ZENITH EDUCATION STUDIO
ECONS
D E F I N I T I O N S
S U M M A R Y
S H E E T
TABLE OF CONTENTS
MICROECONOMICS
Central Economic Problem
3
Price Mechanism
5
Market Failure
9
Market Structure
13
MACROECONOMICS
Intro to Macroeconomics
15
Macroeconomic Aims
17
Policies
21
Balance of Payments
23
Standard of Living
24
International Trade
25
Globalisation
27
ZENITH EDUCATION STUDIO
CENTRAL ECONOMIC
PROBLEM
POSITIVE ECONOMIC STATEMENTS*: Statements of fact
which can be tested for its accuracy. In other words,
normative economic statements are about “What Is”.
NORMATIVE ECONOMIC STATEMENTS*: Statements of
value, and cannot be proven true or false by referring to
objective data. In other words, normative economic
statements are about “What Ought To Be”.
ECONOMIC EFFICIENCY: A situation where resources are
allocated such that it is impossible to make one person
better off without making another person worse off
(achieved when both productive and allocative efficiency is
achieved)
ALLOCATIVE EFFICIENCY*: The allocation of resources to
produce the combination of goods and services most
wanted by society such that consumers’ satisfaction is
maximised. (achieved at Q where MSB=MPC or Price=MC)
PRODUCTIVE EFFICIENCY*: Resources are fully and
efficiently used to achieve maximum output using the
lowest cost production method for a given output level.
(Highest output, lowest cost)
SCARCITY*: Unlimited wants but limited resources
OPPORTUNITY COST*: The net benefit that can be derived
from the next best alternative forgone
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CENTRAL ECONOMIC
PROBLEM
MARGINAL BENEFIT/COST: Additional increase in total
benefit/cost (utility, profit, social welfare) from consuming or
producing one more unit of good or service.
UTILITY: The satisfaction gained from consuming a good or
service
MARGINAL UTILITY: The utility gained from consuming one
additional unit of a good
TOTAL UTILITY: The total satisfaction gained from consuming
a certain quantity of a good
LAW OF DIMINISHING MARGINAL UTILITY: As more and more
units of a good or service are consumed, additional utility
derived from successive units decreases.
EQUITY*: Fairness in the distribution of economic welfare
usually in terms of equal access to essential goods and
services, such as education and healthcare services.
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PRICE MECHANISM
PRICE MECHANISM: Refers to the way in which DD and SS
forces interact to determine prices which in turn help to
allocate scarce resources through the decisions taken by
consumers and producers.
DEMAND*: The willingness and ability of consumers to
purchase a given good at a given price in a given time period,
ceteris paribus.
LAW OF DEMAND: The quantity demanded of a good is
inversely related to its price, over a given time period, ceteris
paribus.
DERIVED DEMAND: Demand of one good used in the
production process of another good is dependent on/derived
from the demand for the product it helps to produce.
SUPPLY*: The willingness and ability of producers to provide a
good for a sale at a given price, in a given time period, ceteris
paribus.
CETERIS PARIBUS: All other factors remaining constant
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PRICE MECHANISM
LAW OF SUPPLY*: The quantity supplied of a good rises
when the price of the good rises, over a given time period,
ceteris paribus.
COMPETITIVE SUPPLY: Refers to goods produced using the
same resources.
JOINT SUPPLY: Refers to different goods produced jointly
using a different part of the same resource.
EQUILIBRIUM PRICE AND QUANTITY: The intersection of
the demand and supply curves
SURPLUS: Quantity demanded less than quantity supplied
at given price
SHORTAGE: Quantity demanded
supplied at given price
CONSUMER
SURPLUS*:
Difference
more
than
between
quantity
maximum
amount consumers are willing and able to pay and what
they actually pay. [The gain to consumers] (Triangular area
above price line and below demand curve)
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PRICE MECHANISM
PRODUCER SURPLUS*: Difference between what producers
receives and minimum amount they are willing and able to
accept. (Triangular area below price line and above supply
curve)
DEADWEIGHT LOSS: Total loss of producer and consumer
surplus from underproduction that is not offset by a gain
to anyone else. (Welfare enjoyed by no economic agent)
WELFARE LOSS: Economic welfare that is lost as a result of
too much or too little production and consumption of a
good or resource.
SOCIAL WELFARE: consumer surplus + producer surplus
PRICE
ELASTICITY
OF
DEMAND*:
Measures
the
responsiveness of the quantity demanded of a good to a
change in the price of the same good, ceteris paribus.
PRICE
ELASTICITY
OF
SUPPLY*:
Measures
the
responsiveness of the quantity supplied of a good to a
change in the price of the same good, ceteris paribus.
CROSS ELASTICITY OF DEMAND* [H2]: Measures the
responsiveness of the demand of a good to a change in the
price of a related good, ceteris paribus.
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PRICE MECHANISM
INCOME ELASTICITY OF DEMAND* [H2]: Measures the
responsiveness of the demand of a good to a change in
income, ceteris paribus.
SUBSTITUTES: Goods that satisfy a similar want.
COMPLEMENTS: Goods that are consumed together.
PRICE CEILINGS:* (Price control) Maximum price that
producers can legally charge.
PRICE FLOORS*: (Price control)
producers can legally charge.
Minimum
price
that
QUOTA: (Quantity control) Highest possible quantity that
could be exchanged in the market set by the government.
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MARKET FAILURE
MARKET FAILURE*: Occurs when the price mechanism,
operating in the absence of government intervention fails
to utilize scarce resources to achieve efficient and
equitable outcomes.
EXTERNALITY: Production/consumption of a good affects
the wellbeing of an external/third party (negatively or
positively) who are not involved in the transaction of the
good; the affected party is not compensated or does not
pay for the effect.
NEGATIVE EXTERNALITIES*: Adverse spillover costs to a
third party not involved in the production/consumption of
the good/service and the affected party does not receive
any compensation for the cost.
POSITIVE EXTERNALITIES*: Spillover benefits to a third
party not involved in the production/consumption of the
goods/service and the third party does not pay for the
benefit they enjoy.
PUBLIC GOODS*: Goods which are non-rivalrous and nonexcludable
in
consumption.
These
two
inherent
characteristics results in the market being said to be
“missing”.
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MARKET FAILURE
MARGINAL
PRIVATE
COST/BENEFIT:
Additional
cost/benefit incurred/enjoyed by the producer/consumer
in the production/consumption of an additional unit of
the good.
MARGINAL
EXTERNAL
COST/BENEFIT:
Additional
cost/benefit borne/enjoyed by third parties who are not
directly involved in the production/consumption of an
additional unit of good
MARGINAL
SOCIAL
COST/BENEFIT:
Marginal
private
cost/benefit + Marginal external cost/benefit (true value of
resources to society)
MERIT GOODS*: Deemed by the government to be socially
desirable, and are often under-consumed in the market
DEMERIT GOODS*: Deemed by the government to be
socially undesirable, and are often over-consumed in the
market
NON-RIVALROUS*: Consumption of the good does not
reduce the amount left for others to consume. (The
satisfaction of other users is not diminished when another
user uses the good.)
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MARKET FAILURE
NON-EXCLUDABLE*: Impossible or prohibitively costly to
exclude non-payers from consuming the good once it has
been produced.
SUBSIDIES*: Monetary payment given to firms by the
government which allows them to boost production,
allowing for the greater consumption of the good.
FULL PROVISION*: Policy taken when the government has
full control over the market. The government undertakes
the entire production of the good.
JOINT PROVISION*: The government allows private
enterprises to be responsible for the initial production of
the good, and in turn augments the market by producing
the remainder of the goods required for
production to be at the socially optimal level.
the
total
TAXATION*: occurs when the government regulates the
market by making producers or consumers pay taxes, or
monetary payments.
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MARKET FAILURE
PERMITS*: Licenses that allow producers to continue
producing the goods that have negative adverse spillover
effects.
BANNING*: The prohibition of both producing and
consuming a good. (Done through government legislation)
INFORMATION FAILURE*: Individuals or firms lack
information that is required for them to make economic
decisions. In perfectly competitive markets, consumers and
firms have perfect information. However, in the real world,
there is imperfect information that causes a great deal of
ignorance and uncertainty.
IMPERFECT INFORMATION*: Occurs when consumers do
not know the full extent of benefits/costs to themselves.
ASYMMETRIC INFORMATION* [H2]: Occurs when one of the
parties involved in the transaction has more information
than the other party. (Moral Hazard/Adverse Selection)
MORAL HAZARD* [H2]: One party can take actions in
secret, hiding it from the other party.
ADVERSE SELECTION* [H2]: One party is able to hide some
characteristics from the other party, leading to more
undesirable parties to enter the market.
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MARKET STRUCTURE [H2]
PROFIT*: Total revenue – Total cost
ECONOMIC COST: Explicit cost + Implicit cost
EXPLICIT COST: Cost of factors of production
IMPLICIT COST: Opportunity cost
SHORT RUN: Time period where at least one factor is fixed
in supply (production period)
LONG RUN: Time period where all factors of production are
variable (planning period)
FIXED COST: Cost of fixed factors which supply is constant
in the short run.
VARIABLE COST: Cost of variable factors which vary with
output.
LAW OF DIMINISHING RETURNS: As a firm adds more units
of a variable factor to a given amount of fixed factor, the
fixed factor gets over utilised, causing total output to
increase at a decreasing rate (falling marginal output).
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MARKET STRUCTURE [H2]
SUBNORMAL PROFIT: Total Revenue < Total Cost
SUPERNORMAL PROFIT: Total Revenue > Total Cost
NORMAL PROFIT: Total Revenue = Total Cost
INTERNAL ECONOMIES OF SCALE*: Cost savings arising
from the benefits of increasing the output by expanding
the firm’s scale of production (size of firm)
EXTERNAL ECONOMIES OF SCALE*: Cost savings enjoyed
by firms due to industry-based expansion or growth in
availability of facilities
BARRIERS TO ENTRY*: Restrictions or constraints that
prohibit the entry of new firms into an industry.
PRICE DISCRIMINATION*: Practice of charging different
prices to different consumers, for the same product with
the same cost of production.
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INTRODUCTION TO
MACROECONOMICS
INJECTIONS: Expenditure components, leads to an
increase in CFoI (government expenditure, investment,
exports)
WITHDRAWALS: Leakages, flows out of CFoI (savings, taxes,
imports)
NATIONAL INCOME OF A COUNTRY:
Total output: Total value of the final g/s produced within a
country
Total income: Sum of all factor income earned: Wages
(Labour) Rent (Land) Interest (Capital) and Profits
(Entrepreneurship)
Total spending/expenditure: Total spending on final g/s
produced within a country
AGGREGATE DEMAND*: The total spending on the output
produced by a country
AGGREGATE SUPPLY*: Total output of good and services
produced in a country given the current level of
technology and resources.
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INTRODUCTION TO
MACROECONOMICS
SHORT RUN AS: Shows the impact of rising total planned
output on the general price level in given conditions.
LONG RUN AS: Maximum output that a country can
produce given current supply conditions. (Potential
Capacity)
MULTIPLIER EFFECT: An injection into the economy
creates a multiplied effect on national income depending
on the size of the multiplier.
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MACROECONOMIC AIMS
SUSTAINABLE ECONOMIC GROWTH*: Rate of growth that
can be maintained without creating other significant
problems (e.g. depleted resources and environmental
problems), particularly for future generations, and implies
a positive and stable growth rate over extended period of
time (without causing high inflation)
INCLUSIVE ECONOMIC GROWTH*: Growth sustained over
time, is broad based across economic sectors and creates
productive employment opportunities for the majority of
the country’s population.
FULL EMPLOYMENT: All labour resources are utilised.
GROSS DOMESTIC PRODUCT: Refers to the total monetary
value of the final goods and services produced in a
geographical boundary in a time period (almost always in
a year)
GROSS NATIONAL PRODUCT: Refers to the total monetary
value of final goods and services produced by nationals of
a country in a time period (almost always a year)
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MACROECONOMIC AIMS
REAL GDP*: National income corrected for the effects of
inflation (calculated by nominal GDP (GDP in prices of
accounting year)/GDP deflator (CPI))
REAL GDP PER CAPITA: National income that accounts for
the growth and size of the population (calculated by
GDP/population size)
ECONOMIC GROWTH*: The increase in the level of real
output (GDP) over a period of time (calculated by %
change in real GDP over two time periods)
ACTUAL GROWTH*: Refers to an increase in the amount of
real output (real GDP) produced by a country.
POTENTIAL GROWTH*: An increase in the productive
capacity of the country (the concave of the production
possibility curve)
PRODUCTIVE CAPACITY: maximum possible output of an
economy
INFLATION*: A sustained rise in General Price Level (GPL)
over a period of time (calculated by % change in CPI over
two time periods.
CONSUMER PRICE INDEX (CPI)*: Shows how price of a
basket of goods and services consumed by an average
household has changed from one period to another.
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MACROECONOMIC AIMS
DEMAND PULL INFLATION*: Occurs when AD persistently
exceeds AS such that the General Price Level rises, when
the condition of the economy is very near or at the level of
full employment
COST PUSH INFLATION*: Inflation due to a fall in the short
run aggregate supply of a country, typically due to an
increase in the price of factors of production.
UNEMPLOYMENT*: The amount of productive resources in
a country that is not being utilized to produce output
(calculated by proportion of the country’s labour force
which is unemployed)
DEMAND DEFICIENT UNEMPLOYMENT*: Unemployment
that occurs when AD persistently falls or is too low
FRICTIONAL UNEMPLOYMENT*: Part of the natural rate of
unemployment. Occurs when workers switch from job to
job and there is a lag time between the period when they
are working and they are unemployed.
STRUCTURAL UNEMPLOYMENT*: Part of the natural rate of
unemployment. Caused by the mismatch between skills
possessed by new sectors and skills required by workers,
occurring when the economy goes through structural
changes or when there are technological advancements.
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MACROECONOMIC AIMS
RECESSION*: Generally identified by a fall in GDP in two
successive quarters (2x 3 months = 6 months of negative
GDP growth).
ECONOMIC SLOWDOWN*: A slowdown in the rate of
Economic growth. Economic growth will still be positive.
DEFLATION*: Sustained decrease in the General price level
of goods and services in an economy.
DISINFLATION: Temporary slowing of the pace of price
inflation.
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POLICIES
FISCAL POLICY*: The management of the government
budget through the adjusting of tax rates and level of
government spending to achieve macroeconomic aims.
INTEREST RATE POLICY*: The management of the
country’s interest rate in order to achieve macroeconomic
aims.
HOT MONEY*: Highly mobile short-term funds that flow
across international boundaries seeking the highest rate of
returns through changes in interest rates and expected
changes in exchange rates.
EXCHANGE RATE POLICY*:
country’s
exchange
rate
The
in
management of the
order
to
achieve
macroeconomic aims.
APPRECIATION:
When
a
country’s
exchange
rate
strengthens relative to other currencies
DEPRECIATION: When a country’s exchange rate weakens
relative to other currencies
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POLICIES
MARSHALL LERNER CONDITION*: Where the sum of price
elasticity of demand of exports and imports is greater than
one, the [weakening] of exchange rate will resulting in a
[rise] in country net exports.
SUPPLY SIDE POLICY*: The management of factors
influencing the aggregate supply in a country in order to
achieve macroeconomic aims.
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BALANCE OF PAYMENTS [H2]
BALANCE OF PAYMENTS (BOP)*: The summary record of
monetary flow between a country and the rest of the world
due to trade and investment, in a period of time.
CURRENT ACCOUNT (CA)*: The current account is a record
of the country's trade balance plus net income and direct
payment
CAPITAL ACCOUNT (KA): The capital account is a record of
the inflows and outflows of capital that directly affect a
nation's foreign assets and liabilities
OFFICIAL FINANCING ACCOUNTS (OFA): The amount of
financial reserves accumulate from CA+KA
SHORT-TERM INVESTMENTS: Financial assets, debts or
equity security that is expected to be sold within the next
year (3-12 months).
LONG-TERM
INVESTMENTS:
Consists
of
either
direct
investments or financial portfolio investments that remain
in a country for more than a year.
FOREIGN DIRECT INVESTMENTS*: Investment in capital
goods made by foreign firms in a domestic country.
OUTWARD DIRECT INVESTMENTS: Investment that is
made abroad by a domestic country.
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STANDARD OF LIVING
STANDARD OF LIVING*: The material and non-material well
being of the people in a country.
MATERIAL WELL BEING*: Refers to and is measured by the
total amount of goods (quantity and quality) available for
consumption that are enjoyed by an individual of the
country.
NON-MATERIAL WELL BEING*: Refers to physical and
mental wellbeing of an individual, which is measured by
intangible aspects of living which affect the quality of
living.
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INTERNATIONAL
TRADE [H2]
THEORY OF COMPARATIVE ADVANTAGE*: States that a
country should specialise in production and export of
goods which they have the lowest opportunity cost in
producing.
TERMS OF TRADE (ToT): ToT index captures the average
price of all exports and imports within a country (Ratio of
country’s export price index to import price index
multiplied by 100)
FREE TRADE: The exchange of goods & services across
international boundaries without any barriers to entry
obstructing the flow of imports into the country.
PROTECTIONISM*: The sheltering of domestic industries
from foreign competition through the use of trade policies
for various reasons
INFANT INDUSTRY: Industry that the country has the
potential to gain comparative advantage in but is too
young to realize its potential yet. (Needs time to grow)
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INTERNATIONAL
TRADE [H2]
DUMPING*: The predatory pricing practise where foreign
producers sell exports at prices below marginal cost of the
production
PATTERN OF TRADE*: A country’s volume, composition and
direction of goods and services traded between the
country and the rest of the world. A country’s pattern of
trade changes over time.
POOR RESOURCE ENDOWMENT: Low amount of resources
TARIFFS*: Taxes on imports that enter the country set by
the government that artificially raise the price of imports.
QUOTAS:
Effects
are
similar
to
tariffs.
Rather
than
artificially raising prices, the country restricts the physical
quantity or values of goods imported into a country.
CAPITAL CONTROLS: Restrictions set by the government
that prevents FDI from being withdrawn in a given time
period.
ANTI-IMMIGRATION POLICIES: Policies that are set to
restrict the flow of labour in and out of a country.
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GLOBALISATION [H2]
GLOBALISATION*: The phenomenon where countries
become more integrated and their economies become
more interdependent, through freer and increased trade,
capital and labour flows.
FREE TRADE AGREEMENTS*: Treaties between countries
with the objective of reducing trade barriers and
intensifying the trade of goods and services between the
countries.
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