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Economic Terms

All   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

Economic activity

Any behaviour or action that involves the supply and consumption of goods and services.

Economic agent

An individual, firm or government involved in the buying and selling of goods and services and making investments.

Economic Cost of Production

The opportunity cost of production.

Economic crisis

A prolonged period of depressed asset values and economic activity and high inflation and unemployment usually as a result of political instability, a war, government debt default or the collapse of a banking system.

Economic cycle

A term used to describe the process of economic expansion (positive output gap) and contraction (negative output gap) that economies experience over time.

Below is a depiction of the theoretical movement of a country's economic cycle. What this diagram is showing is that an economy typically moves from periods of growth, and this culminates in a boom (peak). After this the economy hits a downturn, as economic growth cannot be sustained. If the downturn is sustained for more than two quarters this creates an economic recession, in which the economy hits a trough (the lowest point of growth). Eventually an economy will arrest the decline in growth, as a result of economic policies, and this enables the economy to recover over time. After which, the whole economic cycle restarts.

It is important to appreciate that the depth and duration of cycles and phases within the cycle will vary considerably due to individual specifics within each country (as well as external influences) and therefore a country's economic cycle will not always match the smooth shape of the economic cycle above.

Economic Development

A broader measure than economic growth that considers changes in the standard of living and level of welfare within an economy.

Economic development unlike economic growth can be quantified using lots of different indicators. This is because there are many factors which contribute to a country's standard of living as the diagram below illustrates. The most commonly used measure is the level of nominal GDP per capita, to measure the material welfare and advanaces of the average household. But material expenditure power is not the only indicator of a country's standard of living. For instance the level of healthcare is important as this takes into account how easily this person can live their day-to-day life as well as maintaining a strong and healthy attitude towards work.

Economic efficiency

The extent to which markets produce the right goods (the combination of goods will be determined by the position on the PPF), in the right way (goods will be produced at lowest possible average cost) for the right people (market equilibrium output that fully reflects all costs and benefits).

Economic Efficiency can often be referred to Pareto Efficiency as this is the point where the optimal allocation/distribution of resources is i.e. there is no other outcome that can produce a better result.

When referring to economic efficiency it is concerned with how well scarce resources in the economy are being allocated in order to maximise social welfare by meeting the persistently changing needs and wants of economic agents in the economy. Typically, resources are allocated optimally if markets work well via the price mechanism.

Economic efficiency is achieved if firms within a market can achieve the following forms of efficiency:

  • Productive Efficiency
  • Allocative Efficiency
  • Dynamic Efficiency

But there are many situations where the market mechanism fails to allocate scarce resources optimally and as a result this creates a form of market failure which leads to social welfare becoming reduced. The factors that can lead to economic inefficiency in a market are as follows:

  • Lack of Competition -  in markets where there are a small number of firms present means that these firms do not have the incentive to continually invest and innovate in productive and profitable projects and therefore this causes their costs to increase over time(X-inefficiency). These higher costs eventually get passed onto consumers via higher prices. This occurs in markets such as a monopoly, where the profit maximising output level lies below that of which is socially optimal as a result of the higher prices. Therefore, consumers cannot consume as much of the good as under a competitive market structure (allocative inefficiency).
  • Presence of External Costs or Benefits - results in the private costs and benefits never equating the social costs and benefits through the market mechanism and this means that the quantity of goods and services produced by firms is either under-provided or over-provided. This occurs in markets where externalities are present such as demerit goods.
  • Missing Markets - another situation where the optimal allocation of resources is not met because of the lack of provision of these types of goods from private firms. Often it is the government's role to provide this type of good to the market, but often it ends up under-consumed because of the lack of acknowledgement towards the social benefits of consuming this type of good. Examples of this are public goods and merit goods.
  • Information Failure - efficient markets contain a consistent level of information across all firms and consumers and it is this that allows firms to provide the socially optimal amount of goods.
  • Factor Immobility - if factors are immobile (geographical and occupational immobility of labour) it makes it difficult to firms to achieve the socially desirable allocation of resources they might not be able to allocate enough factors required to each market.


Economic goods

Goods and services that are scarce because using resources for one purpose will mean that they cannot be used for another purpose i.e the use of most resources carry an opportunity cost. This is the opposite of a free good e.g. air.

Economic growth

An increase in the capacity of an economy to produce goods and services – measured by comparing GDP in different periods of time. Below is a table to illustarte the GDP growth rate for the UK from quarter to quarter from 2000 to 2015.

Economic growth is caused by increases in the productive capacity of an economy and is usually explained using AD/AS analysis. A key related definition is sustainable economic growth.

A good way of viewing economic growth is that:

  1. Positive shifts in AD will usually produce temporary economic growth and inflation i.e. unsustainable
  2. Positive shifts in LRAS will produce permanent and lasting economic growth with a minor impact on inflation i.e. sustainable 

Economic model

A hypothetical prediction of a particular aspect of economic activity that is based on empirical evidence.

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