Economic Terms

Represents the production point at which a firm is indifferent between shutting down and continuing to operate in the market. The optimal production decision of the firm at this point will all depend on the position of the individual firm's cost curves. This is because if the firm can acquire sufficient revenue at this point to at least meet their average variable costs, the firm would decide to stay in the market as any additional revenue over the variable costs can be used to cover part of the fixed costs of production. This runs on the assumption that when firms exit an industry the fixed costs must still be incurred.

If the firm produces below the shutdown point it will always cease production because the firm will not acquire enough revenue in order to cover the variable costs of production.

Prices and changes in price signal information to consumers and producers of goods.

Costs or benefits that are external to a transaction and not reflected in the equilibrium price and output. This means that some costs or benefits are imposed on third parties and too little or too much of a good/service will be produced and consumed. They can be positive or negative and are commonly referred to as externalities.

A society wide understanding that specific actions or views are either to be encouraged and discouraged. For instance the government often run anti drink driving campaigns at christmas to build up the social angst towards drink-driving. By implacing on society that it is an unacceptable action it discourages this action across society.

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

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.

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

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

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.