HKDSE Economics key terms

The value of the next best alternative given up when a choice is made. It includes both explicit money costs and the implicit value of forgone options, and exists because resources are scarce.

A situation where limited resources cannot satisfy all human wants at the same time. It forces choice and gives rise to opportunity cost, and applies even to wealthy economies.

A good whose supply is sufficient to meet all wants at zero price, so no one is excluded and no opportunity cost arises from consuming more. Clean air in remote areas is often cited as an example.

A good or service that is scarce relative to wants, so producing or consuming more requires giving up other goods. It normally commands a positive price and has an opportunity cost.

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

An increase in an economy's productive capacity, shown by an outward shift of the production possibility frontier or by a sustained rise in real GDP. It can come from more or better resources or improved technology.

The quantity of a good consumers are willing and able to buy at each price over a period, other things unchanged. A change in price moves along the demand curve; changes in other factors shift it.

The tendency for quantity demanded to fall as price rises, other things unchanged. It produces a downward-sloping demand curve and reflects income and substitution effects.

Non-price factors that shift a demand curve, such as income, tastes, prices of related goods, population and expected future prices. A change in any of them causes a shift rather than a movement along the curve.

The quantity of a good producers are willing and able to sell at each price over a period, other things unchanged. A price change moves along the supply curve; cost or technology changes shift it.

The tendency for quantity supplied to rise as price rises, other things unchanged, because higher prices raise the reward per unit and can cover higher marginal costs. It gives an upward-sloping supply curve.

Non-price factors that shift a supply curve, such as input costs, technology, taxes and subsidies, number of sellers and expected future prices. Changes in them shift supply rather than move along it.

The price at which quantity demanded equals quantity supplied, so there is no shortage or surplus and no pressure for price to change. It is shown by the intersection of the demand and supply curves.

A situation where quantity demanded exceeds quantity supplied at a price below equilibrium, often caused by a price ceiling. It creates a shortage that tends to push the price upward.

A situation where quantity supplied exceeds quantity demanded at a price above equilibrium, often caused by a price floor. It creates a surplus that tends to push the price downward.

A legally imposed maximum price, set below equilibrium to be effective. It causes a shortage, may require rationing and can encourage black markets.

A legally imposed minimum price, set above equilibrium to be effective. It causes a surplus, and may lead to unsold output, surpluses bought up by government or illegal price cutting.

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the value exceeds one and inelastic when it is below one; it affects how revenue responds to price changes.

The percentage change in quantity supplied divided by the percentage change in price. Supply is more elastic when producers can adjust inputs quickly, for example when there is spare capacity or a short production period.

The percentage change in quantity demanded divided by the percentage change in income. A positive value indicates a normal good; a negative value indicates an inferior good; values above one indicate a luxury.

The percentage change in quantity demanded of one good divided by the percentage change in the price of another. A positive value suggests substitutes; a negative value suggests complements.

Price multiplied by quantity sold. Whether revenue rises or falls after a price change depends on the price elasticity of demand: revenue moves the opposite way to price when demand is elastic.

Goods that can replace each other in use, so a rise in the price of one increases demand for the other. They have positive cross elasticity of demand.

Goods used together, so a rise in the price of one reduces demand for the other. They have negative cross elasticity of demand, as with printers and ink cartridges.

A good whose demand rises when consumer income rises, other things unchanged. It has positive income elasticity of demand, and the size of that value shows whether it is a necessity or a luxury.

A good whose demand falls when consumer income rises, other things unchanged, because consumers switch to better alternatives. It has negative income elasticity of demand.

The difference between what consumers are willing to pay for a good and what they actually pay. It is shown as the area below the demand curve and above the price line.

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

The loss of total surplus that occurs when a market produces less or more than the efficient quantity, for example because of a tax, monopoly pricing or a binding price control. It measures lost efficiency.

A cost or benefit from production or consumption that falls on third parties not involved in the market transaction. Negative externalities lead to overproduction; positive externalities lead to underproduction in a free market.

A good that is non-rival and non-excludable, such as national defence, so private markets tend to underprovide it. Because users cannot easily be charged, government provision is often needed.

The tendency for people to benefit from a good without paying for it when the good is non-excludable. It makes voluntary funding unreliable and helps explain why public goods are usually tax-financed.

The total market value of all final goods and services produced within a country's borders during a period. It counts only final output to avoid double counting and excludes transfer payments.

The total market value of final goods and services produced by a country's residents during a period, wherever they are located. It differs from GDP by adding net income earned from abroad.

GDP measured at current market prices, so it changes when either output or prices change. Comparing it across years can mislead because it includes inflation.

GDP measured at constant prices of a chosen base year, so changes reflect changes in output only. It is used to compare living standards over time.

A price index obtained by dividing nominal GDP by real GDP and multiplying by 100. It measures the average change in prices of all goods and services included in GDP.

A measure of the average change over time in the prices of a fixed basket of goods and services bought by a typical household. It is used to measure inflation and adjust wages and benefits.

A sustained rise in the general price level over time, which reduces the purchasing power of money. It may be demand-pull, cost-push or caused by excessive growth in the money supply.

The situation of people who are willing and able to work at the going wage but cannot find jobs. The unemployment rate is the number unemployed divided by the labour force, expressed as a percentage.

The number of people who are employed plus those who are unemployed and actively seeking work. People outside this group, such as full-time students and retirees, are not counted in unemployment statistics.

The total planned spending on domestic output at each price level, made up of consumption, investment, government spending and net exports. It slopes downward partly because lower prices raise real money balances.

The total quantity of output firms are willing to produce at each price level. In the short run it slopes upward because some costs are fixed; in the long run it may be vertical at potential output.

Household spending on goods and services, excluding purchases of new housing. It is usually the largest component of aggregate demand and depends mainly on disposable income.

Spending by firms on capital goods such as machinery and factories, plus spending on new housing and changes in inventories. It is a component of aggregate demand and adds to future productive capacity.

Income available to households for spending or saving after direct taxes have been deducted and transfers such as benefits added. It is a key determinant of consumption spending.

The use of government spending and taxation to influence aggregate demand and the level of economic activity. Expansionary policy raises spending or cuts taxes; contractionary policy does the opposite.

Central bank actions that change the money supply, interest rates or exchange rate to influence aggregate demand and inflation. In Hong Kong, the linked exchange rate system limits independent interest-rate setting.

The total stock of money in an economy at a point in time, measured in aggregates such as currency held by the public plus demand deposits. It affects interest rates and spending.

A situation where government spending exceeds government revenue in a period. It may stimulate aggregate demand but adds to public debt and can crowd out private investment.

A tax where the average tax rate rises as taxable income rises, so higher earners pay a larger share of income. It tends to reduce income inequality but may weaken work incentives.

The ability to produce a good at a lower opportunity cost than another producer. It explains the gains from specialisation and trade, even for a country that is less productive in everything.

The ability to produce more output with the same resources, or the same output with fewer resources, than another producer. It does not by itself determine the pattern of mutually beneficial trade.