IAI CB1 key terms

The condition where available resources are insufficient to satisfy all human wants at zero price. It forces choices about what, how and for whom to produce, and underpins opportunity cost.

The value of the next best alternative forgone when a choice is made. It includes explicit monetary costs and implicit costs such as time or income sacrificed.

A curve showing the maximum combinations of two goods an economy can produce when all resources are fully and efficiently employed, given technology. Points inside are inefficient; outward shifts reflect growth.

A Latin phrase meaning 'all other things being equal'. Economists use it to isolate the effect of one variable by holding other relevant factors constant in a model.

Analysis that describes what is, or predicts what would happen, and can be tested against evidence. It is distinct from normative economics, which makes value judgements about what ought to be.

Analysis involving value judgements about what ought to be, such as whether a policy is fair or desirable. Its conclusions depend on ethical criteria and cannot be settled by data alone.

The satisfaction or benefit a consumer derives from consuming a good, service or combination of them. It is an ordinal concept in modern consumer theory, ranking bundles rather than measuring units of happiness.

The additional satisfaction gained from consuming one extra unit of a good, holding consumption of other goods constant. It typically falls as consumption rises.

The principle that each successive unit of a good consumed adds less extra satisfaction than the previous unit, other things equal. It helps explain downward-sloping demand and risk aversion.

The set of consumption bundles a consumer can afford given income and prices. Its slope equals the relative price of the two goods, and changes in income or prices shift or rotate it.

A curve showing combinations of two goods that give a consumer the same level of utility. Curves are typically downward sloping and convex to the origin, reflecting diminishing marginal rates of substitution.

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 absolute value exceeds one.

In the short run, as more of a variable input is added to fixed inputs, the additional output eventually falls. It explains why short-run marginal cost typically rises with output.

The increase in total cost from producing one additional unit of output. It is the relevant cost for short-run output decisions and typically rises as diminishing returns set in.

A market structure with many small firms, homogeneous products, free entry and exit, and perfect information. Each firm is a price taker, so price equals marginal revenue.

A market with a single seller of a product with no close substitutes, protected by barriers to entry. The monopolist faces the market demand curve and can set price above marginal cost, causing deadweight loss.

A market with many firms selling differentiated products and free entry. Each firm faces downward-sloping demand but competes away long-run economic profit, leaving excess capacity.

A market dominated by a few large firms whose decisions are interdependent. Strategic behaviour, barriers to entry and possible collusion mean outcomes depend on rivals' reactions.

A set of strategies in which no player can improve their payoff by unilaterally changing strategy, given the strategies of others. It is a central solution concept in game theory.

Charging different prices to different customers for the same product, not justified by cost differences. It requires market power and an ability to segment buyers and prevent resale.

The loss of total surplus, relative to an efficient outcome, caused by a distortion such as monopoly pricing, a tax or a price control. It measures unrealised mutually beneficial trades.

The market value of all final goods and services produced within a country's borders in a given period. It can be measured by expenditure, income or output, and excludes intermediate goods to avoid double counting.

A sustained increase in the general price level, reducing the purchasing power of money. It is commonly measured by the annual percentage change in a consumer price index.

The percentage of the labour force that is without work, available for work and actively seeking it. It excludes people not actively searching, who are classified as economically inactive.

Government decisions on taxation and public spending to influence aggregate demand, output and income distribution. It may be expansionary or contractionary and is subject to timing and political constraints.

Central bank actions to influence interest rates, money and credit conditions, usually to achieve price stability and support the economy. The main instrument is often the policy interest rate.

Total planned expenditure on domestic goods and services at each price level, comprising consumption, investment, government spending and net exports. It slopes downward partly because lower prices raise real money balances.

The total output firms are willing to produce at each price level. In the short run it slopes upward because some costs are sticky; in the long run it is often vertical at potential output.

The difference between actual output and potential output, expressed as a percentage of potential. A negative gap indicates spare capacity and upward pressure on unemployment; a positive gap indicates overheating.

The price of one currency expressed in another currency, or in terms of a basket of currencies. It affects export and import competitiveness and the domestic currency value of foreign assets.

The idea that exchange rates should adjust so that identical goods cost the same across countries when expressed in a common currency. It is a long-run benchmark rather than a continuous predictor.

A systematic record of all economic transactions between residents of a country and the rest of the world over a period. It includes the current account, capital account and financial account, which must balance in accounting terms.

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

A tax imposed on imported goods, usually expressed as a percentage of their value. It raises domestic prices, protects domestic producers and can reduce consumer surplus and trade volumes.

The process by which financial institutions channel funds from savers to borrowers, transforming maturity, scale and risk. It supports investment and liquidity but can create fragility.

The ease and speed with which an asset can be converted into cash without significant loss of value. Cash is most liquid; property is relatively illiquid.

A graph showing yields on bonds of similar credit quality against their time to maturity. Its slope reflects expectations of future interest rates, inflation and risk.

The extra return investors require to hold a risky asset rather than a risk-free one. It compensates for uncertainty and rises when perceived risk or risk aversion increases.

The tendency for one party to take greater risks because another party bears the consequences, often after a contract is agreed. It is a form of information problem in insurance and finance.

The risk that failure or disruption in one part of the financial system spreads widely, impairing the system's ability to provide services. It justifies macroprudential regulation and central bank liquidity support.