Economic Terms

Keynesian economists believe that supply is the same in the short and long term and that there is no need for a separate SRAS curve. The Keynesian supply curve is perfectly elastic at low levels of real output and transitions to a perfectly inelastic curve as real output approaches the full employment level.

The diagram below illustrates the Keynesian view of the aggregate supply curve. Unlike the classical view, the keynesian view suggests that the supply curve is not always inelastic at every point i.e. there is a point in the economy when spare capacity exists and firms can increase production (elastic part of curve). But there is also a point in which full capacity is reached and therefore production cannot be changed (inelastic part of curve). This logic is summarised in the table next to the graph.

Is based on the work of John Maynard Keynes during the great depression. Amongst other things the main belief is that optimal economic performance can be achieved by using fiscal policy to manipulate aggregate demand. This is especially important during recessions and depressions.

Is a model based on the theory of game theory, by graphically illustrating the high level of interdependence that exists in an oligopoly market. The idea is the demand curve has a kink to represent that a firm faces two different sections of their demand curve - which differs from the conventional downward-sloping demand curve. They face an elastic demand curve above the market price and an inelastic demand curve below the market price.

Below is an illustration of the kinked demand curve facing markets that have a high degree of interdependency, with the demand curve being elastic above the prevailing market price and inelastic below the prevailing market price. This is all caused because of rival firm reactions.

 

The human capital applied to the production process in return for wages i.e. the workforce of an economy. This includes the physical and mental efforts that workers put into the production process.

 

Is a collective measure for all of the workers who are able and willing to work i.e. sum of the individuals who are either employed or unemployed. This is one of the best measures of the strength of the labour market of a country.

A quarterly survey of the UK labour market completed in accordance with internationally agreed standards. It is a wider measure of unemployment than the count of the number of people receiving Job Seekers Allowance and provides far more detailed view of employment in the UK in a format that facilitates accurate international comparisons.

Below is the LFS measure of the UK unemployment rate from 1971-2014.

Is a term that describes the employment practice of firms keeping workers on the payroll despite an economy going into recession. The decision is made to keep these workers so that firms can quickly regain profitability when the economy recovers. The firm sacrifices profit during the period in which the economy is in recession, so that they can recoup the lost profits when recalling the workers. This is because the workers are already experienced in the environment of working in the company so they can move back into the company seamlessly. therefore, the firm avoids the costly training process of hiring new recruits. This is a strategy that is predominantly used with firms that provide jobs that require a lot of training for the workers.

Aspects of the labour market which causes the prevailing wage rate to lie above or below the equilibrium wage rate. As a result markets will fail to achieve efficient outcomes.

Below is a diagram to show a wage rate that is forced above the equilibrium wage rate creating excess supply classical unemployment. This could be caused by lots of factors such as imposition of a minimum wage, trade union intervention, lower welfare benefits or sticky wages.

The amount of output per unit of labour.

Below is a diagram to show the growth in UK labour productivity since 1960. It has been growing close to a linear trend.

Source: ONS

A curve showing how the amount of tax raised varies with the percentage rate of tax levied. It shows that although there is a positive relationship between the tax rate and revenue at low percentage rates of tax, the tax raised ultimately reduces when the percentage rate starts to rise to high levels, as this discourages workers from providing additional labour or encourages individuals to avoid paying the tax.

Below displays the typical shape of a Laffer curve and highlights that all economies have an optimal tax rate and this tax rate exists at point a in the diagram below. Perversely, in this instance if the tax rate is increased to point b the level of tax revenue falls, this is the key insight behind this curve. Because if the tax rate becomes too high workers lack the incentive to work.