Economic Terms

Individuals that are able to consume a good without actually purchasing it e.g. flood defences

The type of unemployment that measures the time period between jobs when economic agents are searching for jobs or in the process of moving to another job. Another term for this is search unemployment

Below is a diagram to illustrate the effects of frictional unemployment on an economy in a AD-AS framework. In this instance an increase in frictional unemployment reduces the pool of labour available for firms to hire and this pushes up the wages of existing workers as the labour market tightens and workers become more valuable in the employer's eyes. This then causes the SRAS curve to shift inwards as firms have to cut production with a lack of employment. But because frictional unemployment is often a form of short-term employment these effects are soon reversed and the economy moves back to its original position.

This is the maximum level of output sustainable in the long run given the current quantity and quality of productive resources.

Below shows an example of a country's PPF and as they are operating on the PPF they are at full capacity as no slack in the economy exists i.e. all resources and factors of production are being fully utilised.

 

The level of output where all available factors of production are being fully utilised.

Below is a diagram that shows when an economy is in equilibrium and no output gaps exist and the economy is positioned at the full employment output level. Any output level beyond the full employment level introduces inflationary pressures into the economy, because unless there is an outward shift in the LRAS curve, then there are too few resources to produce too many goods. Likewise if the output level falls below the full employment level then this will introduce deflationary pressures into the economy as now there are too many resources to produce the amount of goods and services required.

 

Is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future, or that, if something happens less frequently than normal during some period, it will happen more frequently in the future.

The reason why it is called the gambler's fallacy is that often individuals fall for the this mistake when gambling. For instance many individuals believe that if they are flipping a coin and the previous ten flips all landed on heads, then there is a greater than 50% chance of a tails popping up in the eleventh flip. But of course, this is incorrect because each flip of a coin is independant from the last one so the history of flips has no influence on the next flip. The same logic can be applied to a roulette wheel.

The study of strategic decision making by using mathematical models to illustrate the conflict and cooperation between rational decision makers (players). It is a useful concept to be able to predict the equilibrium condition for interdependant decision making.

Is a situation where player's in a game do have to take into account the reactions of rival firms when setting their own strategic variable i.e. high level of interdependency between firms. Therefore firms need to reason strategically and form expectations about others' decisions when deciding their own course of action. These situations can be predicted and solved using game theory.

Below highlights three examples of firms in which would be classed a game theoretic situation i.e. rivals in the UK supermarket industry have to consider the pricing strategies of rivals and therefore game theory is a useful concept to analyse these types of situations. The most common examples of this are markets that are charactrised by a high degree of interdependency such as oligopolies.

 

An economic model that explains economic activity using a wide range of variables.

A good where a rise in price actually leads to an increase in demand.

Below is a diagram to illustrate the good's demand curve. In this instance the curve has a positive slope and therefore is upward sloping due to the positive relationship between the two variables: price and quantity demanded. It is extremely rare for a good to have this positive relationship between price and quantity demanded and in most cases is just an empirical theory rather than a form of relatiy. But on example of a giffen good in the real world is basic food stapes in times of economic crises. The idea is that if an individual/family is struggiling financially and the price of the basic food essentials increase, these individuals end up purchasing more of this essential food item as they can't afford more expensive food items in its place despite the price of the essential good.

A good where a rise in price actually leads to an increase in demand.

Below is a diagram to illustrate the good's demand curve. In this instance the curve has a positive slope and therefore is upward sloping due to the positive relationship between the two variables: price and quantity demanded. It is extremely rare for a good to have this positive relationship between price and quantity demanded and in most cases is just an empirical theory rather than a form of relatiy. But on example of a giffen good in the real world is basic food stapes in times of economic crises. The idea is that if an individual/family is struggiling financially and the price of the basic food essentials increase, these individuals end up purchasing more of this essential food item as they can't afford more expensive food items in its place despite the price of the essential good.