GCE A/L Economics key terms

The value of the next best alternative forgone when a choice is made. It exists because resources are scarce and can be used in more than one way.

A curve showing the maximum combinations of two goods an economy can produce with all its resources fully and efficiently employed, given constant technology.

The inputs used to produce goods and services: land, labour, capital and entrepreneurship. Each earns a reward such as rent, wages, interest or profit.

Splitting a production process into separate tasks performed by different workers, so each becomes specialised. It raises output per worker but can cause boredom and interdependence.

A statement about what is or will be, which can be tested against evidence and shown to be true or false. It does not express a value judgement.

A statement about what ought to be, based on a value judgement. It cannot be proved or disproved by facts alone.

A situation where resources are distributed between goods and services so that consumer satisfaction is maximised, achieved when price equals marginal cost in each market.

The system in which prices, driven by demand and supply, signal scarcity and guide resources to where they are most valued, without central direction.

The responsiveness of quantity demanded to a change in price, measured as percentage change in quantity demanded divided by percentage change in price. Demand is elastic if the value exceeds one.

The responsiveness of demand to a change in consumer income, measured as percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, negative for inferior goods.

The responsiveness of demand for one good to a change in the price of another, measured as percentage change in quantity demanded of the first good divided by percentage change in price of the second.

The responsiveness of quantity supplied to a change in price, measured as percentage change in quantity supplied divided by percentage change in price. It is greater when producers can respond quickly.

The price and quantity at which the amount consumers wish to buy equals the amount producers wish to sell, so there is no tendency for price to change.

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 price.

As more of a variable input is added to fixed inputs, the extra output from each additional unit eventually falls, holding technology constant.

Falling long-run average cost as a firm's output increases, arising from factors such as specialisation, bulk buying and improved technology.

The addition to total cost from producing one more unit of output. It is important because a profit-maximising firm compares it with marginal revenue.

The minimum profit needed to keep a firm in an industry, equal to the opportunity cost of the entrepreneur's resources. It is included in total cost.

A market structure with many small firms, identical products, free entry and exit, and perfect information, so each firm is a price taker.

A market with a single seller and no close substitutes, protected by barriers to entry. The monopolist is a price maker and can restrict output to raise price.

A market dominated by a few large firms, each affected by the actions of rivals. Firms are interdependent and may compete on price or non-price factors.

A situation where the free market produces an inefficient allocation of resources, so output does not maximise social welfare. Causes include externalities, public goods and imperfect information.

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

A good that society judges people should consume more of than the free market provides, because individuals underestimate its private benefits or it generates positive externalities.

A good that is non-rival and non-excludable, such as national defence. Because people cannot be excluded, the free market tends to underprovide it.

A situation where one party in a transaction knows more than the other, which can cause markets to fail through problems such as adverse selection and moral hazard.

A tax set equal to the marginal external cost of a good, designed to make producers face the full social cost and reduce output towards the socially efficient level.

The total market value of all final goods and services produced within a country's borders in a given period, usually a year.

A sustained rise in the general price level over time, which reduces the purchasing power of money. It is measured by changes in a price index such as the consumer price index.

The situation where people who are willing and able to work at the going wage rate cannot find jobs. It is measured as a percentage of the labour force.

The total amount of money in an economy at a point in time, including notes, coins and bank deposits. Central banks measure it in different definitions such as narrow and broad money.

The ratio of a change in national income to the initial change in spending that caused it, showing how an injection can have a larger final effect.

The use of government spending and taxation to influence the level of aggregate demand, income distribution and the allocation of resources.

The use of interest rates, money supply and credit controls by a central bank to influence aggregate demand and achieve targets such as low inflation.

Government measures designed to increase the productive capacity of the economy, such as education, training, lower taxes and deregulation, shifting aggregate supply to the right.

A country has a comparative advantage in a good when it can produce it at a lower opportunity cost than another country, which is the basis for beneficial specialisation and trade.

A tax on imported goods, which raises their price, reduces imports and protects domestic producers, but can distort trade and invite retaliation.

The price of one currency expressed in terms of another. It is determined by demand and supply in a floating system or fixed by the government.

A record of all transactions between residents of a country and the rest of the world in a year, comprising the current account and the capital and financial accounts.