UNIT 1 Glossary of terms

Scarcity - unlimited wants and finite resources.

Resource - a factor of production used to produce goods and services - land, labour, capital & enterprise.

Finite resources – a limited supply of land, labour, capital and enterprise.

The economic problem is scarcity, there are unlimited wants and finite resources.

The main economic question – how, what and for whom to produce.

Sustainable resource - something that is being used or consumed or produced at a rate that will ensure it is available for future generation, it may not run out it is renewable.

Renewable resource – a sustainable resource that won’t run out as it can be produced again.

Non-renewable resource – an unsustainable resource that will run out as it can’t be produced again.

Production possibility - the maximum output an economy can achieve when all its resources are fully and efficiently employed.

Production possibility frontier - the maximum output combinations of two goods services an economy can achieve when all its resources are fully and efficiently employed.

Economic growth - an increase in real GDP or An increase in the productive potential for an economy - an outward shift in the PPF curve.

Efficient allocation of resources occurs when production occurs on the production possibility frontier (where it is impossible to make one person better off without making someone worse off).

Opportunity cost - the value of the next best alternative foregone.

Marginal analysis – measuring the costs and benefits of an additional (incremental) production or consumption of a good or service.

Specialisation - where labour allocate all their time in producing just one good or service.

Division of labour occurs when production of a good is broken down into different tasks and labour allocated to each task.

Free market economy - where resources are allocated by the price mechanism and there is no government intervention

Mixed economy – where some resources are allocated by the price mechanism and there is some government intervention.

Price mechanism – the interaction of demand and supply to allocate resources.

Equilibrium price - a price where the quantity demanded equals the quantity supplied.

Positive statement is an assertion of a fact that can be proved or disproved and is free of value judgements an takes a scientific approach to economics.

Normative statement is a value judgement and cannot be tested as true or false .

Normative economics - economics that involves making value judgements.

Value judgement - statements that cannot be tested and proved true or false.

Demand – the willingness and ability to buy a good or service at any given price.

Substitutes - goods which have a positive cross elasticity of demand.

Complement - goods in joint demand which have a negative cross elasticity of demand.

Real income – income adjusted for inflation.

Tastes – a fashion for a good or service that changes with time.

Price elasticity of demand measures the responsiveness in demand for a good due to a change in its price, (or the percentage change in demand divided by the percentage change in price)

Price inelastic demand - the proportionate change in demand is less than the proportionate change in price).

Income elasticity of demand measures the responsiveness in demand for a good due to a change in income, or the percentage change in demand divided by the percentage change in income.

Normal good - as real income increases, so will demand increase for a good OR as real income decreases, so will demand decrease for a good) i.e. it has a positive income elasticity of demand.

Inferior goods have a negative income elasticity of demand

Cross elasticity of demand - the responsiveness in demand for one good due to a change in price of another good or %ΔQD good B ÷ %ΔP good A.

Indirect tax - a government levy or charge on expenditure.

Specific tax (unit tax) a fixed charge the government imposes per unit of good.

Ad valorem tax - tax set as a percentage of the price of a good.


Subsidy - a grant to firms that lowers production costs.

Incidence of tax – describes where the burden of taxation falls – what proportion falls on the consumer and the producer.

Supply - the amount of good or service a producer will provide at any given price level.

Producer cartels - a group of individuals or firms that combine together to restrict supply and increase prices.

Costs of production – the cost of land, labour, capital and enterprise used to provide a good or service

Price elasticity of supply – the responsiveness of supply of a good due to a change in its price or %Δ Quantity Supply ÷ %Δ Price)

Short run - the time period when at least one factor input is fixed in supply.

Long run - the tie period when all factors of production are variable.
market equilibrium

Excess demand/Shortage occurs when the quantity demanded exceeds the quantity supplied at the current price.

Excess supply/ Surplus occurs when the quantity supply exceeds the quantity demand at the current price.

Consumer surplus - the difference in the price consumers are prepared to pay for a good and the actual market price paid.

Producer surplus/Supplier surplus (the difference between the price firms are willing to sell a good for and the actual market price or the area above the supply curve and below the price line

Rationing function – when the price mechanism limits the amount of a good or service that can be bought.

Incentive function – buyers and sellers seek to maximize their welfare/Suppliers are motivated by the profit motive to produce more at higher prices and consumers look for the best products and prices to make the best use of their income.

Signalling function – increases in prices tell suppliers to produce more and buyers to demand less and vice versa.

Commodity – a good that is relatively homogenous and trade on world markets, e.g. copper, wheat or oil.

Services – intangible products such as taxi rides and insurance.

Goods – tangible products such as tables and chocolate bars.

Derived demand – the demand for resources (land, labour, capital and enterprise) comes from the demand for the final good or service.

Migration - the geographical movement of labour – usually from one country to another.

National minimum wage - the lowest amount payable to labour that the law allows.

Market failure exists when the price mechanism leads to a net welfare loss / inefficient allocation of resources.

Externalities - spillover effects to third parties from an economic transaction.

Public goods - goods that have the characteristics of non-excludability and non-rivalry. (non-rejectable might also apply).

Imperfect market information - people lack knowledge to make informed choices.

labour immobility /Immobility of labour - inability of labour to move from one location to another in taking work. occupational and geographical.

External cost - costs that the price mechanism fails to take into account, i.e. a negative third party effect.

or – a spillover effect from production or consumption.

or - difference between private cost and social cost.

Private costs are costs that the price mechanism takes into account.

Private benefit - benefit the price mechanism takes into account i.e. benefit direct to consumer or producer from economic activity. (excludes benefits to third parties)

Social optimum position - the level of output where the marginal social benefits are equal to the marginal social costs.

Welfare loss -
the excess of social cost over social benefit for a given output.

Welfare gain -
where social benefits exceed social costs for an incremental output.

External benefits -
benefits ignored by the price mechanism and have positive third party effects, the difference between private and social benefits.

Public good
- a good which has non- rivalry and non-excludability characteristics.

Private good - a good which has rivalry and excludability characteristics.


Free rider problem - difficulty in charging people for consuming a good once it is provided.

Valuation problem – the difficulty of measuring external benefits and external costs.

Net welfare loss
- the excess of social costs over and above social benefits at the current level of output.

Symmetric information
- exists when consumers have the same market knowledge as producers.

Asymmetric information exists when consumers have different market knowledge than producers.

Pension – f
inancial provision for an income after a person’s working life ends.

Geographical mobility of labour
- the ability of labour to move from one region to another without obstacles

Occupational mobility of labour
- the ability of labour to change occupations to take available work
structural unemployment.

Factor immobility – the difficulty of reallocating or resources to different uses or relocating them to different places.

Minimum price scheme - a floor price or minimum price below which price cannot fall.

Buffer stock scheme - agency intervention to buy or sell a commodity to reduce price fluctuations.

Tradable pollution permits
- an allowance on the amount of pollution firms may emit which can be bought and sold in the market.

Property rights
– the ability of a person to own a resource, which is enshrined in law.

State provision
– occurs when the government allocates resources to produce a good or service.

State regulation – occurs when the government provides market rules that producers and consumers must obey.

Road pricing
– the practice of charging motorists for using the road – usually a charge by distance or time.

Landfill tax
– an EU charge per tonne of rubbish that is buried.

Carbon offsetting
– allowing firms to pollute the atmosphere with carbon dioxide in return for carbon reducing activities elsewhere.

Carbon emissions trading
– the buying and selling of Tradable pollution permits.

Renewable energy certificates – are issued to power generators using renewable resources. Operators can trade certificates with other energy providers to demonstrate that they have met their obligation to provide more green energy.

Agricultural stabilisation policies
– government schemes to regulate the prices of agricultural good, the incomes of farmers and provide food security.

National Minimum Wage - a legal minimum that employers must pay to workers.

Government failure exists where government intervention leads to a net welfare loss / inefficient allocation of resources.

Social costs = Private Costs + External Costs

Social Benefit = Private benefits + External Benefits