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Economics: Key Terms and Definitions

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❶Surplus -- A market condition where the quantity supplied exceeds the quantity demanded.

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It refers to the ability to use money to acquire other forms of capital. In this way the ability to take on debt by borrowing from someone else is a form of financial capital.

High value commodities such as gold are often considered as being another form of financial capital. These are non-human, non-monetary objects that are useful for conducting valuable work. Social capital refers to the power of social networks to accomplish work. This could be due to enhanced communication abilities, or it could be simply customer loyalty.

There are many forms that social capital could take. Land, forests, rivers, rainfall, wind, sunlight, animals, and everything else that comprises the natural world is regarded as natural capital. One could think of this as the category that includes everything else other than the above forms of capital. Externalities can be positive or negative. Positive externalities are good for people not involved in the trade in question, while negative externalities are bad. An example of a positive externality would be a nice office building in a city makes the city seem more prosperous and civilized, causing people to enjoy living there more.

An example of a negative externality would be pollutants emitted by coal power plants. These pollutants can make people and animals ill, damage forests and crops, and damage buildings with acid rain. This refers to negative externalities that they do not want to pay for. The company that owns a coal power plant will do their best to not have to pay for the full costs of their effects on the environment, health, and infrastructure.

Corporations are mandated with producing profits for their shareholders. In order to serve this mandate effectively they will make sure that negative externalities stay just that — external. Some companies choose to do this for ethical reasons, or to gain additional social capital. Generally it is the role of government to enforce policy that makes companies take responsibility for the full cost of their actions.

An example of this sort of policy would be government forcing coal power plants to include scrubbers that remove some of the dangerous pollutants from the gases emitted from their plants. The same standard of living costs different amounts of money in different places in the world. These numbers are intended to be illustrative, not real. It would thus cost more USD than euros to obtain the same value of goods.

Therefore we can adjust our perceptions of income levels accordingly for these countries, since in our example one USD does not buy as much in the United States as one euro buys in France. It can be difficult to compare the products in wealthy nations with those in the poorest, as product quality can vary greatly and this is difficult to quantify numerically.

This can cause the PPP of poor countries to be overstated. PPP is closely related to currency exchange rates, but it is not the same thing. The differences in prices that cause the basket of goods to be more or less expensive can be caused by a myriad of factors that we will not go into here. Gross domestic product GDP is an economic measure intended to represent the sum of all economic activity in a country.

Money Multiplier -- The relationship between changes in the monetary base and the money supply. Monetary Base -- Also known as High-powered Money. National Income -- The sum of all types of income wages, net interest, profits, and net rental income earned in a given time period by any type of economic agent individuals or corporation. Natural Rate of Unemployment -- That rate of unemployment where there is neither upward nor downward pressure on prices.

Net Investment -- Investment exclusive of replacement of depreciated capital. Nominal Interest Rate -- The interest rate published as part of a debt contract. Non-Durable Goods --Goods that tend to be immediately consumed or deliver consumption services over a short period of time.

Non-Income Producing Asset --Something of value that does not generate any income or revenue stream. Normal Current Yield -- The ratio between the annual income generated by an asset and its purchase price.

Also known as the present value of a perpetuity. Paasche Index -- A weighted average of prices based on current expenditure patterns. Peak -- A point of transition in the business cycle from expansion to contraction. Permanent Income -- Expected levels of individual income that guide consumption expenditure decisions. Personal Income -- The income earned by individual households in a given time period. Potential Output -- A measure of the economy's ability to produce goods and services.

Present Value -- The value of a future payment or stream of payments discounted by some appropriate rate of interest. Activity in this market represents direct finance where actual borrowing and lending activity takes place.

Producer -- An economic agent that converts inputs factors of production into output goods and services with the goal of maximizing profits from production and sale of those goods and services. Profits -- The difference between sales revenue and the costs of production..

The Quantity Equation -- Also known as the Equation of Exchange , an identity relating the amount of money in circulation to the price level and level of output in an aggregate economy. Rate of Time Preference -- The equivalent of a personal interest or discount rate. The measure by which individuals compare current and future economic activity. Real Interest Rate -- An interest rate that has been adjusted for changes in the price level or changes in purchasing power over some time period.

Relative Price -- A ratio of any two prices or one particular price compared to a price index. Risk -- A measure of uncertainty about the value of an asset or the benefits of some economic activity. Risk Premium -- An adjustment to a real interest rate to compensate for uncertainty in the ability of a borrower to service a loan. Savings -- The difference between income and expenditure in the current time period. Scarcity -- A physical or economic condition where the quantity desired of a good or service exceeds the availability of that good or service in the absence of a rationing system.

Stagnation -- An economic condition where an economy is facing relatively high rates of inflation, little or no growth, and high unemployment. This market provides liquidity to these types of financial assets. A Share of Stock --A financial instrument that give the holder a share of ownership in a publicly held corporation.

Shortage -- A market condition where the quantity demanded of a particular good or service exceed the quantity available. Speculation -- The purchase of a good or asset not intended for final consumption but rather in the expectation of future sale at some higher price. Spending Multiplier -- The relationship between an autonomous spending shock and eventual changes in aggregate income. However, each firm is selling a differentiated product and may exploit brand preferences such that is may act as a monopolist with respect to its own customers.

Monopoly --A market structure where only one firm exists in a given industry. This firm has a high degree of market power such that it is able to act as a price-maker with respect to market prices. Needs --Goods and services essential for human survival. Negotiation Space --A set of consumption bundles points relative to an initial or current endowment where one or all consumers can be made better off through trade without harming any other consumers.

Normal Good --A good where quantity demanded increases when consumer income increases a direct relationship between quantity demanded and income.

Oligopoly --A market structure with only a few firms in a given industry. Opportunity Cost --The value of a resource applied to its next best use. Pareto Improvement --A situation in exchange where one consumer is made better off by a trade without harming the other consumer. Pareto Optimum --A situation where it is not possible to exchange goods or services without harming one of the agents involved. Perfect Competition --A market structure where many firms exist, each with a small percentage of market share selling a homogeneous product.

These firms are all price-takers with no influence on market price. Price Elastic Demand --When the percentage change in quantity demanded exceeds the percentage change in market price.

Price Elasticity of Demand --A measure of sensitivity of quantity demanded to changes in market price. Price Inelastic Demand --When the percentage change in quantity demanded is less than the percentage change in market price. Unitary-elastic Demand --When the percentage change in quantity demanded is exactly equal to the percentage change in market price. Producer business firm --An economic agent that converts inputs factors of production into output goods and services with the goal of maximizing profits from production and sale of those goods and services.

Producer Optimum --A choice of input combinations or output levels that maximize the profits of a producer taking all prices as a given. Producer's Surplus --The difference between revenue received and the variable costs of production for each unit of a commodity sold.

Represents a contribution to fixed costs and producer profits. Production Function --A technical relationship between a certain level of factor inputs and the corresponding level of output. Production Possibilities Frontier --A relationship between two types of output defining the tradeoff that exists in allocating resources from production of one good to the other. Profits --The difference between sales revenue and the costs of production. Rationing Systems --A process used to match the desire for goods and services with their availability.

Relative Prices --A ratio of any two prices or one particular price compared to a price index. Resources --The raw materials and other factors of production that enter the production process or final goods and services that are desired by economic agents.

Revenue The amount received by a producer from the sale of goods and services the product of market price and quantity sold. Risk -- A measure of uncertainty about the value of an asset or the benefits of some economic activity. Satiation --A level of consumption where the consumer is fully satisfied in a given period of time.


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Economics A-Z terms beginning with A. The arbitrage pricing theory says that the price of a financial asset reflects a few key risk Visit The Economist e .

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A brief introduction to some of the basic language of economics. This should be understandable even for those with nothing more than personal experience in . An extremely useful and fun resource for revising economics and learning tricky definitions. Made for OCR but applicable to all boards including IB. If you have any recommendations about more levels or better definitions etc. let me know and I .

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Scarcity the conditions that result from a society not having enough resources to produce things for wants Economics the study . This key term glossary covers the vast majority of concepts needed for students preparing for their AS (Unit 2) macro economics exam. It is suitable for all.