Free-market economy An economy where all economic decisions are taken by individual households and firms and with no government intervention. Law of diminishing (marginal) returns When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish. Opportunity cost Cost measured in terms of the best alternative forgone. Production possibility curve A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed. Rate of economic growth The percentage increase in output over a 12-month period. Rate of inflation The percentage increase in the level of prices over a 12-month period. Real values Money values corrected for inflation. Retail price index (RPI) An index of the prices of goods bought by a typical household. Unemployment The number of people who are actively looking for work but are currently without a job. (Note that there is much debate as to who should officially be counted as unemployed.) Unemployment rate The number unemployed expressed as a percentage of the labour force. Market The interaction between buyers and sellers. Macroeconomics The branch of economics that studies economic aggregates (grand totals): e.g. the overall level of prices, output and employment in the economy. Gross domestic product (GDP) The value of output.
produced within the country over a 12-month period.
Microeconomics The branch of economics that studies
individual units: e.g. households, firms and industries. It studies the interrelationships between these units in determining the pattern of production and distribution of goods and services. Mixed economy An economy where economic decisions are made partly by the government and partly through the market. Production The transformation of inputs into outputs by firms in order to earn profit (or meet some other objective). Productive efficiency A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost. The least-cost combination of factors for a given output. Cross-section data Information showing how a variable (e.g. the consumption of eggs) differs between different groups or different individuals at a given time. Index number The value of a variable expressed as 100 plus or minus its percentage deviation from a base year. Perfect competition A market structure where there are many firms, none of which is large; where there is freedom of entry into the industry; where all firms produce an identical product; and where all firms are price takers. Economics is the study of how society decides what, how and for whom to produce. Scarce resource a resource for which demand at zero price would exceed available supply. Income distribution how total income is divided between different groups or individuals.
Invisible hand the assertion that the individual pursuit of
self-interest within free markets may allocate resources efficiently from societys viewpoint. Positive economics objective or scientific explanations of how the economy works. Normative economics recommendations and views based on subjective value judgments. Aggregate price level the average price of goods and services. Data pieces of evidence about economic behavior. Model/Theory a set of assumption from which behavior is deduced; a deliberate simplification of reality. Behavioral law a sensible theoretical relationship not rejected by evidence over a long period. Purchasing power of money an index of the quantity of goods that can be bought for $1 Percentage change specifies units.