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Economic Terms

0-9   A B C D E F G H I J K L M N O P Q R S T U V W X Y Z


Social ownership of the means of production and management of the economy.

Socially optimal output

The output level that reflects all the costs and benefits associated with a transaction i.e. it is the equilibrium that would be achieved if the market outcome reflects the effect of externalities.

Below is a diagram which shows a market that previously had negative production externalities in and ultimately a tax equal to the size of the divergence between the marginal private and social cost curves has removed the excessive production of this externality onto third parties. As a result the socially optimal level of output reached. This can only occur in a market with externalites if the marginal private and social curves are equal to each other for both the benefits and the costs.

Socially owned housing

Housing built and owned by local authorities or housing associations that is earmarked for rental to specific socio-economic groups.

Soft commodities

Are commodities that are agricultural products e.g. sugar, soya, wheat, coffee, fruit.

Soft landing

A slow down in economic growth that does not carry the risk of a recession. Normally associated with successful interventions to slow down the rate of inflation.


The ability of a financial institution to ultimately repay obligations by a given time period. If a bank is classed as being solvent it means the value of its assets outstrip the value of its liabilities and therefore even if a bank runs into unexpected liquidity problems it has enough value to cover these liabilites to prevent problems and ultimately bankruptancy. Another way of describing this is if the losses that banks make on their assets exceed the level of equity capital they have then they are unable to act as a buffer stock to absorb losses.

Below is a graphic to summarise the definition of this form of protection for a bank.

Sovereign debt

A general description for loan agreements relating to money borrowed by governments. the sovereign debt of countries with strong credit ratings are referred to as gilt edged.

Spare capacity

Highlights the extent of how far away an economy or firm is from producing at its maximum feasible production level. The spare capacity refers to resources which are not being fully utilised in the production processes of firms and this explains why output lies below the maximum level. 

If an individual firm has spare capacity this means the factors of production (labour, land, capital and enterprise) are not being used in the most efficient way and this reduces the ability of firms to produce at their maximum level. The implications of firms having a significant level of spare capacity is that they are likely to face an inelastic supply curve i.e. restricted in their ability to increase production when prices rise. This inelastic supply will then go on to impact the firms profitability. 

From an economy's perspective, if spare capacity exists this relates to the total economy's endowment of resources not being fully utilised in the most efficient way possible. As a result the firm is producing at a level below its productive capacity and is classed as productively inefficient. 

The cleanest way to evaluate spare capacity in the economy is to use the Keynesian aggregate supply curve. As this curve shows that the AS curve for an economy is upwardly sloping. It shows as the economy moves closer to full employment the AS curve becomes more inelastic. This means the impact of aggregate demand curve shifts on the inflation rate becomes amplified the less spare capacity the economy has, because the increased demand cannot be absorbed by spare resources. The evaluative point here is that the more spare capacity an economy has the less of an impact AD curve shifts have on the inflation rate.

Below is a depiction of the Keynesian AS curve for an economy that is positioned at a point with significant spare capacity.


By working with other workers and dividing up the tasks involved in production the overall productive process becomes more efficient because specialisation helps the workers to become more proficient in a smaller number of tasks.

For instance, rather than all villagers carry out all tasks it would be much more beneficial for the entire village to divide specialised tasks to individual villagers. This way each villager would become more focused and more skilled in that particular practice because of the 'learning by doing' approach. This is the basic concept invented by Adam Smith and his idea of the pin factory to increases productivity and efficiency in the production process.

Specific tax

A tax per unit of consumption that does not vary with the value of consumption. The fuel duty on unleaded petrol is currently 58p/litre (n.b. also subject to VAT which is an ad valorem tax).

The following table and diagram detail a specific tax of £2.00:

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