NCEA Level 3 Economics key terms

The value of the next best alternative forgone when a choice is made. Every decision to use scarce resources one way means giving up the benefits of the option not chosen.

The situation where limited resources cannot satisfy all wants. It forces individuals, firms and governments to choose, and it is the fundamental problem economics studies.

A curve showing the maximum combinations of two goods an economy can produce with all resources fully and efficiently employed. Points inside the curve indicate inefficiency; points outside are unattainable at current capacity.

The condition where resources are distributed among goods and services so that marginal social benefit equals marginal social cost. At this point total welfare is maximised and no reallocation can improve it.

Producing output at the lowest possible average cost per unit, achieved when firms operate at minimum efficient scale and no resources are wasted in production.

The quantity of a good consumers are willing and able to buy at each price over a period, other things equal. A change in price causes movement along the curve; changes in other factors shift it.

The quantity of a good producers are willing and able to offer for sale at each price over a period, other things equal. Higher prices normally encourage greater quantity supplied because production becomes more profitable.

The price and quantity where the quantity demanded equals the quantity supplied, leaving no shortage or surplus. At this price there is no tendency for price to change.

A situation where quantity demanded exceeds quantity supplied at the current price, usually because a price is held below equilibrium. It creates shortages, queues or rationing.

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. Demand is elastic when the value exceeds one in absolute terms.

A measure of how responsive quantity supplied is to a change in price, calculated as percentage change in quantity supplied divided by percentage change in price. Supply is more elastic when producers can adjust inputs quickly.

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. Positive values indicate normal goods; negative values indicate inferior goods.

A measure of how responsive quantity demanded of one good is to a change in the price of another, calculated as percentage change in quantity demanded divided by percentage change in the other good's price. Positive values suggest substitutes; negative values suggest complements.

Goods that can replace each other in satisfying a want, so a rise in the price of one increases demand for the other. Examples include butter and margarine or tea and coffee.

Goods consumed together, so a rise in the price of one reduces demand for the other. Examples include printers and ink cartridges or cars and petrol.

The difference between what consumers are willing to pay and what they actually pay. It is the area below the demand curve and above the price line up to the quantity traded.

The difference between the price producers receive and the minimum price they would accept. It is the area above the supply curve and below the price line up to the quantity traded.

A situation where the free market produces a quantity of a good different from the socially efficient level, so total welfare is not maximised. Causes include externalities, public goods, common resources and imperfect information.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction and is not reflected in the market price. Negative externalities cause overproduction; positive externalities cause underproduction.

The total cost to society of producing one additional unit, equal to marginal private cost plus marginal external cost. Comparing it with marginal social benefit identifies the socially efficient output.

The loss of total welfare caused when a market does not trade at the efficient quantity, such as when output is restricted by a tax, monopoly or externality. It is shown as a triangle between the marginal benefit and marginal cost curves.

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 prevented from consuming it. Markets tend to underprovide such goods, so government funding is often used.

A good that is rival but non-excludable, such as ocean fish stocks or grazing land. Because users do not pay the full cost, the resource tends to be overused or depleted.

A maximum legal price set below equilibrium, such as rent control, intended to make a good more affordable. It typically creates excess demand, shortages and non-price rationing.

A minimum legal price set above equilibrium, such as an agricultural support price or minimum wage. It typically creates excess supply, surpluses or unemployment among the affected group.

A tax set equal to the marginal external cost of a harmful activity, designed to make producers or consumers face the full social cost. It shifts supply or demand toward the socially efficient quantity.

The division of the burden of a tax between buyers and sellers, determined by the relative elasticities of demand and supply. The side of the market that is less elastic bears the larger share.

Falls in average cost as output expands, arising from factors such as specialisation, bulk purchasing and spreading fixed costs. They encourage larger firms and can create barriers to entry.

A market structure with a single seller and no close substitutes, protected by high barriers to entry. The firm can restrict output and charge a price above marginal cost, causing deadweight loss.

Factors that make it difficult or costly for new firms to enter a market, such as high capital requirements, legal licences, patents or strong brand loyalty. They allow existing firms to sustain above-normal profits.

The total market value of all final goods and services produced within a country's borders in a period. It is a key measure of the size of an economy's output.

GDP adjusted for changes in the price level so that it reflects changes in the volume of output. It is used to compare output across time and to measure economic growth.

An increase in an economy's real output over time, usually measured as the percentage change in real GDP. Sustained growth raises living standards and depends on productivity and capital accumulation.

The output produced per unit of input, such as output per worker or per hour worked. Rising productivity is a key source of long-run growth and higher real wages.

The recurring pattern of expansion and contraction in economic activity, measured by fluctuations in real GDP around its long-run trend. It includes upturns, peaks, downturns and troughs.

A period of declining economic activity, often defined as two consecutive quarters of falling real GDP. It typically brings rising unemployment and weaker business investment.

The difference between actual real GDP and potential real GDP, expressed as a percentage of potential output. A negative gap means spare capacity; a positive gap means the economy is overstretched.

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

A measure of the average price of a fixed basket of goods and services bought by households, expressed relative to a base period. Its percentage change is the headline inflation rate.

Inflation caused by aggregate demand growing faster than the economy's capacity to produce, so buyers compete for limited output. It is often associated with a positive output gap.

Inflation caused by rising costs of production, such as higher wages, energy prices or imported input costs. It shifts aggregate supply left, raising prices while reducing output.

The situation of people who are willing and able to work, actively seeking work, but do not have a job. The unemployment rate is the number unemployed divided by the labour force.

The percentage of the working-age population that is either employed or actively seeking work. Changes in participation affect both the size of the labour force and the unemployment rate.

The total spending on domestic goods and services at each price level, made up of consumption, investment, government spending and net exports. It is shown as a downward-sloping curve on a price level–real output diagram.

The total quantity of goods and services firms are willing to produce at each price level. In the short run it slopes upward; in the long run it is vertical at potential output.

The use of government spending and taxation to influence aggregate demand, output and employment. Expansionary settings raise spending or cut taxes; contractionary settings do the reverse.

The use of official interest rates and money supply measures by a central bank to influence inflation and economic activity. In New Zealand the Reserve Bank sets the Official Cash Rate to target inflation.

The interest rate the Reserve Bank of New Zealand sets on overnight lending between banks, which anchors short-term market interest rates. Raising it tends to reduce spending and inflation.

A feature of the tax and benefit system that dampens fluctuations in economic activity without new policy decisions, such as progressive tax receipts falling in a downturn or welfare payments rising.

A record of all economic transactions between a country's residents and the rest of the world, comprising the current account and the capital and financial account. The accounts must balance overall.

The part of the balance of payments recording trade in goods and services, income flows and transfers. A deficit means a country is spending more abroad than it earns from abroad.

The ratio of a country's export prices to its import prices, usually expressed as an index. An improvement means each unit of exports buys more imports, raising real incomes.

The price of one currency expressed in another. A depreciation lowers the foreign price of exports and raises the domestic price of imports, affecting trade volumes and inflation.

The ability to produce a good at a lower opportunity cost than another country, which is the basis for mutually beneficial specialisation and trade even when one country is more efficient at everything.

A tax imposed on imported goods, raising their domestic price and protecting local producers. It reduces consumer surplus, may invite retaliation and lowers total welfare.