Economics (Subject) / Economics Definitions (Lesson)

Economics Definitions

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• Joint-Stock Company A company where ownership is distributed between shareholders.
• Limited Liability Where the liability of the owners for the debts of a company is limited to the amount they have invested in it.
• U-Form Business Organisation One in which the central organization of the firm (the chief executive or a managerial team) is responsible both for the firm’s day-to-day administration and for formulating its business strategy.
• M-Form Business Organisation One in which the business is organised into separate departments, such that responsibility for the day-to-day management of the enterprise is separated from the formulation of the business’s strategic plan.
• Flat Organsisation One in which technology enables senior managers to communicate directly with those lower in the organisational structure. Middle managers are bypassed.
• Holding Company A business organisation in which the parent company holds interests in a number of other companies or subsidiaries
• Principal-Agent Problem One where people (principals), as a result of lack of knowledge, cannot ensure that their best interests are served by their agents
• Asymmetric Information A situation in which one party in an economic relationship knows more than another.
• PEST (or STEEPLE) Analysis Where the political, economic, social and technological factors shaping a business environment are assessed by a business so as to devise future business strategy. STEEPLE analysis would also take into account ethical, legal and environmental factors.
• Globalisation The process whereby the economics of the world are becoming increasingly integrated.
• Primary Production The production and extraction of natural resources, plus agriculture
• Secondary Production The production from manufacturing and construction sectors of the economy.
• Tertiary Production The production from the service sector of the economy.
• Gross Domestic Product (GDP) The value of output produced within the country over a 12-month period.
• Deindustrialisation The decline in the contribution to production of the manufacturing sector of the economy.
• Industry A group of firms producing a particular product or service.
• Industrial Sector A grouping of industries producing similar products or services.
• Standard Industrial Classification (SIC): The name given to the formal classification of firms into industries used by the government in order to collect data on business and industry trends.
• Scarcity The excess of human wants over what can actually be produced to fulfil these wants.
• Consumption The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.
• Production : The transformation of inputs into outputs by firms in order to earn profit (or meet some other objective).
• Opportunity Cost The cost of any activity measured in terms of the best alternative foregone.
• Rational Choices Choices that involve weighing up the benefit of any activity against its opportunity cost.
• Marginal Costs The additional cost of doing a little bit more (or 1 unit more if a unit can be measured) of an activity
• Marginal Benefits The additional benefits of doing a little bit more (or 1 unit more if a unit can be measured) of an activity.
• Free Market One in which there is an absence of government intervention. Individual producers and consumers are free to make their own economic decisions
• Perfectly Competitive Market A market in which all producers and consumers of the product are price takers (There are other features of a perfectly competitive market, examined later).
• Price Taker A person or firm with no power to be able to influence the market price.
• Price Mechanism : The system in a market economy whereby changes in price, in response to changes in demand and supply, have the effect of making demand equal to supply.
• Equilibrium Price The price where the quantity demanded equals the quantity supplied; the price where there is no shortage or surplus
• Equilibrium: A position of balance. A position from which there is no inherent tendency to move away.
• Law of Demand The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls, other things being equal (ceteris paribus).
• Income Effect The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change.
• Substitution Effect: The effect of a change in prince on quantity demanded arising from the consumer switching to or from alternative (substitute) products.
• Quantity Demanded The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.
• Demand Schedule for an Individual A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.
• Market Demand Schedule A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.
• Demand Curve A graph showing the relationship between the price of a good and the quantity of the good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or a group of consumers, or more usually for the whole market.
• Substitute Goods A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.
• Complementary Goods A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall.
• Normal Goods Goods whose demand rises as people’s incomes rise. They have a positive income elasticity of demand. Luxury goods will have a higher income elasticity of demand than more basic goods.
• Inferior Goods Goods whose demand falls as people’s incomes rise. Such goods have a negative income elasticity of demand.
• Change in Demand The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes.
• Change in the Quantity Demanded The term used for a movement along the demand curve to a new point. It occurs when there is a change in price.
• Supply Schedule A table showing the different quantities of a good that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers, or for all producers (the market supply schedule).
• Supply Curve A graph showing the relationship between the price of a good and the quantity of the good supplied over a given period of time
• Substitutes in Supply These are two goods where an increased production of one means diverting resources away from producing the other.
• Goods in Joint Supply These are two goods where the production of more of one leads to the production of more of the other.
• Change in the Quantity Supplied The term used for a movement along the supply curve to a new point. It occurs when there is a change in price
• Change in Supply The term used for a shift in the supply curve. It occurs when a determinant other than price changes.

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