Economic Terms

All relevant parties who have a vested interest in the operation and results of the business.

Below is an example of some of the economic agents who have a clare interest in the economy. Shareholders are concerned with the profit performance of the company. The management team are concerned with the organisation of the company to ensure the most efficiency, as well as internal goals to elevate their reputation. Staff are interested in personal performance to ensure a bonus or promotion. The government are interested, as the more susccessful the company is the more competitive the economy becomes on an international stage. Customers and the local community provide the demand and factors of production for the production process so are crucial to both the consumption and creation of products.

Services provided by central government and paid for from tax revenues e.g. flood defences, policing, education and health services

A situation where resources are allocated efficiently at a specific point in time. An example of this would be to question whether a firm could produce 2 million cars a year more cheaply by using more labour and less capital.

When economic agents form their inflation expectations on the basis that nothing in the economy changes i.e. they ignore the fact that inflation can change.

A model that considers a particular issue at a set point in time.

Prices rise in a steady and consistent manner without ever rising rapidly. This is the target of most economies as a consistent and modest rate of inflation encourages consumption and investment.

It is important when evaluating the inflation rate in an economy, to judge how quickly the inflation rate is rising. This is because the impact on economic agents from inflation depends on the type of inflation in the economy

• Rising and volatile inflation is bad for the economy as it creates uncertainty and reduces confidence, consumption and investment
• Modest, steady and consistent inflation creates macroeconomic stability and encourages economic activity such as consumption. 
• Low and falling inflation raises fears over deflation and this discourages economic activity as economic agents await further price falls.

Below is a diagram to depict controlled and steady inflation in an economy. In this situation the economy is below full employment and therefore has a significant amount of spare capacity available. This means a positive aggregate demand curve shift  does not raise concerns about the inflation rate as a result of the economy being below full employment. This type of inflation is not damaging and this highlights the role of the MPC to ensure that this type of steady inflation is met and it does not escalate to runaway inflation. 

In an exam if you are evaluating inflation rate increases, the position of the economy (level of spare capacity available) will affect how the inflation rate increase is perceived in the wider economy.

 

Is the accumulation of wealth contributed by continous flows. A stock is the opposite of a flow as it is very rarely spent and is made up of assets that are not very liquid. The idea of a stock can be thought of as a bath tub with water inside it (stock) and the flow of water from the tap (flow) adds to the already accumulated water. Just like an income does to a person's wealth.

 

 

A liquid store of value provides individuals with the ability to accumulate their wealth in any form, at any time can convert this money instantaneously into goods and services. This is one of the three functions of a successful and efficient monetary system, alongside a medium of exchange and a unit of account.

When production in a particular industry ceases due to long term changes in demand or production techniques. This type of unemployment can persist for long periods if an industry accounted for a large proportion of jobs in a particular region as this means there will be relatively few alternative jobs for workers to turn their skill sets to. 

Below is an illustration of the impact of structural unemployment on the economy. For example if a steel company closed down in the UK this is likely to make lots of people unemployed for a long period of time, because these workers might not be able to afford to migrate to other parts of the country to take work in a new steel mill or workers skills become defunct and they struggle to settle into another industry. As this shrinks the capacity of the economy it causes the LRAS curve to shift inwards and creates a permanently higher level of unemployment.

Payments made by governments to suppliers to encourage the supply of particular goods. This is common in agricultural markets and goods with environmental benefits.

Below is a diagram to illustrate a market which has had the benefit of a government subsidy. In this instance, the subsidy encourages producers to produce more goods causing the supply curve to outwardly shift. This is because the costs of production have fallen due to the money from the subsidy. However, this creates excess supply so the price has to fall in order for the market to clear and this causes the amount of goods sold to increase as lower prices fuels higher demand.