Glossary

Aggregate – In total

Positive Statement - A statement backed up by facts or evidence that can be supported or refuted.

Normative Statement - A statement of opinion which cannot be supported or refuted.

Ceteris Paribus – All other things being equal (other factors are expected to remain constant).

Laissez Faire – Abstention by the government from interfering in the works of the free market.

Efficiency (Productive Efficiency) - When an economy is working on its PPF; all factors of production are employed. Efficiency does not necessarily mean all resources are used for the benefit of an economy merely that all factors (land, labour and capital) are used.

Allocative Efficiency - is where only goods and services are being produced that are needed/demanded in an economy. It is where the Marginal Benefit (MB) is equal to the Marginal Cost (MC).

Inefficiency - This is when an economy isn't working efficiently and thus it is working within its PPF. This means that all resources aren't being used; so there may be high unemployment or machines (capital) lying idle.

Profit Motive – An incentive to make a profit results in people working harder and puts resources to their best potential use and produces goods and services in the most efficient way possible. This is present in a free market economy.

Entrepreneurs – People who are willing to work and have the drive and self determination to provide goods and services to meet demand. They are willing to take risks in return for a larger reward (profit).

Price Mechanism – A principle where demand is met with supply by an entrepreneur; essentially the higher the price the more supply which would be available.

Consumer Sovereignty – A principle that consumers have the power to decide what products they think are the best quality or the cheapest by their buying power.

Giffen Goods – A Giffen good is extremely inferior. An example is potatoes during the Irish Potato Famine, potatoes were a staple crop and due to a poor harvest the price increased. Yet consumers disobeyed the laws of demand and still bough the good even after huge price rises. This led to a dramatic fall in real income and unusually the demand curve for potatoes at the time was upward sloping!

Effective Demand - Demand that can be paid for.

The Conspicuous Consumption Effect – Is where demand for a good is still high even at high prices, this is due to the snob effect, where because the product is expensive it is usually seen to be of high quality and have a strong brand, therefore people buy it. This defies the law of demand in the opposite effect to Giffen goods.

Scarcity – A situation where people have unlimited wants but there are limited resources available. 

Economic Goods – Are goods that always have an opportunity cost to producing so scarce resources are consumed.

Free Goods – Are goods where there isn’t an opportunity cost to produce, as the goods are abundant. They are usually natural goods and so no land, labour or capital goes into making them.

Momentary Time Period – Time period is immediate

Short Run – Time period is relatively short

Long Run – Time period is relatively long

Specific Tax/Subsidy – A fixed rate tax or subsidy which is represented on a graph by a parallel shift (positive for subsidy, negative for tax) of the supply curve.

Ad Valorem Tax/Subsidy – A percentage based tax or subsidy which is represented on a graph by a divergent shift (a shift which isn’t parallel and for a subsidy will be positive and will expand as the price rises, for a tax the shift will be negative) of the supply curve.

Derived Demand – Is the demand for primary commodities that are used in manufacturing. For example a rise in the demand for aluminium would cause derived demand for bauxite which is used to manufacture aluminium.

Bullish Outlook – Investors think the price of a share, commodity, or good will increase and so buy it at a low price with the intention of selling at a higher price and make a profit.

Bearish Outlook – Investors think the price of a share, commodity, or good will decrease and so agree a contract with a buyer, who pays for the instrument but won’t receive it for a time period. The seller, doesn’t actually own the instrument, but believing the price of the instrument will fall, agrees to sell to the buyer at what they consider a high price. At the end of the time period they then buy the instrument from someone else and give it to the buyer. If the price of the instrument has fallen then the seller will make a profit, however if it has risen or remained constant then they will lose money. This is known as short selling.

Marginal Analysis – A process of considering the effect of one more unit of a good/service.

Marginal Private Benefit- The benefit a consumer gets from their own consumption of one more unit of a good/service.

Marginal Social Benefit – The benefit society gets from a consumer consuming one more unit of a good/service. Society includes the buyers and sellers of the good/service as well as the 3^rd party.

Society – Everyone = Individuals + Groups + Firms + Government (Consumer, Producer and 3^rd party)

Marginal Private Cost – The cost to a firm producing one more unit of a good/service.

Marginal Social Cost – The cost to society of a firm producing one more unit of a good/service.

Perfect Market – Where there are no failures on either side of the market. The Marginal Private Cost (MPC) equals the Marginal Social Cost (MSC), the Marginal Private Benefit (MPB) equals the Marginal Social Benefit (MSB) and Price equals the Marginal Cost.

Utility – Is the benefit or enjoyment that an individual gets out of a good or service.

Shadow Price – An estimate of the monetary value of an item that does not carry a market price.

Discount – A process whereby the future valuation of a cost or benefit is reduced (discounted) in order to provide an estimate of its present value.

Net Present Value – The estimated value in the current time period of the discounted future net benefit of a project.

Structural Unemployment – Unemployment arising from changes in the pattern of economic activity in an economy.