Economics Dictionary

AAA credit-rating – This is the highest grade for the rating of a bank’s or country’s debt. An AAA grade shows that the corporation or country is highly investable and can easily meet its financial obligations (i.e. paying back its debt).

Absolute advantage – A firm or country has an absolute advantage in a good or service if it can produce more of it using the same amount of resources.

Absolute poverty – This is when people’s incomes are so low that they aren’t able to purchase basic necessities such as clothing, food and shelter.

Acquisition – When a company expands by buying another business. If the business is not a corporation (i.e. doesn’t trade shares on the public stock exchange), the terms will be agreed with the owners. If the business is a company that has shares on a public stock exchange then shares will be purchased to complete the acquisition.

Administration – When a company is under severe financial difficulties, an administrator will be called in (either by creditors, the court or the company itself) to operate the company so that it can continue trading temporarily without going into liquidation. The object will usually be to turn the company around financially or to get a better price for the assets than an immediate liquidation.

Ad valorem – This is a tax or tariff on a good or service that is calculated as a percentage of its price rather than a raw value.

Adverse selection – This is a situation in a market when buyers and sellers have access to different information about each other and as a result, the market doesn’t function properly.

Aggregate demand – This refers to the total of all the demand in an economy. The equation for aggregate demand is: Consumption (C) + Government Spending (G) + Investment (I) + (Exports (X) – Imports (M)).

Aggregate supply – This refers to the total supply of goods and services in an economy.

Allocative efficiency – This occurs in a free market economy when resources are allocated in a way that matches the requirements of consumers to the greatest possible extent.

Anarcho-capitalism – This is a political system whereby markets are kept completely free and there is no central government or authority.

Animal spirits – This is the term used by John Maynard Keynes which conveys the idea that in major business or investment decisions people act quickly without any rational calculations because they are spurred to act spontaneously rather than stopping to think what they are doing.

Anti-competitive practices – These are methods used by firms to reduce the competition in a market or industry.

Arbitrage – The practice of buying a good at a certain price and then selling it at a higher price, in order to make a positive return.

Assets – An asset is anything of value (real and financial) that a business possesses. The term can be divided up into fixed assets – things like property or machinery that cannot easily be easily turned into cash, and current assets which are more liquid (can easily be converted into cash).

Asymmetric information – A situation when the buyer or the seller knows more than the other about the quality of the product. Asymmetric information is one cause of market failures. See full article “Market failures explained”

Balance of payments – This is a record of the amount of money flowing into a country and the amount of money flowing out. It is divided into two accounts: the current account and the capital account.

Balance of trade – The balance of trade is the difference between the value of a county’s exports and the value of their imports.

Balanced trade – This is when the value of a country’s exports is equal to the value of their imports.

Bank – This is an institution that accepts deposits and uses this money to make loans to people and businesses. The bank will reward depositors with interest and charge interest on any loans made.

Bankruptcy – A situation in which an individual or a business has insufficient cash or other assets with which to settle debts. A business will be forced to cease trading.

Bank run – This is when a large amount of people remove their money from a bank because they fear that the bank is unable to pay its debts. By removing their deposits, this actually increases the chance that the bank will default on its debts so it prompts more people to remove their deposits.

Barriers of entry – Obstacles which make it difficult for new firms to enter a market. E.g. high start-up costs or collusion between existing firms.

Barter economy – This is when people obtain goods by exchanging other goods rather than using money. This is usually because people lack confidence in the system of money.

Base rate – This is the rate of interest, generally set by central banks, around which other interest rates tend to be set. For example, the Bank of England sets the base rate for the British Pound which acts as a benchmark for the rates of high-street and commercial banks.

Benefit principle – This is the idea that public services should be funded by the people who use them.

Bonds – This is an IOU issued by governments and companies . Individuals, banks and investment funds can purchase these bonds and will receive the full money back after a set period of time as well as a fixed rate of interest at regular intervals.

Brand loyalty – Achieved if the distinguishing features of the product create a sense of uniqueness that will induce customers to make repeat purchases.

Brand proliferation – Once producer sellers multiple brands to reach different markets segments and as a competitive strategy.

Broad trends – Tendencies in the overall economy, generally seen in macroeconomic data (e.g. price indices, confidence levels) and in social trend data.

Bubble – This is when the price of an asset is driven significantly above its actual value by speculators.

Budget deficit – When the government spends more money than it receives from tax receipts.

Budget surplus – When the government receives more money (from tax receipts) than it spends.

Bulk buying economies – Occur when businesses are purchasing large enough quantities to be charged a lower price per unit, either because unit supplier costs are reduced or because the buyer has marketing power.

Bundling – The practice of selling products as a group or package rather than individually.

Capital – Material or financial wealth that can be used to generate income.

Capital goods – These are man-made goods that are used to produce more goods.

Capitalism – An economic system where the means of production are placed in private hands and profit is the main objective for businesses.

Capital output ratio – This is the amount of capital needed to produce one unit of output.

Capital stock – The total physical capital available in an economy at any given time.

Capital structure – This is the way a firm sources its capital to finance its operations and growth.

Cartel – A group of firms that collude together to act as a monopoly in order to restrict output and increase prices.

Central bank – This is a bank which controls the supply of money in an economy and has the ability to use monetary policy. Many central banks also have the task of the regulating the banking system.

Circular flow of incomeThis is the economic theory that in an economy total expenditure and total income are equal.

Claimant count – This is a measurement of unemployment that counts all the people who have registered for unemployment benefits.

Classical economics This is a branch of economics based on the concept that free markets regulate themselves, and that the economy always moves towards full employment without the need for government intervention.

Classical realism – Those in positions of power are driven by competitive self-interest. Classical realism is man’s inherent “drive for power and the will to dominate [that are] held to be fundamental aspects of human nature”. ( Baylis, J & Smith, S & Ownes, P)

Classical unemployment – This is a type of unemployment caused by real wages being too high in the economy. Too high real wages mean firms cannot afford to employ all available workers so some are left unemployed.

Collateral – This is another name for a security used for a loan. For example, a house would be a collateral for obtaining a mortgage. When someone offers a collateral when trying to obtain a loan, they are often charged a lower rate of interest because they are seen as safer to lend to.

Collusion – This is when businesses reach agreements with other businesses, often in ways which are anti-competitive, sometimes bringing shared monopoly power. Collusion is illegal in most markets including the US and UK due to competition laws.

Command economy – This is where the market is mainly controlled by the government and it decides what and how things are produced. Predominately left-wing governments will operate this system.

Commercial bank – This is a bank that deals with individuals and small businesses. Its main activities include giving out loans to individuals and businesses and taking deposits. This type of bank is also known as a retail or high street bank.

Common market – This is a trade bloc where all member countries trade freely with each other and agree to have a single unified trade policy that covers all member country’s trade with the rest of the world.

Company – This is a type of organisation for a business. A company is an organisation that has a separate legal entity to the people running it. This means that a company acts very much like an individual. For example, a company has to pay taxes and can be sued.

Comparative advantage – The idea developed by David Ricardo that countries should specialise in the good that they have the lowest opportunity cost in and this way everyone is made better off.

Complementary goods – These are products that can be used in conjunction with other goods. E.g. DVDs are a complementary good for DVD players.

Concentration ratio – A measure of the extent to which a market is dominated by large firms (or not). This is found by adding the market shares of the largest three to five firms.

Confederation of British Industry – This is a not-for-profit organisation which promotes the interests of its members, British businesses by lobbying governments and influential institutions.

Consumer expenditure – The amount of money that is spent by households to purchase goods or services in an economy.

Consumer Price Index (CPI) – A method of measuring inflation by calculating the average price increase as a percentage from a basket of 600 goods and services.

Consumer sovereignty – This is the theory that consumers have ultimate control over what is produced in an economy.

Contingency planning – A method of preparing for unwelcome or unlikely but possible problems.

Contractionary fiscal policy – This is when a government increases taxation and reduces public spending in order to reduce the aggregate demand in the economy.

Conventional wisdom – A widely accepted which is not necessarily as true as it once might have been.

Core inflation – This is the long-run, underlying rate of inflation in an economy.

Corporate social responsibility – Accepting that organisations must take account of their impacts on the community and environment, show consideration for stakeholders and behave ethically.

Corporation tax – This is a tax on the profits of companies.

Cost benefit analysis – This involves calculating the potential costs and benefits of a particular project or action.

Cost differential – A difference in cost compared to rivals.

Cost inflation – This is when there is a general rise in prices in the economy due to an increase in the cost of production for firms.

Creative destruction – Refers to Schumpeter’s idea that monopoly profits will spur innovation to find new products and ways of operating which will in turn enhance competition on price and quality.

Credit rating – This is a measure of the ability of a debtor in paying off its debts and not defaulting.

Current account – The current account is the net amount of money coming into a country from trade, factor payments and international transfers.

Current account surplus – This is when there is more money coming into the country from trade, factor payments and international transfers than there is going out.

Current account deficit – This is when there is more money going out of the country from trade, factor payments and international transfers than there is coming in.

Cyclical deficit – This is when a government’s expenditure exceeds its tax revenue as a result of a slowdown in the economy,

Cyclical unemployment – This is the unemployment created during a recession i.e. when an economy’s gross domestic product is falling and there is a reduction in spending.

Debt – This is money that an individual, a firm or government owes to other parties.

Debt deflation – This is when deflation and high amounts of debt create a downward spiral in the economy.

Deficit – This is when the government’s spending exceeds its tax revenue in a given year.

Deflation – When the overall level of prices in an economy is falling.

Demand – The quantity of a good or service that people are willing and able to buy.

Demand curve – A line on a graph that represents the quantity people demand of a good at specific prices.

Demand inflation – This when there is a general rise in prices in the economy due to an increase in aggregate demand.

Demerit goods – These are goods that are considered harmful to society when they are consumed.

Depreciation – This is the loss of performance and value in capital equipment over time.

Depression – This is a very severe recession with typical characteristics of low levels of investment, rising unemployment and falling prices.

Derivative – This is a financial instrument (usually a contract between two parties) where the price of it depends on the value of an underlying asset like a share or bond.

Differentiation – Making your product stand out from the competition.

Diminishing returns – A situation where increasing one factor in a production process will bring forth successively smaller amounts of output.

Discouraged workers – These are people who are unemployed for so long that they eventually give up the search for a job and leave the labour market.

Diseconomies of scale – This is when a firm experiences an increase in average unit costs as they grow larger, often because of communication issues or costs of co-ordination.

Disinflation – When the overall level of prices in an economy is rising at a slower rate.

Disposable income – This is the income remaining after all taxes have been paid off.

Diversification – Spreading risks by developing a range of products and the markets they are sold in, reducing the reliance of income on just one product.

Division of labour – This is when individuals specialise in one part of the production process so that they can become quicker and more efficient at that task.

Duopoly – This is when a market consists of just two sellers who control the market and its supply of goods.

Dumping – This is when businesses export at a price that is less than the true cost of production.

Dutch disease – This is the name for the idea that countries who discover huge reserves of natural resources will be badly impacted in the long run. After the discovery of natural resources, large amounts of investment will go into the country causing the currency to rise in value compared to other currencies. This will make the country’s other exports, such as manufacturing, more expensive and will cause a decline in all sectors of the economy other than natural resource exports.

Economic costs – This is the raw cost of producing something as well as the income sacrificed from the next best alternative that could have been produced.

Economic cycle – This is when economic activity fluctuates between its target growth rate. The four stages of the economic cycle are known as: upswing, boom, downturn, recession.

Economic development – This is when a country sees an increase in wealth, equality and a higher standard of living.

Economic growth – This is when a country’s production of goods and services increases over time. I.e. gross domestic product (GDP) increases.

Economic profit – This is calculated by taking economic costs from revenue. A firm is making economic profit when revenue exceeds economic costs.

Economics – A social science that studies how people decide to use scarce resources to satisfy their wants and needs.

Economic system – This is the way the government of a country organises the production and consumption of goods and services in the economy.

Economies of agglomeration – This is when firms benefit from lower average-unit-costs when several firms set up their operations in the same location. All firms will benefit from the more sophisticated infrastructure, supply chains and the supply of trained labour in the area.

Economies of scale – This is when a firm’s average costs decrease due to an increase in output.

Economy – A system that provides goods and services.

Effective demand – Similar to demand. Its the combination of wanting a good with the ability and readiness to acquire it.

Efficiency – This is how many units of output a firm produces for every unit of input. A firm is more efficient over other firms if it produces more units of output using the same amount of inputs.

Efficient markets hypothesis – This is the theory that markets are efficient so the prices of traded assets fully reflect all the available information to investors.

Emerging markets – These are economies that are not fully developed but have a growing group of middle class consumers.

Engel’s Law – This is the law that states the proportion of spending on food decreases as incomes rise.

Entrepreneur – Someone who organises business activity and is responsible for the risks involved.

Environmental charges – These are charges for using natural resources that are imposed by a government.

Environmental economics – This is a branch of economics that focuses on how economics can be used to protect the environmental reduce the environmental damage involved in economic transactions.

Equilibrium price – The price at which quantity supplied and quantity demanded are equal.

Equity – This is when there is a fair distribution of income and wealth.

Ethnocentric model – This is an approach to marketing that involves looking at the whole world primarily from the perspective of one’s own culture.

Eurozone – This is a currency made up of 17 European Union member countries who chose to adopt the Euro.

Excess demand – This is a situation when the quantity demanded for a product is greater than the quantity supplied by sellers.

Excess supply– This is a situation when the quantity supplied for a product is greater than the quantity demanded by buyers.

Exchange rate – An exchange rate is very simply the nominal rate at which one country’s currency can be traded for another.

Expansionary fiscal policy – This is when a government reduces taxation and increases public spending in order to increase the aggregate demand in the economy.

Expansionary policies – This is when the government tries to increase the level of demand in the economy by using monetary or fiscal policy.

Exports – Goods and services that are sold to other countries.

External benefits – These are the benefits from an activity (such as the production of a good) that are felt by third parties such as the general public. External benefits aren’t felt by the buyers or sellers but by people outside of the transaction.

External costs – These are the costs from an activity (such as the production of a good) that are felt by third parties such as the general public or environment. External costs aren’t felt by the buyers or sellers but by people or the environment outside of the transaction. An example of an external cost is pollution.

External economies – This is when the growth of output in an industry causes a fall in average unit costs for all firms in that industry.

Externalities – These are negative or positive consequences that are not accounted for in a market transaction. Examples of negative externalities are pollution or congestion.

Factors of production – These are inputs used to create goods and services. The four factors are land, labour, capital and human enterprise.

Fiat money – This is a type of money that has no actual value but it is generally in an economy because people trust that it can be exchanged for goods and services.

Financial year – This is a 12-month accounting period used by organisations. An organisation can choose any 12-month period to be their financial year.

First-degree price discrimination – This is a pricing strategy which involves a firm charging every consumer the maximum price that they are willing to pay

Fiscal policy – This is the governments use of taxation and spending to influence the economy – mainly to control the aggregate demand.

Fiscal year – This is a 12-month period used by the government for accounting purposes. The UK’s fiscal year runs from 6 April to 5 April.

Fixed costs – These are costs that aren’t affected by the current levels of production. Therefore increasing production from four to five units a day will not have any affect on a firm’s fixed costs.

Floating exchange rate – This is an exchange rate that is determined by the supply and demand for it on a foreign exchange market.

Forward guidance – This is when the central bank of an economy make a promise to keep interest rates at a certain level for a given period of time.

Footloose – Literally meaning not tied to a particular location and able to move freely.

Foreign direct investment – This is when people or firms invest money into a foreign country.

Forward contract – This is contract between a buyer and a seller in which a price is agreed for an asset, such as a commodity, to be delivered at a future date. This is different to a futures contract in many ways. Forward contracts are private agreements usually between a business and a supplier whereas futures are traded on an exchange. Furthermore, the actual asset in a forward contract is usually traded whereas in a futures contract the asset is very rarely traded.

Free market economy – An economy where activity is directed by entrepreneurs and private organisations with little intervention from the state.

Free trade area – This is a trade bloc in which a group of countries trade freely with each other but retain their own independent trade policies in relation to the rest of the world.

Frictional unemployment – Unemployment due to the movement between jobs in a dynamic economy. Frictional unemployment is normally regarded as relatively short term and less problematic than other types of unemployment.

Full employment – This is a situation when everyone who is willing and able to work has a job.

Full employment output – This is the maximum potential output for the economy where every unit of capital and labour is being utilised. It is also referred to as the level of output produced when an economy is in full employment.

Futures contract – This is a contact to buy or sell an asset, such as a good, share or bond, at an agreed price on a future date. Both the buyer and the seller are obliged to trade the asset on the agreed date whereas in an option one of the parties is not obliged to.

Game theory – The analysis of the behaviour of players (rival firms) which are interdependent. The actions of one firm will always have an impact on the other firms. See full article on Game Theory

Generic brand – A brand that has become so well-known that it is the first association with the market it is. E.g. Sellotape.

Geocentric Model – A marketing approach that sees the world as a potential market with both similarities and differences in domestic and foreign markets.

Geographical mobility of labour – This describes the ease with which members of the labour force can move from working in one location to another.

Gini index – This is a measure of income equality in a country. A low value indicates an equal distribution of income within a country whereas a high value shows that a country has large skews in income.

Glocalisation – This the method used by businesses to adapt products in foreign economies to the specific requirements of the local consumers.

Globalisation – This describes the movement of capital, goods, services and people across the world.

Global oligopoly – This is created when multinational corporations grow to the point where they’re dominating the world market.

Goldilocks economy – This is an economy that is growing at a sustainable rate which means it is ‘not too hot, not too cold, but just right’

Government failure – This is when a government intervention worsens the situation in the market.

Green taxes – These are taxes on the output of certain products. The aim of the tax is to reduce the negative effects of the production and consumption of certain products (such as fuel) on the environment.

Gross domestic product (GDP) – This is the total value of all goods and services produced in an economy during a set period of time.

Gross national income per capita – The value of goods and services produced by citizens of a country, divided by the total population.

Harrod-Domar model – This is a growth model used in development economics that states an economy’s growth rate is dependent on the level of saving and the capital output ratio.

Hedging – Signing contracts for future completion at prices decided now. This can reduce uncertainty over future costs and be used to spread risks.

Homogeneous products – These are products that are identical to one another and it is impossible to distinguish one producers output from another. Homogeneous products are produced in perfectly competitive markets.

Horizontal merger – This is when two firms that are in the same stage of production join together under one entity. Lets say firms in the retail sector merge together – this would be an example of a horizontal merger.

Hot money – This is money that frequently flows between different financial markets so investors can take advantage of higher interest rates

Human capital – This is the knowledge and skills that people acquire through training and education.

Human development index – This is an index that is constructed by the United Nations Development Program and measures a country’s development based on access to healthcare and education as well as national income.

Hyperinflation – A situation in an economy when the general level of prices in an economy is rapidly increasing. Hyperinflation is usually defined when prices are increasing by over 50% a month.

Imperfect competition – This is a term that describes any market structure between the extremes of perfect competition and pure monopoly. Duopolies, oligopolies and monopolistic markets are all imperfectly competitive market structures.

Imports – Goods and services that are bought from other countries.

Imputed value – This is an estimate of the value of a good or service that isn’t sold in a marketplace and therefore is difficult to measure. For example, opportunity costs are often calculated using an imputed value.

Incentive – A reward that stimulates activity.

Income –This is the money people earn from wages, dividends and rents.

Income elastic demand – A situation in which a rise in income will lead to a larger proportionate change in quantity demanded.

Income inelastic demand – a situation in which a rise in income will lead to a less proportionate change in quantity demanded.

Income elasticity of demand – This is a measurement of how sensitive the demand for a product is to a change in people’s income.

Indirect tax – This is a tax on people’s spending or wealth. Value-added tax is an example of an indirect tax because it taxes people s spending on goods and services.

Infant industry –This is a small industry in a country that has the potential to prosper but needs to be protected from foreign competition in order to fully develop.

Inferior goods – These are goods that are of inferior quality to other products and have negative income elasticity.

Inflation – When the general level of prices of goods and services in an economy is increasing.

Inflationary gap – This is a situation when the economy is operating above the full employment level.

Inflation rate – This measures the percentage change in the general level of prices from the year before.

Informative advertising – Advertising that provides information on the product availability, features and price.

Infrastructure – This is the provision of basic services, transport and communication facilities.

Injections – Injections increase the demand for domestically produced goods and services. Injections come from investment, government spending and export sales.

Innovation – Product innovation is the development of new products or an improvement in the design of a product. Process innovation is finding new methods of producing things in order to cut costs.

Inorganic growth – This is when a business expands through the taking over or merging of other companies.

Intellectual Property Rights – These are the rights to own and take advantage of ideas or inventions.

Interdependence – This is when the actions of firms in a market affect the actions of competitors in the same market.

Interest rate – This is the cost of borrowing money and the reward for saving it. It is also referred to as the price of money.

Intermediate inputs – These are goods or services that are used in the production process for final goods or services. For example, a computer motherboard would be an intermediate input for a personal computer.

Investment – This is spending that aims to generate income in the future. E.g. building factories and buying machinery.

Invisible hand – An expression coined by the economist Adam Smith to show that when people acted selfishly and bought products that they wanted, society on the whole would be better off because only the goods and services that people wanted would be produced. Therefore when people act in their own self-interest they are actually acting in the most socially optimal way.

Inward looking trade policies – These are trade policies that aim to protect domestic producers from foreign competition.

Joint venture – This is when two businesses collaborate together on a particular project.

Keynesian economics – This is a branch of economics based around the concept that economic output is influenced by aggregate demand in the short run, and that full employment can be achieved by changing aggregate demand through intervention policies such as fiscal policy.

Knowledge economy – The situation in which intellectual skills, command of knowledge, understanding and ideas have all become central to economic activity, and more important than physical effort.

Labour forceThe labour force is the total amount of people who are willing and able to work. It is also referred to as the number of employed people plus the number of unemployed people.

Laffer curve – The Laffer curve is a graphical representation of the relationship between the government tax rate and the amount of tax revenue it receives.

Lagging indicators – These are measures which are slow to reflect the current rate of economic activity. E.g. unemployment levels and price indices.

Laissez-faire – This is an economic system in which there is a competitive market economy where prices are determined by supply and demand and there is little or no intervention from the government.

Law of demand – This is the accepted theory that when the price of a product falls, people demand larger quantities of it.

Law of supply – This is the accepted theory that when the price of a product rises, firms will supply more of it.

Leakages – Leakages – This is when demand for domestically produced goods and services is reduced due to money being diverted into savings, taxes or imports.

Leading indicators – These are early signals of the direction of economic activity. For example share prices for companies.

Lender of last resort – This is the role of central banks to ensure that the banking system has enough funds during a financial crisis.

LFS unemployment – This is a measurement of unemployment which includes everyone who is actively looking for work but doesn’t have a job.

Limit pricing – This is a method similar to predatory pricing. It involves setting prices below a profitable level in order to put off firms entering the market.

Macroeconomics – The study of the economy as a whole and its key factors such as inflation, interest rates and unemployment.

Malthusian problem – This is a theory introduced by the economist Thomas Robert Malthus which states that the current rate of population growth will eventually cause countries to live in poverty. The reason for this, it states, is because the world’s population is growing exponentially whilst the supply of resources is growing at a slow, linear rate so overtime countries will become poorer and famines will become more frequent.

Marginal benefit – This is the amount total benefit changes by when producing one more unit of output.

Marginal cost – This is the amount total cost changes by when producing one more unit of output.

Marginal propensity to consumeThis is the proportion of an increase in income that is spent.

Marginal social benefit – This is the increase in total social benefit resulting from the production of one more item.

Marginal social cost – This is the increase in total social costs resulting from the production of one more item.

Market – A market consists of buyers and sellers of a good or service.

Market failure – This is a situation when the free market system leads to an inefficient allocation of resources. An example of a market failure is an externality. See full article “Market Failures Explained”

Market led – A business that focuses on the quality of the product but also taking into consideration the position of the market and how to promote it to the consumer.

Market mapping – The method of plotting the position of brands in the market against two key characteristics of the product like price and product quality.

Market orientation – This refers to the way businesses use the needs and wants of the consumer to guide production.

Market penetration – This is the process of expanding market share so as to reach a larger number of customers.

Market saturation – This is a situation when it is impossible to expand sales further in a particular market.

Market segment – This is a subdivision of the market in which consumers have distinctive characteristics and preferences.

Market share – The share of sales in a market that a business or brand has. Calculated by dividing sales of the business by total sales of the market and multiplying by one hundred.

Menu cost – This is the actual cost of printing out new menus and price labels. In periods of high inflation firms have to print out new menus and price labels in order to take into account inflation – the cost of doing this is called a menu cost.

Mercantilism – This is an economic system that involves encouraging exports and restricting imports in order to increase the amount of capital in an economy and create economic growth.

Merit goods – These are goods that bring wider benefits to society if they are consumed. They are generally undersupplied by the private sector so the government provides them as well. An example of a merit good is education.

Merger – This is when two companies combine in to form a single entity.

Microeconomics – The study of the actions and behaviour of individuals and businesses.

Minimum efficient scale – This is the lowest level of output at which average or unit costs can be minimised.

Mixed economy – An economic system in which both the state and the private sector direct the economy. See full article “Mixed Economy Explained”

Modigliani-Miller theorem – This states that a firms capital structure makes no difference to its value

Monopolistic competition – This is a market structure with many sellers, easy entry and product differentiation.

Monetary policy – The controlling of the supply of money in order to stimulate or reduce the level of demand in the economy.

Money – This is an asset that is used in transactions. Money is a store of value, a unit of account and a medium for exchange.

Monopoly – A market in which there is a single supplier. However, in the UK having 25% (or more) of a market is seen as an indicator of monopoly power.

Monopoly power – This is the ability to determine price or quantity of output without having to consider competitors and their actions.

Monopsony – Literally meaning ‘a single buyer’. Buyers with monopsony power have some control over their suppliers and can force them to reduce prices or lose their contracts.

Moral hazard – This is a situation when an individual in an economic transaction is willing to take more risks because the costs that could occur from their actions will not be felt by them. For example, if someone has insurance on their car they are more likely to drive dangerously because if they crash they won’t have to pay for the damage.

Multinational corporations – These are businesses which are active in several different countries.

Nationalisation – This is when governments take control of businesses which previously operated in the private sector.

National saving – This is the sum of the private saving and government saving in an economy.

Natural monopoly – This is when it is sensible to have just one supplier for a market. Natural monopolies occur when fixed costs for a market are very high meaning it is most efficient to have just one supplier – having more than one supplier would involve a wasteful duplication of resources.

Niche market – This is a small segment of a market with distinctive specialised characteristics.

Nominal exchange rate – This is the price of a country’s currency compared to another country’s currency.

Nominal income – This is income expressed in money terms at current prices but without accounting for inflation.

Nominal prices – These are the prices of goods and services at face value and not corrected to show the effects of inflation.

Non-inflationary consistently expanding (NICE) – This is when an economy’s output of goods and services is increasing but inflation is low .

Non-price competition – This is all the possible inducements to buy the product other than a price cut.

Normal good – This is a good that we buy more of as incomes rise.

Normal profit – Profits that are just sufficient to keep the producer in the market. Normal profit is when the revenue of a firm equals its total costs (including opportunity costs). In other words, economic profits are equal to zero. In a perfectly competitive market, normal profits are always guaranteed in the long run.

Occupational mobility of labour – This refers to the ease with which members of the labour force can move from one type of work to another.

Office of fair trading – This is an organisation that gathers information about the competitiveness of markets.

Offshoring – This is when firms set up factories or operations in foreign countries.

Oligopoly – This is a market structure with a few very large firms which dominate the market and its output.

Open economy – This is an economy where exports and imports form a significant proportion of gross domestic product.

Opportunity cost – The cost of the next best alternative being sacrificed; a trade off.

Option – This is a contract between a buyer and a seller that gives the buyer the ability to purchase an asset (like a bond or share) at a specific price on a future date. This is different from a futures contract because the buyer doesn’t have to purchase the asset but has the right to.

Organic growth – This is expansion of a single business by extending its own operations rather than by merger or takeover. This is often slower but more secure.

Output gap – This is when the output, or gross domestic product (GDP), of an economy is different from its potential output.

Outsourcing – The method of buying components, services or finished products from independent suppliers, rather than producing them in-house.

Patents – A device which gives a business’s invention legal protection from competition for 20 years.

Perfect capital market – This is a capital market without any taxes, bankruptcy costs or asymmetric information.

Perfect communism – Communism in a perfect society. Power and wealth is owned by the state which would then be distributed evenly to the people.

Perfect competition – An idealised competitive market form where there are many buyers and sellers with an insignificant market share. Homogeneous products are produced with every supplier seeking to maximise profits and there is perfect knowledge of prices, technology and production methods. There are also very few barriers to entry and normal profit is inevitable in the long run for businesses.

Perfect information – A theoretical (unrealistic) situation in which an economic agent holds all relevant information needed to make a decision.

Persuasive advertising – This involves communication that is designed to have an emotional appeal.

Poll tax – This is a lump-sum taken from every citizen regardless of their income or wealth.

Polycentric model – A marketing approach that considers each host country to be unique.

Potential output – This is the level of output in an economy when all factors of production are being fully utilised.

Power brand – A brand that is very well-known and other products can branch off it. E.g. Dairy Milk.

Poverty trap – This is a situation where the unemployed are financially better off claiming benefits than entering employment.

Predatory pricing – This involves setting unusually low prices with the intention of driving a competitor out of the market. This strategy is illegal in most markets.

Price ceiling – This is a market intervention in which the government ensures that the price of a good or service stays below the market equilibrium (free market price).

Price discrimination – This is the practice of a firm charging different consumers different prices for the same good or service.

Price floor – This is a market intervention in which the government makes sure that the price of a good or service stays above its market equilibrium (free market price).

Price elastic demand – A situation in which quantity demanded is sensitive to a price change so a change in price will lead to a more than proportionate change in quantity demanded.

Price elasticity of demand – The responsiveness of demand to changes in price. Very elastic: a small change in price prompts a large change in quantity demanded. Very inelastic: a large change in price prompts a small change in quantity demanded.

Price inelastic demand – A situation in which a price change will lead to a more than proportionate change in quantity demanded.

Price setters– These are leading firms in the industry with sufficient market power to decide between restricting output and charging higher prices.

Price takers – These are businesses with undifferentiated products that face high price elasticity of demand. Following or undercutting the market price is the only way to reach enough sales.

Price wars – This is when firms in a market make substantial price cuts to their products in order to try and increase their market share.

Primary sector – The sector of an economy making direct use of natural resources, such as agriculture, fishery and mining.

Principles of taxation – The set of criteria used by governments to ensure a tax is efficient.

Private benefit – This is the benefit a firm or consumer receives when a good or service is purchased.

Private cost – This is the cost paid by firms and consumers when goods and services are bought.

Private saving – This is calculated by subtracting consumption from the total disposable income in an economy. Private saving = disposable income – consumption.

Private sector – This is the area of the economy that is controlled by private individuals and organisations.

Privatisation – This is when private businesses take control of organisations that were previously owned by the government.

Process innovation – This is when firms use new technologies in the production process to increase efficiency.

Producer surplus – This is the gain that produces receive when they are able to sell output at a higher price than they are willing to produce it. A producer surplus occurs when the price of a product reaches its market equilibrium.

Product innovation – This is when firms bring new and unique products to the market. Product innovation can involve creating completely new concepts or improving existing products.

Production Possibilities Frontier (PFF) – A graph that shows the maximum outputs of goods and services possible with the available resources. It is used to show the opportunity cost created from reallocating resources from producing one thing to producing another.

Product life cycle – This refers to the phases which many products go through between their launch into the market and the decline in sales which leads to a cease in production. The phases include, research and development, introduction, growth, maturity and decline.

Product orientation – When a business prioritises the product quality, design or performance over the preferences of the consumer.

Productive efficiency – When firms minimise the average cost of production by minimising resource use.

Productivity – This is a measure of output per unit of input.

Profit signalling mechanism – The way that the prospect of profits will attract entrepreneurs to a market and losses will make business consider leaving the market.

Progressive taxes – These are forms of taxation that take a high percentage of total income from the richer people in society.

Protectionism – This is when government policies are used to restrict foreign trade and the involvement of foreign businesses in the home economy.

Public interest – This is the interest of society as a whole.

Public goods – These are goods or services that are non-excludable (meaning you can’t prevent people from using it) and non-rivalrous (meaning it doesn’t cost any more to supply an extra person) so they are provided by the government rather than private firms.

Public sector – This is the area of economic activity which is directly controlled by the state. E.g. the defence and legal system.

Public spending – This is the spending by governments on goods and services in the economy.

Purchasing power parity – This is when the exchange rate is adjusted to allow for accurate comparisons of purchasing power.

Quantitative Easing– The process of injecting money into the economy in order to stimulate it, carried out by central banks who buy government bonds with newly created electronic money.

Quota – A limit on the amount of goods that can be imported into a country during a period of time.

Real GDP – This is a measurement of the value of goods and services produced within an economy, corrected for inflation.

Real income – This is nominal income that is corrected for inflation, focusing on the amount of goods and services income can buy, i.e. purchasing power.

Real wages – These are the wages taken home by workers after the impact of inflation has been accounted for. Real wages represent the actual amount of purchasing power a worker earns.

Recession – This is the phase of the economic cycle in which GDP is falling (strictly for two or more successive quarters).

Recessionary gap – This is a situation when the economy is operating below the full employment level.

Recovery – The stage of the economic cycle during which an economy’s total output is expanding.

Regional unemployment – Unemployment that occurs in a particular geographical area, often because of a structural change in localised industries like shipbuilding.

Regressive taxes – These are forms of taxation that take a higher percentage of total income from the poorer people in society.

Relative poverty – This is when a person’s income isn’t sufficient enough for them to participate fully into society.

Research and development – This is when firms spend money on developing new and more innovative products and production methods.

Retail Price Index – The Retail Price Index (RPI) is an index that measures inflation during a set period of time.

Revenue – This is the money received by a firm when they sell a product. The calculation for total revenue is: price multiplied by quantity sold.

Risk averse – This means reluctant to take chances and inclined to play safe.

RPIX – This is a price index that is the same as the Retail Price Index but excludes mortgage interest payments in its measurement.

Scarcity – The fact that individual needs and wants will always exceed the resources available.

Seasonal unemployment – Unemployment that reflects the uneven pattern of activity through the year in some industries. E.g. construction, tourism and agriculture all require fewer workers in midwinter.

Shocks – These are sudden and unexpected events that cause serious disruption in an economy.

Shoe-leather cost – This is the cost to individuals who have to take frequent visits to the bank to take out more money for goods and services in periods of high inflation. The name ‘shoe-leather cost’ comes from the fact that walking to the bank more regularly will wear down your shoes.

Single market – This is when barriers to the movement of goods, services, people and capital are completely removed between countries so they act more and more like a single economy.

Sin tax – This is a form of taxation which is placed on goods that are considered bad for society when they are consumed

Social benefit – This is the total benefit of producing goods and services. Social benefit is calculated by adding up the private benefits and external benefits of a transaction.

Social costs – These are the total costs of producing goods and services. Social costs are calculated by adding up private costs (such as wages) and external costs (such as pollution).

Soft landing – This occurs when the economy moves to a gradual slowdown of output after a boom rather than into recession.

Specialisation – This is when people concentrate their skills and time on what they do best.

Speculation – A financial activity in which people buy and sell assets (e.g. stocks or property) in the hope of making a large profit but with the risk of a substantial loss.

Stabilisation policy – This when the government uses fiscal and monetary policy to try to smooth out the fluctuations in economic activity.

Standard of living – The level of wealth and material comfort available to an individual.

Stagflation – An unattractive combination of stagnant or falling GDP with prices rising at rapid rates. A portmanteau of stagnation and inflation.

Stakeholders – These are people who are affected by a particular business in any way. For example shareholders, customers and the government are all common stakeholders of a business.

State owned enterprises – These are businesses that are run by the government but instead of solely serving the public interest they are also expected to be profitable.

Stealth tax – This is a type of tax that is subtle and often isn’t detected by the people who are paying it.

Sticky prices – These are prices which do not vary during changes in market conditions (like changes in demand or supply).

Stock market – This is an institution where financial assets issued by governments and companies are sold between investors.

Structural change – This occurs when some economic activities are growing whilst others are declining. For example, the decline in shipbuilding in the UK is a result of structural change as resources are put into more profitable areas of the economy and the industry is offshored.

Structural unemployment – This is caused by a structural change in the economy, such as a decline of an industry or technological change.

Subcontracting – This is when firms source parts of the production process from other businesses rather than using their own employees to produce them.

Subjective theory of value – This is the theory that a good’s value isn’t objective but is dependent on people’s personal judgement and preferences.

Subsidy – This is an economic benefit or financial aid provided by the government to support an industry.

Substitute goods – These are items that replace the function of other goods.

Sunk costs – These are the costs of a business that cannot be recovered. Even if a business stops operating, sunk costs can never be restored.

Supply – The quantity of a good or service offered for sale.

Supply chain – The sequence of processes which starts with acquiring the most basic inputs and ends with delivery of the product to the customer.

Supply constraints – This is when all the available resources in the economy become used up and bottlenecks start to appear in production.

Supply curve – A graph that shows the quantity of a good or service that firms in an industry are willing and able to produce at specific prices.

Supply side policies – This is when the government uses policies to increase the aggregate supply in the economy.

Synergy – This is the idea that after a merger or acquisition the performance of the new business will exceed that of its previous components i.e. 2+2=5.

Tacit collusion – This is when firms in a market make a tacit agreement not to engage in price cutting strategies.

Tariff – A tax on imported goods.

Tariff-jumping – This is when firms set up factories or operations in foreign countries in order to sell goods there without paying import tariffs.

Taxation – This is the money collected by governments from people’s earnings, wealth or spending.

Technology transfer – This is when countries with limited access to new technologies acquire skills and expertise when multinational companies operate there. The foreign company trains the local people the necessary skills to use the new technology. Over time, the employees can use these skills when they move to other businesses and this spreads the new technologies across the economy.

The long tail – This refers to the retailing strategy of selling large numbers of niche items along with fewer popular items in large quantities. This is mostly used by internet retailers who can make the niche products widely available through search engines and filters.

The multiplier – This is when an increase in spending has a greater impact on the economy than the initial amount spent. If there is an injection into the economy, spending on goods and services will increase. This is turn causes firms to increase employment which leads to further spending on goods and services and thus creating a multiplier effect.

Third-degree price discrimination – This is when a firm charges different market segments different prices for the same good.

Total surplus – This is the sum of the producer surplus and consumer surplus in a market transaction.

Trade barriers – These are factors make trading between countries more difficult.

Trade bloc – This is a group of countries that have a written agreement to reduce trade barriers between all members.

Trade creation – This occurs when there is an increase in the total amount of goods and services traded because of a reduction in trade barriers between countries.

Trade deficit – This is when the value of a country’s imports are greater than the value of their exports.

Trade diversion – This is when a trading bloc reduces the amount of imports from countries who are not members in the bloc.

Trade-offs – This is when doing one thing results in less of something else.

Trade surplus – This is when the value of a country’s exports are greater than the value of their imports.

Tragedy of the commons – This is an economic problem in which there is a great amount of demand for a given resource, such as land. Each person will try and exploit the resource as much as they can but in doing so they reduce the availability of the resource for everyone in the future. So the ‘commons’ is the common resource such as land that is available to all and the tragedy is that a common resource will always be overexploited until it does not exist.

Transfer pricing – This the price companies use when they are transferring goods or services from one business that they own to another business that they own which exists in another country.

Transitional economy – when the government is liberalising some sectors so that production and marketing decisions are made by private organisations on the basis of supply and demand.

Under production – This is when a good or service has significant external benefits to society and therefore it is under produced by the private sector. Healthcare is an example of a service that is under produced by the private sector and this is why it is it is also provided by the government.

Unemployment – This is a situation in an economy where there are people who are willing and able to work but do not have a job.

Unemployment rate – This measures the percentage of people in the labour force (those who are able to work) who do not have jobs.


Utility – This is a measure of happiness which a person will gain through the consumption of a good or service. Economists use this to understand how people make decisions.

Value added – This is the value of output minus the cost of input. Methods adding value include branding, enhancing product quality and good customer service.

Value-added tax (VAT) – This is a tax placed on goods or services, as a percentage of their value added (price of the good minus the cost of inputs). Customers pay the VAT on top of the original price of the good. Businesses then pay the government the money earned from VAT but are then able to claim back any money on goods they have purchased which have VAT. Therefore VAT is a tax on consumers as they are the ones that ultimately pay for it.

Variable costs – These are costs that are directly affected by changes in the level of output.

Vertical merger – This is when two firms that are different stages of the production line merge together under one entity. For example say a manufacturing firm merges with a firm in the primary sector – this would be an example of a vertical merger.

Wage-price spiral – This is a concept that describes how an increase in wages or prices creates an inflationary spiral in the economy.

Wealth – This is the total value of everything a person owns minus their debts.

Wealth effect – This is when spending in an economy rises as a result of people feeling wealthier.

Wholesaling – This is the sale of goods to distributors or retailers rather than to the general public. Wholesaling involves selling goods in large quantities.

World Trade Organisation (WTO) – This is a supranational organisation that supervises and encourages international trade and the breaking down of trade barriers between countries.

X-inefficiency – This occurs where there is weak control of costs and resource use and no competition to provide an incentive to be efficient.