Cambridge IAL Economics key terms

A measure of how much the quantity of a good demanded changes when its price changes, calculated as the percentage change in quantity demanded divided by the percentage change in price.

A measure of how responsive the quantity supplied of a good is to a change in its own price, found by dividing the percentage change in quantity supplied by the percentage change in price.

The percentage change in demand for one good divided by the percentage change in the price of another good; positive values suggest substitutes and negative values suggest complements.

The responsiveness of demand for a good to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.

A product for which demand rises when consumers' incomes rise, giving a positive income elasticity of demand; most goods and services fall into this category.

A product for which demand falls as consumers' incomes rise, producing a negative income elasticity of demand; cheaper staple foods are a common example.

The difference between the total amount consumers are willing to pay for a good and the amount they actually pay, shown as the area below the demand curve and above the market price.

The difference between the price a seller actually receives and the lowest price at which they would have been willing to supply the unit, shown above the supply curve and below price.

A tax levied on spending or on a transaction, such as a specific tax per unit or an ad valorem percentage tax, which shifts the supply curve upward and usually raises price.

The division of the burden of an indirect tax between buyers and sellers, determined by the relative price elasticities of demand and supply rather than by who legally pays the tax.

A payment made by government to producers, usually per unit of output, which lowers production costs, shifts supply to the right and tends to reduce the market price.

A legally imposed minimum price set above the equilibrium, which prevents the market price from falling and typically creates excess supply unless the government buys the surplus.

A legally imposed maximum price set below the equilibrium, which stops the price from rising and usually causes excess demand, shortages and possible rationing or queues.

The situation where a country can produce a good at a lower opportunity cost than another country, which is the basis for mutually beneficial specialisation and trade.

The ability of a country to produce more output of a good than another country using the same quantity of resources, or to use fewer resources for the same output.

The ratio of a country's average export prices to its average import prices, usually expressed as an index; a rise means each unit of exports buys more imports.

The price of one currency expressed in terms of another currency, determined in a floating system by demand and supply for currencies in the foreign exchange market.

An increase in the value of a currency against another currency under a floating exchange rate, which makes exports dearer abroad and imports cheaper at home.

A fall in the value of one currency against another under a floating exchange rate, which tends to make exports cheaper abroad and imports more expensive at home.

A tax imposed on imported goods, which raises their domestic price, reduces the volume of imports and protects domestic producers, but can provoke retaliation and reduce consumer surplus.

A physical limit on the quantity of a good that may be imported during a given period, restricting supply, raising domestic prices and creating quota rents for licence holders.

The removal or reduction of barriers to international trade such as tariffs and quotas, intended to increase specialisation, competition and the gains from trade.

The number of people unemployed expressed as a percentage of the labour force, where the labour force comprises those employed plus those actively seeking work.

A measure of unemployment based on the number of people claiming unemployment-related welfare benefits, which is administrative and may understate or overstate true joblessness.

A household survey used to measure employment and unemployment according to an agreed definition, such as being without work, available to start and actively seeking work.

A weighted average of the prices of a representative basket of goods and services bought by households, used to measure changes in the cost of living over time.

The percentage change in a price index, such as the consumer price index, over a period, showing how quickly the general price level is rising.

Rising prices caused by growth in aggregate demand outpacing the economy's productive capacity, often associated with booms, loose monetary policy or rising export demand.

Rising prices caused by increases in the costs of production, such as higher wages, energy prices or import prices, which shift the short-run aggregate supply curve to the left.

A curve showing a short-run inverse relationship between the inflation rate and the unemployment rate, implying a temporary trade-off that may disappear once expectations adjust.

The condition where resources are distributed so that the marginal benefit to consumers equals the marginal cost of production, maximising the sum of consumer and producer surplus.

A situation in which the free market fails to allocate resources efficiently, producing too much or too little of a good, often because of externalities, public goods or imperfect information.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction and is not reflected in the market price.

A good that is non-rival and non-excludable in consumption, so the free market tends to underprovide it because of the free-rider problem.

The use of government spending and taxation to influence aggregate demand, output and employment, and to redistribute income or correct market failures.

The use of interest rates, money supply and exchange rate tools by a central bank to influence aggregate demand and control inflation, often targeting a specific inflation rate.

Measures designed to increase the productive capacity of the economy, such as improving education, reducing labour market rigidities or encouraging investment and competition.

The total market value of all final goods and services produced within a country's borders in a given period, used as the main measure of national output.

A composite indicator combining income per head, life expectancy and education measures to compare development across countries beyond output alone.

Income measured in terms of the quantity of goods and services it can buy, obtained by adjusting nominal income for changes in the price level.