MATSEC IM Economics key terms

The condition in which available resources are limited while human wants are unlimited. It forces individuals, firms and governments to make choices about how resources are allocated.

The value of the next best alternative given up when a choice is made. It is measured in terms of the forgone option, not in money unless money is the alternative sacrificed.

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

Man-made resources such as machinery, tools, buildings and equipment used to produce other goods and services. It does not include money itself, which is only financial capital.

The factor of production that organises the other inputs, takes risks and makes business decisions. The entrepreneur bears uncertainty and receives profit as a reward for risk-taking.

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 unemployment or inefficiency.

The way a society decides what to produce, how to produce it and for whom. In a market economy this is largely decided by prices and the price mechanism.

The system in which changes in prices, driven by supply and demand, signal to producers and consumers what to produce and how much to buy, without central direction.

The quantity of a good or service that consumers are willing and able to buy at a given price over a period of time. Willingness must be backed by ability to pay.

The principle that, other things being equal, as the price of a good rises the quantity demanded falls, and as price falls quantity demanded rises. This gives a downward-sloping demand curve.

The quantity of a good or service that producers are willing and able to offer for sale at a given price over a period of time. Supply reflects the costs and expectations of sellers.

The price at which the quantity demanded equals the quantity supplied, so there is no shortage or surplus. It is also called the market-clearing price.

A measure of how responsive quantity demanded is to a change in price, calculated as percentage change in quantity demanded divided by percentage change in price.

A measure of how responsive quantity demanded is to a change in consumer income, calculated as percentage change in quantity demanded divided by percentage change in income.

A good for which demand rises when consumer income rises, giving a positive income elasticity. Most goods, such as restaurant meals, are normal goods.

A good for which demand falls when consumer income rises, giving a negative income elasticity. Examples include cheaper staple foods that households abandon as they become richer.

Goods that can replace each other in use, so a rise in the price of one increases demand for the other. Tea and coffee are a common example.

Goods used together, so a rise in the price of one reduces demand for the other. Printers and ink cartridges are a standard illustration.

A measure of how responsive demand for one good is to a change in the price of another. It is positive for substitutes and negative for complements.

A maximum legal price set below the equilibrium, often to protect consumers. It causes excess demand, shortages and possibly black markets unless accompanied by rationing.

A minimum legal price set above the equilibrium, often to protect producers or workers. It causes excess supply, such as surpluses or unemployment, unless the government buys the surplus.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction. It is a form of market failure when not reflected in prices.

A situation where the free market fails to allocate resources efficiently, producing too much or too little of a good. Causes include externalities, public goods and imperfect information.

A good that is non-rival and non-excludable, meaning one person's use does not reduce another's and users cannot easily be charged. National defence is a standard example.

A good or service that society judges people should consume more of because it generates positive externalities or is under-consumed when left to the market, such as education or healthcare.

A good or service that society judges people should consume less of because it generates negative externalities or harms the consumer, such as cigarettes or alcohol.

The total market value of all final goods and services produced within a country's borders in a given period. It is the most common measure of national output.

Gross domestic product measured at constant prices, adjusted to remove the effect of inflation. It allows comparison of output across years on a like-for-like basis.

Gross domestic product measured at current market prices, without adjustment for inflation. A rise in nominal GDP may reflect higher prices rather than more output.

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

A measure of the average change in prices of a representative basket of goods and services bought by households, used to calculate the rate of inflation.

The situation of people who are willing and able to work, are actively seeking work, but do not have a job. It is usually expressed as a percentage of the labour force.

The use of government taxation and spending to influence the level of economic activity, redistribute income and manage the budget position of the government.

The use of interest rates, money supply and other instruments by a central bank to influence inflation, output and employment. It is often conducted by an independent central bank.

The cost of borrowing money or the reward for saving, expressed as a percentage of the amount borrowed or saved over a period. It influences spending and investment decisions.

The ability of a country to produce a good at a lower opportunity cost than another country. It explains why specialisation and trade can raise total output even when one country is more efficient at everything.

The ability of a country or producer to produce more of a good with the same resources, or the same amount with fewer resources, than another. It is not the basis for mutually beneficial trade.

The concentration of production on a narrow range of goods or tasks, allowing workers or countries to become more efficient through repetition and division of labour, but increasing dependence on others.

Inflation caused by aggregate demand rising faster than the economy's capacity to produce, so buyers compete for limited output and prices are pushed up.