereas the quantity of food 146. Marginal propensity to consume – the proportion of
grows in arithmetic progression extra income that is spent

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147. Consumption – spending by households on goods and 173. Keynesians – economists who think that government
services intervention is needed to achieve full employment
148. Disposable income – income minus direct taxes plus 174. Liquidity preference – a Keynesian concept that
state benefits explains why people demand money
149. Consumption function – the relationship between 175. Transactions motive – the desire to hold money for the
income and consumption day-to-day buying of goods and services
150. Saving function – the relationship between income and 176. Precautionary motive – a reason for holding money for
saving unexpected or unforeseen events
151. Average propensity to save – the proportion of income 177. Active balances – the amount of money held by
that is saved households or firms for possible future use
152. Investment – spending by firms on capital goods 178. Speculative motive – a reason for holding money with
153. Government spending – the total of local and national a view to make future gains from buying financial
government expenditure assets
154. Net exports – exports minus imports 179. Idle balances – the amount of money held temporarily
155. Injections – additions to the circular flow of income as the returns from holding financial assets are too
156. Withdrawals – leakages from the circular flow of low
income 180. Liquidity trap – a situation where interest rates cannot
157. Paradox of thrift – where the fact of people saving be reduced any more in order to stimulate an upturn
more results in a fall in saving due to lower spending in economy activity
and income 181. Foreign aid – assistance given to developing
158. Inflationary gap – the excess of aggregate expenditure economies on favourable terms
over potential output (equivalent to a positive output 182. Dependence – a situation where the economic
gap) development of a developing economy is hindered by
159. Deflationary gap – a shortage of aggregate its relationships with developed economies
expenditure so that potential output is not reached 183. International monetary fund (IMF) – an international
(equivalent to a negative output gap) organisation that promotes free trade and helps
160. Autonomous investment – investment that is made countries in balance of payments difficulties
independent of income 184. Virtuous cycle – the links between, for example, an
161. Induced investment – investment that is made in increase in investment, increase in productivity,
response to changes in income increase in income and increase in saving
162. Accelerator theory – a model that suggests 185. Foreign direct investment (FDI) – the setting up of
investment depends on the rate of change in income production units or the purchase of existing
163. Capital-output ratio – a measure of the amount of production units in other countries
capital used to produce a given amount, or value, of 186. Inflation target – the rate a central bank is set to
output achieve
164. Narrow money – money that can be spent directly 187. Phillips curve – a curve that shows the relationship
165. Broad money – money used for spending and saving between the unemployment rate and the inflation rate
166. Quantity Theory of Money – the theory that links over a period of time
inflation in an economy to changes in the money 188. Expectations-augmented Phillips curve – a diagram
supply that shows that while there may be a trade-off
167. Fisher equation – the statement that MV = PY between unemployment and inflation in the short run,
168. Credit multiplier – the process by which banks can there is no trade-off in the long run
make more loans than deposits available 189. Tinbergen’s rule – for every policy aim there must be
169. Liquidity ratio – the proportion of a bank’s assets held at least one policy measure
in liquid form 190. Government macroeconomic failure – government
170. Government securities – bills and bonds issued by the intervention reducing rather than increasing economic
government to raise money performance
171. Total currency flow – the current plus capital plus 191. Counter-cyclically – going against the fluctuations in
financial balances of the balance of payment economic activity
172. Quantitative easing – a central bank buying 192. Laffer curve – a curve showing tax revenue rising at
government bonds from the private sector to increase first as the tax rate is increasing and then falling
the money supply beyond a certain rate

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CAIE A2 LEVEL
Economics (9708)

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