Economic Terms

A person or individual not directly involved in an action, transaction or agreement.

Is the amount of capital that banks need to hold to comply withe BASLE capital adequacy requirements. This capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves. According to the current version of BASLE (BASLE II) banks must hold at least 50% of the 8% capital in tier 1 capital.

Is supplementary bank capital that includes items such as revaluation reserves, undisclosed reserves. A bank's reserve requirements includes this capital in its calculation, but it is considered less reliable than its Tier 1 Capital.

When an economy is close to full employment and recruitment becomes difficult placing upward pressure on wages.

Below is a depiction of what happens in the labour market of an economy that is close to full employment. Once an economy aproaches full employment more output needs to be made in order to meet ever-increasing demand for products. However, if the economy is close to full employment extra labour cannot be hired easily as the pool of available workers is small. Therefore the aggregate demand for labour curve shifts to the right as firms would like to employ more workers but the supply is not available. Ultimately this excess demand causes existing workers wages to steadily rise as workers now hold higher bargaining power. This is shown in the diagram by moving to point C at a higher wage rate of W1 to cancel out the excess demand for labour.

When monetary conditions are adjusted to counteract inflation e.g. base rate rises and tighter regulation of banks.

Below is a diagram to show when there is unsustainable growth and runaway inflation, a cut in the bank rate will contract the aggregate demand curve in order to restore full employment and ensure the target CPI inflation rate is met.

This is the moral hazard problems that are created in the financial sector when large financial institutions (in terms of asset value) realise that any losses they make will be paid by the taxpayer they increase their propensity for risk. For example in the case of Northern Rock the Bank of England provided them with a £3bn bailout to keep them alive. However if large banks receive the guarantee that they will always be bailed out they have no incentive to stave off losses.

The sum of all costs of production.

Below is a diagram to show that the total cost curve is derived from the total variable cost curve and total fixed cost curve. As these are sepearate costs that face the firm, if at each output level both of these costs are added up the total cost for each level of output can be calculated and by connectng all of these points together the total cost curve can be derived, as shown below.

The efficiency of the productive process usually determined by measuring the units of output produced by all factor inputs. Increasing productivity is usually associated with periods of economic growth.

The sum of all the fixed costs such as rent, loan payments and salaries.

Below is a diagram to show an example of a total fixed costs curve for an individual firm. As can be seen this curve is perfectly horizontal because these costs do not change regardless of how much output is produced and therefore this line will indefinitely continue until the firm either has a reduction or increase in the amount of fixed payments such as rent on a building.

The total revenue produced by the sale of a good. It is equal to the market price x the number of units sold.

Below is a diagram to show the level of revenue that a monopolistic firm makes. As can be seen this blue shaded region is equal to the market price multiplied by the quantity of goods produced. The level of sales revenue in this instance is quite large as the monpolist has significant market power and can charge a price above the marginal cost curve.