Economics definitions

Unit 1;
Wants: these are desires for luxury things such as the desire for a luxury car, a luxury house etc.

Needs: these are the basic necessities of life such as food, shelter and clothing.

Opportunity cost: the next best alternative for gone.

Scarcity: resources being insufficient to satisfy all people’s wants.

Factors of production: the resources needed to produce goods and services such as land, labour capital
and enterprise.

Land: land itself and all the renewable and non-renewable resources of nature such as coal, crude oil
and timber.

Labour: manual and skilled workforce.

Capital: not just finance but also capital goods that aid in the production of goods and services such as
machines, offices and vehicles. It is a man made resource.

Enterprise: initiative provided by risk-taking individuals who combine the other factors of production in
order to produce goods and services.

Human capital: refers to the manual and skilled labour that aid in the production of goods and services.

Physical capital: tangible physical assets which aid in the production of goods and services such as
factories. Tools, machinery and technology etc.

Specialization and division of labour: the labour is divided in such a way that every person performs a
specific task efficiently.

Economic system: refers to the set of arrangements by which society makes the use of its resources in
the production of output to satisfy the human needs and wants.

Free market economy: economic resources are owned largely by private sector with very little state
intervention.

Command/planned economy: economic resources are owned, planned and controlled by the state.

Mixed economy: economic resources are owned and controlled by both private and public sectors.

Production possibility curve: a curve that shows all of the different combinations of output of two goods
that can be produced given current resources and technology.

Economic goods: goods that require factors of production to be produced.

Non-economic goods: goods that do not require factors of production to be produced.

Rivalry: a feature of a product where one person uses it and its availability for others diminishes.
Example a fried fish consumed by one person will diminish the availability of it for a second person.

Free goods: goods that are not being bought and sold in market and have zero opportunity cost, these
goods are available to everyone free of cost such as air, sunlight and rainfall etc.

Private goods: these are economic goods that have excludability and rivalry. They are bought and sold in
the market against a certain price by the individuals or firms for their own benefits. Example mobile
phones and cars etc.

Public goods: these are economic goods that have non-excludability and non-rivalry. These not traded in
the market and are usually provided by the state example defence, street lights, light house, public
parks and public libraries etc.

Quasi-public goods: these goods are partially non-excludable and partially non-rival. Example
motorways (everyone can use except the bikers and cyclists) and Wifi connections (whose availability
reduces as more number of people use it).

Merit goods: the economic goods that create positive externalities and are mainly provided by the
government as it thinks that all people cannot afford them but must have them. Example education and
healthcare (like vaccination) etc.

De-merit goods: economic goods that create negative externalities and are mainly provided by the
private producers. Example habit forming goods such as cigarette.

Positive externalities: positive side effects that also benefit the non-members of the transaction.

Negative externalities: negative side effects, which is a cost to third party such as smoke of factories.

Information failure: means that customer do not have the sufficient information about the usefulness of
merit goods and harmfulness of demerit goods.

Unit 2;
Demand: the quantity of a product that consumers are willing and able to buy at a given price in a
specific time period.

Market demand: the total amount of product demanded in the market by all consumers.

Supply: the quantity of a product that producers are willing and able to supply at a given price in a
specific time period.

Market supply: the total amount of supply of a product in the market by all producers.

Price elasticity of demand (P.E.D): the responsiveness of the quantity demanded due to the change in
price. PED = %change in quantity demanded/%change in price. PED has values of >1, <1 and 1.
Elastic PED (PED > 1): when a change in price brings more than proportionate change in the quantity
demanded.

Inelastic PED (PED < 1): when a change in price brings less than proportionate change in the quantity
demanded.

Unitary PED (PED = 1): when a change in price brings equal proportionate change in the quantity
demanded.

Income elasticity of demand (YED): the responsiveness of change in quantity demanded of a certain
product due to the change in income of the people. YED = %change in quantity demanded of a
product/%change in the income of people. YED has different values for different goods. Luxury products
have YED = +1.5, normal goods have YED = 1, basic necessity goods have YED = 0.1 and inferior goods
have PED = -0.6

Cross elasticity of demand (CED): the responsiveness of change in quantity demanded of good A due to
the change in price of good B. CED = %change in the quantity demanded of good A/ %change in the price
of good B. it has three values CED = +1.5 (substitute goods), CED = -0.5 (complimentary goods) and CED
= 0 (irrelevant products).

Price elasticity of supply (PES): the responsiveness of the quantity supplied due to the change in price.
PES = %change in quantity supplied/%change in price. PES has values of >1, <1 and 1.

Elastic PES (PES > 1): when a change in price brings more than proportionate change in the quantity
supplied.

Inelastic PES (PES < 1): when a change in price brings less than proportionate change in the quantity
supplied.

Unitary PES (PES = 1): when a change in price brings equal proportionate change in the quantity
supplied.

Equilibrium price: the price level at which demand is equal to supply.

Market equilibrium: it is the market situation where quantity demanded equals quantity supplied.

Price rationing: who will get the goods by paying its price.

Price as allocative mechanism: the price performs its functions to guide the producers to transmit their
production to different products.

Consumer surplus: the difference between the market price and the price consumer is willing to pay.

Producer surplus: the difference between the market price and the price producer is willing to charge.

Unit 3;
Market failure: market failure occurs when the free market economy allocates resources inefficiently
and it doesn’t consider the benefits of society.
Indirect tax: a tax levied on goods and services rather than on income or profits.

Direct tax: a tax levied on income or profits of person or firms, rather than on goods and services.

Specific tax: a form of tax in which the amount of tax per unit price is fixed.

Ad valorem tax: a form of tax in which the percentage of tax per unit price is fixed.

Incidence of tax: refers to the extent to which the burden of a tax is borne by the producer and the
consumer.

Subsidy: the amount of money directly paid by the government to the producers so that they can
produce greater quantities of goods and services at low prices.

Incidence of subsidy: refers to the extent to which the relief of a subsidy is gained by the producer and
the consumer.

Direct provision: when government provide the goods and services itself by taking over the private
firms, this is also known as nationalization.

Regulation: the laws passed by the government to prohibit the production of certain goods to solve the
environmental and health issues.

Maximum price: maximum price control also known as price ceilings, is the price set by government
below equilibrium to protect consumers as it thinks they are being overcharged, but it results in a
shortage or excess demand and causes black marketing.

Minimum price: minimum price control also known as price ceilings, is the price set by government
above equilibrium to protect producers as it thinks they are being underpaid, but it results in excess
supply or surplus.

Buffer stock: minimum stock off goods (mainly agricultural goods) that should be held to ensure the
supply of goods in case of shortages, wars or natural disasters.

Income inequality: refers to the uneven distribution of income throughout the population.

Progressive tax: a form of tax which raises with the rise in income and falls with the fall in income,
designed to reduce disparities and more equal distribution of income.

Regressive tax: a form of tax which falls with a rise in income and rises with a fall in income, this is
designed to reduce the consumption of demerit goods but increases disparities.

Proportional tax: a form of tax which remains the same regardless of income earned by individuals and
firms.

Marginal tax: the tax paid on the extra amount of dollars earned.

Calculation of tax rate = amount of tax paid in dollars/ amount of income earned in dollars.

Transfer payments: payments made by the government to the general public without any corresponding
exchange of goods and services.
Minimum wage law: the minimum wage rate set by government above equilibrium for the workers who
are paid very low by their employers.

Means tested benefits: benefits given or paid to the very low-income people who are considered to be
the most in need.

Universal benefits: benefits given or paid to everyone who comes under certain categories whether
need it or not such as state pension, old age benefit or child benefit etc.

Unit 4;
National income: national income is the aggregate income of all the residents of a country, arising out of
economic activities during a period of one year.

National output: it is the total market value of all the goods and services produced in a country in one
year.

Total expenditure: it is the aggregate expenditure of all the residents of a country during the period of
one year.

Gross domestic product (GDP): it is the total market value of all the goods and services produced in a
country in one year.

Net domestic product (NDP): GDP less depreciation of fixed assets.

Gross national income (GNI): GDP + Net compensation receipts + Net property income + Net taxes.

Net national product (NNP): refined form of national income of a country, NNP = GNP – Depreciation.

Personal income: the income received by the individual through different sources like rent of building,
salary income, interest received on loan and profit earned from any business.

Disposable income: income left with individual after the payment of direct tax (income tax).

Per capita income: per head income of a country, income per capita = national income/total population.

GDP per capita: total GDP divide by total population.

Nominal GDP: it is the total market value of all the goods and services produced in a country in one year.
Its calculated as; nominal GDP = quantity produced * price.

Real GDP: the real GDP after removing the distorting effect of inflation, it is calculated as nominal GDP
divide by GDP deflator.

GDP deflator: is used to remove the distorting effect of inflation, it is calculated as;

GDP deflator = current year price index/ base year price index.

Circular flow of income: refers to a simple model which shows movement of income around the
economy and among different economic agents including consumers, producer, government, importers
and exporters.
2-sector economy: the economy where income flows within its boundaries between households and
firms only and there is no international trade and government intervention.

3-sector economy: the economy where income flows between countries and there are leakages from
circular flow and injection into it as well.

Equilibrium national income: when the injections in to circular flow of income are equal to the leakages
from circular flow of income.

Injections: inflow of income into the circular flow of income in the form of investment, government
expenditure and exports.

Aggregate demand: it is the sum of demand by consumers, firms, government expenditure and net
exports, it is calculated as AD = C + I + G + (X-M).

Consumption: refers to the day to day expenditures of consumers which they make on purchasing
household items.

Investment: refers to the purchase of capital goods by producers and firms to increase the productive
potential of economy.

Government spending: government makes an expenditure to run the economy properly, such as current
and capital expenditure.

Current expenditure: expenditure made by government on routine basis such as salary payments to
government staff, repair and maintenance of public and merit goods like roads, hospitals and schools.

Capital expenditure: expenditure made by government on the long-term projects like construction of a
new road, building a new hospital or a school.

Net exports: difference between the value of exports and the value of imports.

Aggregate supply: refers to the total quantity of goods and services firms are willing and able to sell at a
given price in an economy at a certain period of time.

Equilibrium macro-economy: a situation in economy where aggregate demand equals aggregate supply.

Economic growth: refers to the rise in real GDP per capita as compared to the previous time period.

Economic growth rate: percentage rise in the GDP as compared to the previous year it is calculated as;
growth rate = GDP of year 2 – GDP of year 1/ GDP of year 1 * 100.

Actual economic growth: occurs when country’s output rises due to the employment of previously
unemployed resources, but doesn’t increase the productive potential of economy.

Potential economic growth: occurs when country’s output rises due to the increase in resources
including land, labour and capital, it increases the productive potential of economy.

Sustainable economic development: economic development should take place without damaging the
environment and development in the present should not compromise with the needs of future
generation.
Labour force: includes all those people who are between the ages of 18-60 and they are willing and able
to work or are actively seeking for job.

Economically active: people are part of the labour force and are actively seeking for job.

Economically inactive: people are not part of the labour force and are not actively seeking for job.

Unemployment rate = total people unemployed/ labour force * 100.

Claimant count: measures how many unemployed people are claiming unemployment-related benefits.

Labour force survey: when government sends its staff door to door to encounter the people who are
unemployed.

Unemployment: a count of jobless people who want to work, are available to work, and are actively
seeking employment.

Frictional or transitional employment: when a person leaves one job and tries to find another one. The
unemployment between these two jobs is termed as frictional unemployment.

Structural unemployment: occurs when the skills of worker get obsoleted due to the requirement of
new skills caused by invention of new technology.

Cyclical unemployment: occurs when aggregate demand falls due to the recession or depression in
economy.

Classical unemployment: occurs when government sets minimum wage rate.

Inflation: refers to the persistent rise in the general price level over time throughout the economy.

Creeping inflation: when a price level rises at a slow rate between 1-5%.

Hyperinflation: when the price level rises by 50% or above and it has no upper limit.

Anticipated inflation: a rate of inflation which was predicted before its occurance.

Stagflation: the situation where price level and unemployment both are rising.

Nominal or money value: value at current prices.

Real value: value at relative prices.

Demand-pull inflation: occurs when aggregate demand increases due to rise in consumption,
investment, government spending or net exports.

Cost-push inflation: occurs when the cost of production increases.

Disinflation: when price level increases with decreasing rate.

Deflation: refers to a fall in general price level over time throughout the economy.

Unit 5;
Demand side policies: includes two types of policies fiscal and monetary policy, and tries to achieve
macro-economic aims by manipulating its tools to affect the aggregate demand in the economy.

Fiscal policy: policy of government that raises revenue through taxation and spends this revenue to
achieve economic growth aims by affecting aggregate demand in the economy.

Expansionary fiscal policy: the policy of government through which it wants to increase the aggregate
demand in the economy to bring expansion in the level of economic activity, this is done by reducing the
direct taxes and increasing the government expenditure, but causes budget deficit.

Contractionary fiscal policy: the policy of government through which it wants to reduce the aggregate
demand in the economy to control inflation by increasing direct taxes and lowering government
expenditure.

Automatic stabilizer: government uses automatic stabilizer to bring equality between tax income and
government expenditure.

Surplus budget: when government’s income is more than its expenditure.

Deficit budget: when government’s income is less than its expenditure and has to take loan to meet its
expenditures.

Cyclical deficit: caused by a fall in economic activity, but government is less concerned about this as it
get auto-corrected.

Structured deficit: when government commits more expenditure as compared to the tax revenue.

Equilibrium budget: when government’s income is equal to its expenditure, also known as balanced or
zero budget.

National debt: the sum of a nation's annual budget deficits.

Tax: a compulsory contribution to the state revenue, levied by government on the people’s income and
business profits, or added to the cost of some goods, services and transactions.

Monetary policy: policy of the central bank aimed at achieving macro-economic objectives by affecting
the aggregate demand using its tools such as interest rate, money supply, exchange rate and credit
regulations.

Expansionary monetary policy: the policy of government through which it wants to increase the
aggregate demand in the economy to bring expansion in the level of economic activity, this is done by
reducing the interest rate, increasing the money supply and lowering the exchange rate of its currency
against other currencies.

Contractionary monetary policy: the policy of government through which it wants to reduce the
aggregate demand in the economy to control inflation by increasing the interest rate, reducing the
money supply and raising the exchange rate of its currency against other currencies.

Supply side policy: policy of government designed to increase the aggregate supply in the economy to
achieve macro-economic objectives by manipulating its tools.
Deregulation: the government policy through which it makes the entry of new firms in the market free
from barriers.

Privatization: ownerships of firms lies with the private firms instead of the government.

Nationalization: when government takes over the private institutions and runs them by itself.

Unit 6;
Free international trade: refers to the buying and selling of goods and services among different countries
without any trade barriers.

Economic specialization: the process wherein economy decides to focus their labour on a specific type of
production.

Diversification: the process of shifting an economy away from a single source of income towards
multiple sources of income from a growing range of sectors and markets.

Absolute advantage: the ability to produce a product at clear cut lower cost than the other country.

Comparative advantage: ability to produce a product at a lower opportunity cost as compared to the
other countries.

Terms of trade: ratio between the prices of exports and the prices of imports.

Protectionism: refers to the tools or methods which help protect the local young industry from
international competition.

Dumping: when the low price products from other counties captures the domestic market, and young
local industry suffers from it.

Tariff: a form of tax that is imposed on imported goods to make them expensive so that imports may fall
to correct the deficit in the balance of payment.

Quota: the physical limitation imposed on the number of goods being imported into the country to help
correct the deficit in the balance of payment.

Subsidy to exporters: grant provided by the government to the local producers so that they can produce
import substitutes within the country and to earn foreign exchange as well, this helps correct the deficit
in the balance of payment.

Administrative restrictions (red tape): government increases implications regarding importing goods
from other countries, this forces people to shift their demand towards domestically produced goods,
and to help correct the deficit in the balance of payment as well.

Exchange control: government reduces the people’s access to foreign currency to get the imports under
control and to help correct the deficit in the balance of payment.

Balance of payment: the summary of all the transactions of a country with the rest of the world, its
calculated as; BOP = receipts – payments.
Current account: a major part of the balance of payment which is composed of components such as
trade in goods and services, income flows and current transfers.

Surplus BOP: when the receipts (inflow of cash) are more than the payments (outflow of cash).

Deficit BOP: when the receipts are less than the payments.

Equilibrium balance of payments: when the receipts are equal to payments, also known as zero balance
of payment.

Balance of trade: summary of only visible items traded between the countries, it is calculated as;

BOT = value of visible exports – value of visible imports.

Trade in goods: this part of the current account records imports and exports of physical goods from one
country to the other.

Trade in services: this part of the current account records invisible services between the countries such
as transportation and banking etc.

Income flows: this part of the current account records the net flow of income in the form of interest,
profit and dividends received by investors in other countries.

Current transfers: this part of the current account records the net flow of grants and aids between
countries without the corresponding exchange of goods and services, this is termed as secondary
income while all other parts of current account are termed as primary income.

Exchange rate: the price of currency in terms of another currency.

Freely floating exchange rate system: it is a system where the value of currency against other currency is
determined through the free forces of demand and supply of currency.

Appreciation of currency: refers to the rise in the value of currency in terms of another currency.

Depreciation of currency: refers to the fall in the value of currency in terms of another currency.

Dampening policies: policies designed by the government to reduce the total spending in the economy,
it includes deflationary fiscal and monetary policy.

(Compiled by: Ali Mustafa)

(AS level)