NSSCAS Economics (8246) key terms

The value of the next best alternative given up when a choice is made. Because resources are scarce, choosing to produce or consume one thing always means sacrificing something else.

The situation where available resources are insufficient to satisfy all human wants. It forces individuals, firms and governments to make choices and is the foundation of the economic problem.

A curve showing the maximum combinations of two goods an economy can produce using all its resources efficiently. Points inside the curve indicate inefficiency; the curve shifts outward with growth in resource quantity or quality.

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

Output produced per unit of input over a period, usually per worker or per hour worked. Rising productivity lowers unit costs and is a key source of long-run economic growth.

A measure of how responsive quantity demanded is to a change in price, calculated as percentage change in quantity divided by percentage change in price. Demand is elastic when the value exceeds one in magnitude.

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

The responsiveness of demand for one good to a change in the price of another, calculated as percentage change in quantity of good A divided by percentage change in price of good B. Positive values suggest substitutes; negative values suggest complements.

The responsiveness of quantity supplied to a change in price, measured as percentage change in quantity supplied divided by percentage change in price. Supply is more elastic when firms can adjust inputs quickly.

The price and quantity at which quantity demanded equals quantity supplied, so there is no tendency for price to change. A surplus pushes price down; a shortage pushes it up.

A situation where quantity demanded exceeds quantity supplied at the current price, usually because price is held below equilibrium. It typically produces shortages and upward pressure on price.

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

Goods consumed together, so a rise in the price of one reduces demand for the other. Their cross elasticity of demand is negative.

A good for which demand rises when consumer income rises, giving a positive income elasticity of demand. Most goods and services fall into this category.

A good for which demand falls when consumer income rises, giving a negative income elasticity of demand. Consumers switch to better-quality alternatives as they become richer.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction. It is not reflected in market prices, so the free market output is not socially optimal.

A situation where the free market allocates resources inefficiently, so social welfare is not maximised. Causes include externalities, public goods, information failure and market power.

A good that is non-rival and non-excludable, meaning one person's use does not reduce availability to others and non-payers cannot easily be excluded. Markets tend to underprovide such goods.

A good or service that society judges people should consume more of than they would choose freely, often because of information failure or positive externalities. Governments may subsidise or provide it directly.

A good whose consumption creates negative externalities or harms consumers who underestimate the risk. Governments often tax, regulate or restrict it to reduce consumption.

A legal ceiling on price set below equilibrium, intended to make a good more affordable. It creates excess demand, so governments may need rationing or parallel supply measures.

A legal floor on price set above equilibrium, often to protect producers' incomes. It creates excess supply, so governments may buy up surpluses or impose quotas.

A cost that does not vary with the level of output in the short run, such as rent or insurance. Average fixed cost falls continuously as output rises.

A cost that changes directly with the level of output, such as raw materials and hourly labour. Total variable cost rises as production expands.

The addition to total cost from producing one extra unit of output. Profit is maximised where marginal cost equals marginal revenue.

The addition to total revenue from selling one extra unit. In perfect competition it equals price; for a firm facing a downward-sloping demand curve it is below price.

Falls in long-run average cost as a firm expands its scale of output. They arise from sources such as specialisation, bulk buying and indivisible capital equipment.

Rises in long-run average cost as a firm grows beyond an optimal size, usually caused by management and coordination difficulties. They explain the upward-sloping section of the long-run average cost curve.

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

A market with a single dominant seller, high barriers to entry and no close substitutes, giving the firm price-setting power. Output tends to be lower and price higher than under competition.

Obstacles that prevent new firms from entering a market, such as high capital requirements, patents, brand loyalty or legal licences. They protect existing firms' profits and sustain market power.

A market where entry and exit costs are low, so the threat of new entrants disciplines existing firms even if few currently operate. Potential competition can produce competitive pricing.

The total market value of final goods and services produced within a country's borders in a period, usually a year. It is the standard measure of national output and a common indicator of economic growth.

GDP measured at current prices, without adjusting for inflation. A rise may reflect higher prices rather than greater output.

GDP adjusted for changes in the price level, measured at constant prices of a base year. It shows changes in actual output and is used to compare living standards over time.

A weighted average of the prices of a representative basket of goods and services bought by households, expressed relative to a base year. Its annual percentage change is a common measure of inflation.

A sustained rise in the general price level over time, reducing the purchasing power of money. It may be caused by demand-pull pressures or cost-push pressures such as rising input prices.

Central bank action to influence the money supply, interest rates or exchange rate in order to control inflation and support macroeconomic objectives. Higher interest rates typically reduce borrowing and spending.

The cost of borrowing expressed as a percentage of the amount borrowed, and the reward for saving. Central banks use it as the main instrument of monetary policy.

The use of government spending and taxation to influence aggregate demand and achieve macroeconomic objectives. Expansionary policy raises spending or cuts taxes; contractionary policy does the reverse.

A situation where government spending exceeds tax revenue in a given period. It must be financed by borrowing, which adds to public debt.

Measures designed to increase the productive capacity of the economy, such as education, training, deregulation and infrastructure investment. These shift aggregate supply rather than aggregate demand.

A record of a country's transactions with the rest of the world, comprising the current account, the capital and financial accounts, and the balancing item. In principle it always balances overall.

The part of the balance of payments recording trade in goods and services, plus primary income such as investment earnings and secondary income such as transfers. A deficit means outflows exceed inflows on these items.

The price of one currency expressed in terms of another. A depreciation lowers this price and tends to make exports cheaper and imports dearer.

The ability of a country to produce a good at a lower opportunity cost than a trading partner. Specialising according to comparative advantage allows gains from trade even when one country is absolutely more efficient at everything.

The ability to produce more of a good than another country using the same quantity of resources. It differs from comparative advantage, which is based on opportunity cost and determines the pattern of mutually beneficial trade.

The growing integration of national economies through trade, investment, migration and information flows. It increases competition and market size but can expose economies to external shocks.