Economic Terms

There are insufficient resources to satisfy all of our needs and wants as resources are scarce while our wants and needs are unlimited.

When an economy grows after a period of contraction.

Often these types of recoveries are stimulated by government policies e.g. an interest rate cut, a batch of quantitatitve easing, cut in taxation or higher government spending. All these policies aim to move the economy back towards full employment. Below is a diagram which highlight the effects that these types of policies can have on the economy in an AD-AS framework.

 

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

The overall standard of living and satisfaction within an economic system.

The study of the mechanisms that determine how we allocate resources to produce goods and services.

Increasing the dimensions of any structure will lead to a proportionately larger increase in capacity. e.g. increasing the size of a box from 2m x 2m to 4m x 4m increases the surface area by a factor of 4 while the capacity increases by a factor of 8. This has the effect of reducing the storage costs per unit as scale rises.

A firm operating equipment units or vehicles will have requirements for spare parts and expertise to maintain their equipment. As the total cost will be the same for a single or number of vehicles the average cost reduces as the number of equipment units increase.

Economies of scale describes a process which causes average costs to reduce as scale increases. It will continue until output rises to a level at which capacity is fully utilised.

Below is a diagram to illustrate how economies of scale can be graphically represented for a firm. All average cost curves have a minimum point i.e. the level of output where average costs are minimised. The idea is that as the firm increases in scale the average cost curves begin to move down the LRAC curve and as a result the firm experiences lower costs as their output grows.

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As the scale of a firm increases it may diversify in to vertically linked processes (i.e. own the land, rear the cows, slaughter the cows and own a butchers). Owning and integrating the processes can achieve economies that help to reduce average costs as the firm increases in scale.

The quantity demanded at any particular price.