Pancyprian Economics key terms

The value of the next best alternative given up when a choice is made. Because resources are scarce, every decision to produce or consume one thing means sacrificing something else.

The condition in which available resources are insufficient to satisfy all human wants. It forces individuals, firms and governments to choose between competing uses of limited resources.

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed. Points inside the curve indicate inefficiency; points beyond it are unattainable with current resources.

The inputs used to produce goods and services: land, labour, capital and enterprise. Each factor earns a reward, respectively rent, wages, interest and profit.

Producer goods such as machinery, tools, buildings and equipment used to make other goods and services. It is created by investment and differs from land and labour as a factor of production.

A measure of how responsive quantity demanded is to a change in price, calculated as the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the value exceeds one.

A measure of how responsive quantity supplied is to a change in price, calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply is more elastic when firms can adjust output quickly.

The responsiveness of quantity demanded to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income. Positive values indicate normal goods, negative values inferior goods.

A good whose demand increases when consumers' income rises. Its income elasticity of demand is positive, and goods such as restaurant meals or branded clothing are typical examples.

A good whose demand falls when consumers' income rises, because buyers switch to preferred substitutes. Its income elasticity of demand is negative; examples include cheaper staple foods or second-hand clothing.

The quantity of a good or service consumers are willing and able to buy at each price over a given period. A movement along the curve follows a price change; a shift occurs when other conditions change.

The quantity of a good or service producers are willing and able to offer for sale at each price over a given period. Supply curves normally slope upward because higher prices make extra output profitable.

The price and quantity at which quantity demanded equals quantity supplied, so there is no tendency for price to change. Above it a surplus pushes price down; below it a shortage pushes price up.

A situation where quantity demanded exceeds quantity supplied at the prevailing price, usually because the price is held below equilibrium. It creates shortages and pressure for the price to rise.

A maximum price set by government below the equilibrium level, often to protect consumers. It causes excess demand, shortages and possible black markets unless accompanied by rationing or extra supply.

A minimum price set by government above the equilibrium level, often to support producers' incomes. It creates excess supply, so surpluses may need to be bought up or stored publicly.

The difference between what consumers are willing to pay for a good and what they actually pay. On a demand and supply diagram it is the area below the demand curve and above the price line.

The difference between the price producers actually receive and the minimum price they would accept for each unit. It is shown as the area above the supply curve and below the price line.

A cost that does not vary with the level of output in the short run, such as rent or insurance. Average fixed cost falls continuously as output expands because the same total is spread over more units.

A cost that changes directly with the quantity produced, such as raw materials and hourly labour. Total variable cost rises as output increases, though not necessarily at a constant rate.

The addition to total cost from producing one extra unit of output. It typically falls at first, then rises as diminishing returns set in, and it cuts average total cost at its minimum point.

Total cost divided by the number of units produced, combining average fixed and average variable cost. Its curve is usually U-shaped, and firms must cover it to earn normal profit in the long run.

The principle that adding more of a variable input to fixed inputs eventually yields smaller increases in output. In the short run it explains why marginal cost rises as output expands.

Reductions in average cost per unit that arise as a firm grows larger, from specialisation, bulk buying or better technology. They explain why average cost curves fall over a range of output.

A market structure with many small firms, identical products, free entry and exit, and perfect information. Each firm is a price taker facing a horizontal demand curve and earns only normal profit in the long run.

A market with a single seller and high barriers to entry, giving the firm price-setting power. Output is usually lower and price higher than under competition, producing a deadweight welfare loss.

Obstacles that prevent new firms from entering a market, such as large capital requirements, patents, exclusive licences or strong brand loyalty. They protect existing firms' profits and reduce competition.

The minimum return needed to keep a firm in an industry, treated as part of total cost. It is earned when total revenue just equals total cost, including the opportunity cost of the owner's resources.

A situation where the free market allocates resources inefficiently, so social welfare is not maximised. Causes include externalities, public goods, imperfect competition and missing information.

A cost or benefit of production or consumption that falls on third parties not involved in the transaction. Negative externalities lead to overproduction; positive ones to underproduction, relative to the social optimum.

A good that is non-rival and non-excludable, such as national defence or street lighting. Because users cannot be excluded, markets under-provide it, so government provision is usually required.

A good whose consumption society believes should be encouraged, such as education or healthcare, because people undervalue its benefits. It is often subsidised or provided publicly to raise consumption.

The total market value of final goods and services produced within a country's borders in a given period. It measures national output and can be stated at market prices or factor cost.

A model showing money moving between households and firms through spending, income and output, with injections of investment, government spending and exports and withdrawals of saving, taxes and imports. Equilibrium occurs when injections equal withdrawals.

The ratio of a change in national income to the initial change in injections that caused it. It is larger when the marginal propensity to withdraw is smaller, so spending circulates more times.

A sustained rise in the general price level, reducing the purchasing power of money. It is measured by the percentage change in a consumer price index and may be demand-pull or cost-push in origin.

The number of people willing and able to work at current wage rates who cannot find jobs. It is measured as a percentage of the labour force and may be cyclical, structural, frictional or seasonal.

Central bank action to influence the money supply and interest rates in order to control inflation and support output. The main instrument is usually the policy interest rate, which affects borrowing and spending.

The institution that manages a country's currency, money supply and interest rates and supervises the banking system. It acts as lender of last resort and typically holds official reserves.

Government use of taxation and public spending to influence aggregate demand and achieve macroeconomic objectives. Expansionary policy raises spending or cuts taxes; contractionary policy does the opposite.

The amount by which government spending exceeds its revenue in a given year. It must be financed by borrowing, which adds to public debt and may raise interest rates.

The accumulated stock of government borrowing outstanding at a point in time, owed to domestic and foreign lenders. It grows when deficits persist and is often expressed as a percentage of GDP.

A record of all economic transactions between a country and the rest of the world over a period. It comprises the current account, the capital account and the financial account, which must in principle balance.

The part of the balance of payments recording trade in goods and services, primary income such as investment earnings, and secondary income transfers. A deficit means the country spends more abroad than it earns.

The price of one currency expressed in terms of another. It may be fixed by the authorities or determined by demand and supply in foreign exchange markets, and it affects import and export prices.

A rise or fall in a currency's value against another under floating exchange rates. Appreciation makes exports dearer abroad and imports cheaper; depreciation does the reverse.

The ability of a country to produce a good at a lower opportunity cost than another country. It explains the potential gains from specialisation and trade even when one country is absolutely less efficient in everything.

A broad improvement in living standards, covering income growth plus better health, education, equality and freedom. It is wider than economic growth, which measures only the rise in real output.