Term Definition

Ability to pay Where taxes should be set according to how well a person can afford to pay
Ad valorem tax An indirect tax based on a percentage of the sales price of a good or service
Air passenger duty APD is a charge on air travel from UK airports. The level of APD depends on
the country to which an airline passenger is flying.
Alcohol duties Excise duties on alcohol are a form of indirect tax and are chargeable on beer,
wine and spirits according to their volume and/or alcoholic content
Asking price The price at which a security, commodity or currency is offered for sale on the
market - generally the lowest price the seller will accept
Automation Production technique that uses capital machinery / technology to replace or
enhance human labour and bring about a rise in productivity
Basic problem There are infinite wants but finite resources with which to satisfy them
Behavioural Branch of economics that studies the impact of psychological and social
economics factors on economic decision making
Black market An illegal market in which the market price is higher than a legally imposed
price ceiling. Black markets can develop where there is excess demand
Bottlenecks Any factor that causes production to be delayed or stopped – this may reduce
the price elasticity of supply of a product
Buffer stock Buffer stock schemes seek to stabilize the market price of agricultural products
by buying up supplies of the product when harvests are plentiful and selling
stocks of the product onto the market when supplies are low
Buyer’s market A market that favours buyers because supply is plentiful relative to demand
and therefore prices are relatively low. The opposite of a seller's market
By-product Something produced as a consequence of producing another good or service
Capacity utilisation The extent to which a business is making full use of existing factor resources
e.g. 80% capacity utilisation means that 20% of capacity is not being used
(spare)
Capital goods Producer or capital goods such as plant (factories) and machinery and
equipment are useful not in themselves but for the goods and services they
can help produce in the future. Distinguished from "financial capital", meaning
funds which are available to finance the production or acquisition of real capital
Capital-intensive A production technique which uses a high proportion of capital to labour
Capitalist economy Economic system organised along capitalist lines uses market-determined
prices to guide choices about the production and distribution of goods. One
key role for the state is to maintain the rule of law and protect private property
Ceteris paribus To simplify analysis, economists isolate the relationship between two variables
by assuming ceteris paribus - all other influencing factors are held constant
Command economy Economic system where resources are allocated by the government
Competitive market A market where no single firm has a dominant position and where the
consumer has plenty of choice. There are few barriers to the entry of new firms
Competitive supply Alternative products a firm could make with its resources. E.g. a farmer can
plant potatoes or carrots. An electronics factory can produce VCRs or DVDs
Complements Two complements are said to be in joint demand
Composite demand Where goods or services have more than one use so that an increase in the
demand for one product leads to a fall in supply of the other. E.g. milk which
can be used for cheese, yoghurts, cream, butter and other products
Congestion charging A direct charge for use of roads in a defined zone e.g. central London
Conspicuous Conspicuous consumption is consumption designed to impress others rather
consumption than something that is wanted for its own sake
Constraints Limits to what we can afford to consume – we have to operate within budgets,
and make choices from those sets that are feasible/affordable
Consumer durable A good such as a washing machine or a digital camera that lasts a period of
time, during which the consumer can continue getting utility from it
Consumer Consumer sovereignty exists when the economic system allows scarce
sovereignty resources to be allocated to producing goods and services that reflect the
wishes of consumers. Sovereignty can be distorted by the effects of
persuasive advertising
Consumer surplus Consumer surplus is the difference between the total amount that consumers
are willing and able to pay for a good or service (indicated by the demand
curve) and the total amount that they actually pay (the market price)
Consumption The act of buying and using goods and services to satisfy wants
Cross price elasticity Responsiveness of demand for good X following a change in the price of good
of demand Y (a related good). With cross price elasticity we make a distinction between
substitute products and complementary goods and services
Cyclical demand Demand that change in a regular way over time depending on the part of the
economic (business) cycle that a country is in or the time of year
Demand Quantity of a good or service that consumers are willing and able to buy at a
given price in a given time period
Demand curve A demand curve shows the relationship between the price of an item and the
quantity demanded over a period of time. For normal goods, more of a product
will be demanded as the price falls
Derived demand Derived demand occurs when the demand for a particular product depends on
the demand for another product or activity
Disequilibrium A situation where there is a state of imbalance and so a tendency for change
Division of labour The specialization of labour in specific tasks, intended to increase productivity
Effective demand Demand in economics must be effective. Only when a consumers' desire to
buy a product is backed up by an ability to pay for it do we speak of demand
Elastic demand Demand for which price elasticity is greater than 1
Elastic supply Where the price elasticity of supply is greater than +1
Elasticity of supply Price elasticity of supply measures the relationship between change in quantity
supplied and a change in price
Entrepreneur An entrepreneur is an individual who seeks to supply products to a market for
a rate of return (i.e. a profit). Entrepreneurs will usually invest their own
financial capital in a business and take on the risks associated with a business
investment.
Equilibrium Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there
is no tendency for change
Equity Fairness; a view on the ‘rightness’ of an issue based on opinion rather than
fact - requires a value judgement
Excess demand The difference between the quantity supplied and the higher quantity
demanded when price is set below the equilibrium price
Excess supply When supply is greater than demand and there are unsold goods in the
market. Surpluses put downward pressure on the market price
Excise duties Excise duties are indirect taxes levied on goods and services such as
cigarettes, fuel and alcohol. There are duties on air travel, car insurance
Factor incomes Factor incomes are the rewards to factors of production. Labour receives
wages and salaries, land earns rent, capital earns interest and enterprise
earns profit
Finite resources There are only a finite number of workers, machines, acres of land and
reserves of oil and other natural resources on the earth. By producing more for
an ever-increasing population, we may destroy the natural resources of the
planet
Free market In a free market, the forces of supply and demand alone determine price and
output without any government intervention. Free markets are totally
unregulated
Goods Tangible, physical products e.g. cars and computers
Incentives Incentives matter! For competitive markets to work efficiently economic agents
(i.e. consumers and producers) must respond to price signals in the market
Incidence of a tax How the final burden of a tax is shared out. If demand for a good is elastic and
a tax is imposed then the tax will fall mainly on the producer as they will be
unable to put prices up without losing a lot of demand
Income Income represents a flow of earnings from using factors of production to
generate an output of goods and services. For example wages and salaries.
Income elasticity of Measures the relationship between a change in quantity demanded and a
demand change in real income. The formula for income elasticity is: percentage change
in quantity demanded divided by the percentage change in income
Independent goods Two products that have no price-quantity demanded relationship: XED=0
Indirect tax An indirect tax is imposed on producers (suppliers) by the government.
Examples include excise duties on cigarettes, alcohol and fuel and also value
added tax
Inefficiency When the best use of resources is not being made
Inelastic demand When the price elasticity of demand is less than 1
Inelastic supply When the price elasticity of supply is less than +1
Inferior good When demand for a product falls as real incomes increases
Inputs Labour, capital and other resources used in the production of goods and
services
Inventories Unsold products, finished and unfinished, and the raw materials used to make
them
Invisible hand Adam Smith - one of the founding fathers of modern economics, described
how the invisible or hidden hand of the market operated in a competitive
market through the pursuit of self-interest to allocate resources in society's
best interest
Joint supply Joint supply describes a situation where an increase or decrease in the supply
of one good leads to an increase or decrease in supply of another by-product
e.g. a contraction in supply of lamb will reduce the supply of wool
Land Quantity and quality of natural resources available in an economy
Latent demand Latent demand exists when there is willingness to buy a product, but where
the consumer lacks the purchasing power to be able to afford the product
Law of demand The law of demand is that there is an inverse relationship between the price of
a good and demand
Living Wage The living wage is an hourly rate of pay set annually by reference to the basic
cost of living in the UK and London. Unlike the National Minimum Wage,
employers may choose to pay the living wage on a voluntary basis.
Long run The time period when firms can adjust all factors used in production
Market equilibrium Equilibrium means a state of equality between demand and supply. Without a
shift in demand and/or supply there will be no change in market price. Prices
where demand and supply are out of balance are termed points of
disequilibrium
Market incentives Market signals that motivate economic actors to change their behaviour
(perhaps in the direction of greater economic efficiency)
Market shortage Where demand exceeds supply at a given price
Market supply Market supply is the total amount of an item producers are willing and able to
sell at different prices, over a given period of time egg one month. Industry, a
market supply curve is the horizontal summation of all each individual firm’s
supply curves
Maximum price A legally-imposed maximum price in a market that suppliers cannot exceed.
To be effective a maximum price has to be set below the free market price
Minimum price A legally imposed price floor below which the normal market price cannot fall.
To be effective the minimum price has to be set above the normal equilibrium
price. A good example of this is minimum wage legislation currently in force in
the UK
Mixed economy Where resources are partly allocated by the market and partly by the
government
Needs Humans have many different types of wants and needs e.g.: economic, social
and psychological. A need is essential for survival e.g. food satisfies hungry
people. A want is something desirable but not essential to survival e.g. cola
quenches thirst
Non-renewable Non-renewable resources are resources which are finite and cannot be
resources replaced. Minerals, fossil fuels and so on are all non-renewable resources
Normal goods Normal goods have a positive income elasticity of demand. Necessities have
an income elasticity of demand of between 0 and +1. Luxuries have income
elasticity > +1 demand rises more than proportionate to a change in income
Normative Normative statements express an opinion about what ought to be. They are
statements subjective statements - i.e. they carry value judgments
Opportunity cost The cost of any choice in terms of the next best alternative foregone.
Ostentatious Some goods are luxurious items where satisfaction comes from knowing both
consumption the price of the good and being able to flaunt consumption of it to other people
Persuasive Designed to manipulate consumer preferences and cause a change in
advertising demand
Perverse demand A perverse demand curve is one which slopes upwards from left to right.
curve Therefore an increase in price leads to an increase in demand
Planned economy In a planned economy, decisions about what to produce, how much to
produce and for whom are decided by central planners rather than using the
price mechanism
Positional goods Goods which are at least in part demanded because their possession or
consumption implies social or other status of those acquiring them
Positive statement Objective statements that can be tested or rejected by referring to the
available evidence. Positive economics deals with objective explanation
Preferences Our tastes, likes, rankings reflected in the choices that people make in markets
Price elasticity of Responsiveness of demand for a product following a change in its own price.
demand Also called own price elasticity of demand.
Price elasticity of Relationship between change in quantity supplied and a change in the price of
supply a product
Price mechanism The means by which decisions of consumers and businesses interact to
determine the allocation of resources between different goods and services
Price rigidity Situation where the price of a product rarely changes
Price signals Changes in price act as a signal about how resources should be allocated. A
rise in price encourages producers to switch into making that good but
encourages consumers to use an alternative substitute product (therefore
rationing the product)
Producer surplus The difference between what producers are willing and able to supply a good
for and the price they actually receive
Production A boundary that shows the combinations of two or more goods and services
possibility frontier that can be produced using all available factor resources efficiently
Productivity A measure of efficiency = output per unit of input or output per person
employed
Rational choice ‘Rational choice’ involves the weighing up of costs and benefits and trying to
maximise the surplus of benefits over costs
Redistribution Measures taken by government to transfer income from some individuals to
others
Regressive tax A tax is said to be regressive when low income earners pay a higher
proportion of their income in tax than high income earners
Regulations Regulations are legally enforced rules that restrict or ban specified activities
Regulator A government agency that monitors the performance of firms in an industry
such as OFCOM or the Office of Rail Regulation
Relative poverty Relative poverty measures the extent to which a household's financial
resources falls below an average income threshold for the economy
Road pricing A direct charge to road users for their use of a particular road e.g. a motorway
toll
Scarcity Scarce means limited. There is only a limited amount of resources available to
produce the unlimited amount of goods and services we desire
Self sufficiency Where people meet their own wants and needs without producing a surplus to
trade
Seller’s market A market where demand exceeds supply, allowing the sellers of a product to
have greater control over prices, terms, etc. The opposite of a buyer's market
Shortage A situation in which quantity demanded is greater than quantity supplied
Signalling Prices have a signalling function because the price in a market sends
important information to producers and consumers
Spare capacity Where a firm or economy can produce more with existing resources. When
there is plenty of spare capacity, elasticity of supply tends to be high
Specialisaton A method of production where a business or area focuses on the production
of a limited scope of products or services to gain greater productive efficiency
Speculation Speculation is the activity of buying a good or service in anticipation of a
change in the price/market value e.g. currency or stock-market speculation
Stakeholders Groups who have an interest in the activity of a business e.g. shareholders,
managers, employees, suppliers, customers, government and local
communities. Different stakeholders have different objectives e.g. owners want
maximum profits, customers low prices and workers high wages and rising
living standards
State provision Government-provided good or services - funded through tax revenue, in order
to provide goods which have positive externalities or are public goods
Subsidy Payments by the government to suppliers that reduce their costs. The effect of
a subsidy is to increase supply and therefore reduce the market equilibrium
price
Substitutes Goods in competitive demand and act as replacements for another product
Substitutes in A substitute in production is a product that could have been produced using
production the same resources. Take the example of barley. An increase in the price of
wheat makes wheat growing more attractive
Substitution effect When a price fall encourages consumers to buy more of a relatively lower
priced product and less of a higher priced substitute
Supply Quantity of a good or service that a producer is willing and able to supply onto
the market at a given price in a given time period
Supply chain Different stages of making, distributing and selling a good or service from the
production of parts, through to distribution and sale of the product
Supply shock An event that directly alters firms' costs and prices shifting the supply curve
either to the right (lower costs) or to the left (higher costs). Examples include
unexpected changes in the global prices of commodities such as oil, gas and
metals
Technology The application of knowledge to production
Time lags Time lags occur in production, particularly in agriculture, when decisions about
the quantity to be produced are made well ahead of the actual sale. Demand
and the price may change in the interval, creating a problem for the producer
Trade-off The process of making a choice between alternatives e.g. deciding if is worth
sacrificing a new car for a holiday
Value judgement A view of the rightness or wrongness of something, based on a personal view.
Welfare loss The excess of social cost over social benefit for a given output
Willingness to pay The maximum price a consumer is prepared pay to obtain a product