MATSEC AM Economics key terms

The value of the next best alternative that is given up when a choice is made. It reflects scarcity, because using resources for one purpose means they cannot be used for another.

A curve showing the maximum combinations of two goods an economy can produce when all its resources are fully and efficiently employed. Points inside the curve indicate inefficiency, while points outside are currently unattainable.

The quantity of a good or service that consumers are willing and able to buy at each price over a given period, other things being equal. A fall in price normally increases the quantity demanded.

The quantity of a good or service that producers are willing and able to offer for sale at each price over a given period, other things being equal. A rise in price normally increases the quantity supplied.

The price at which the quantity demanded of a good equals the quantity supplied. At this price the market clears, and there is no tendency for the price to change unless demand or supply shifts.

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

A legal maximum price set below the free-market equilibrium, usually to make a good more affordable. It creates excess demand, which may lead to shortages, queuing, rationing or black markets.

A cost or benefit from production or consumption that falls on third parties who are not involved in the market transaction. Negative externalities make social cost exceed private cost; positive externalities make social benefit exceed private benefit.

A good that is non-rival in consumption and non-excludable, so one person's use does not reduce availability to others and people cannot easily be prevented from consuming it. National defence is a common example.

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 market price.

The loss of economic welfare when a market distortion, such as a tax, monopoly pricing or price control, prevents some mutually beneficial transactions from taking place. It appears as a triangle on a supply and demand diagram.

A situation in which the free market does not allocate resources efficiently, so that social welfare is not maximised. Causes include externalities, public goods, imperfect competition and poor information.

The extra satisfaction a consumer gains from consuming one more unit of a good or service in a given period. It usually falls as consumption rises, which is called diminishing marginal utility.

The additional cost of producing one more unit of output, calculated as the change in total cost divided by the change in quantity. It typically falls at first and then rises as output expands.

Reductions in average cost per unit that a firm obtains as it expands its scale of production in the long run. They may come from specialisation, bulk buying, better technology or spreading fixed costs.

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

A market structure with a single seller of a product that has no close substitutes and is protected by barriers to entry. The monopolist faces the market demand curve and can set price or output, but not both.

A market structure with many firms selling differentiated products and free entry and exit. Firms compete through product features, branding and advertising, and earn only normal profit in the long run.

A market structure dominated by a small number of large firms, each of which must consider how rivals are likely to react when it sets price or output. Interdependence and barriers to entry are central features.

The practice of charging different prices to different buyers for the same product when the price difference is not justified by differences in cost. It requires market power and an ability to prevent resale.

Obstacles that make it difficult or costly for new firms to enter a market, such as large capital requirements, patents, strong brand loyalty, economies of scale or legal licensing. They help existing firms keep market power.

The total market value of all final goods and services produced within a country's borders during a given period, usually a year. It measures economic activity but leaves out unpaid work and informal output.

Gross domestic product adjusted for changes in the price level, so that comparisons over time show changes in the volume of output rather than price movements. It is also called GDP at constant prices.

A sustained increase in the general price level of an economy over time, which reduces the purchasing power of money. It is usually measured by the annual percentage change in a consumer price index.

A measure of the average change over time in the prices paid by households for a fixed basket of goods and services. It is widely used to calculate inflation and to adjust incomes and benefits.

The state of people who are without work, are actively seeking work and are available to start work. The unemployment rate expresses these people as a percentage of the labour force.

The use of government spending and taxation to influence aggregate demand and economic activity. It can be expansionary, aiming to raise output and employment, or contractionary, aiming to reduce inflation.

The use of interest rates and other instruments by a central bank to influence aggregate demand and inflation. In the euro area, the European Central Bank sets monetary policy for member states, including Malta.

The total planned expenditure on goods and services in an economy at a given price level, made up of consumption, investment, government spending and net exports. It slopes downward because of wealth, interest rate and trade effects.

The ratio of the change in equilibrium national income to the initial change in an autonomous component of aggregate demand, such as investment or government spending. A larger marginal propensity to consume produces a larger multiplier.

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

The price of one currency expressed in terms of another. A depreciation makes exports cheaper and imports dearer, while an appreciation has the opposite effect on a country's trade competitiveness.

The ability of a country to produce a good at a lower opportunity cost than another country. Specialisation according to comparative advantage can raise total output and create gains from trade.

A tax imposed on imported goods. It raises the domestic price of imports, protects domestic producers and generates government revenue, but it reduces consumer surplus and may provoke retaliation from trading partners.

An economy whose trade is large relative to its size and which has little influence over world prices, so it must largely adapt to external conditions. Malta is a clear example, being highly dependent on imports and exports.