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Tariffs A tax impose on imported goods. (regressive tax). It is regressive because the tariff on a good would be higher proportion of low income earners than it would be on high income earner. Area C: Loss created by inefficient production of domestic produce...

Aggregate demand (AD) The total planned expenditures (spending) by households, firms, government and foreign sector in a period of time at given price levels. Why AD curve is downward sloping The wealth effects: Price level ↑ → real income ↓ → C & I ↓ → Rea...

Governments earns revenue primarily from: Taxes (direct and indirect) Sale of goods and services Sale of state-owned (government-owned) enterprises Government spending can be classified into Current expenditures Capital expenditures Transfer payments A bud...

Economic growth An increase in the total output of goods and services (real GDP) in an economy over time. Actual growth An increase in actual output (real GDP) through time. Potential growth An increase in potential output (or production possibilities). It ref...

Inequality & equity Equality in distribution of income = a narrow wealth gap Equity in distribution of income = fairness Equity ≠ equality Lorenz curve A graphical measure of a country’s income distribution within its population. It shows what percentage of th...

Inflation A persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index (CPI) Disinflation A falling rate of inflation. Deflation A persistent fall in the average price level in the economy....

Supply-side policies Supply-side policies aim at increasing potential output (the overall productive capacity) of an economy by increasing the quantity and/or quality of the factors of production, thus shifting the long-run aggregate supply (LRAS) curve to the...

The circular flow of income model A simple model of the economy showing flows of goods and services and factors of production between firms and households. Two sectors model It is assumed that the only decision-makers are households (or consumers) and firms (o...

Aggregate demand for labor (ADL) The total demand for all the labor that produce an economy’s goods & services. Aggregate supply for labor (ASL) The total number of an economy’s workers that are willing and able to work in the economy at every given average wa...

Utility The happiness of satisfaction that consumer receives from the consumption of one product. Total utility Overall satisfaction. Marginal utility Additional utility from one additional consumption of one product. Mu=∆Tu/∆Q The law of diminishing Mu The Mu...

Firm A business organization that buys or hires factors of production in order to produce goods and services that can be sold at a profit. Industry Is taken to be the total number of firms producing within the same product group, ie, things which are close sub...

Market A place, physical or virtual, where buyers and sellers of goods and services meet to make an exchange. Competitive market The market for a good with large numbers of buyers and sellers, where the single seller has very little or no market power. Demand ...

Elasticities The responsiveness of an economic variable (such as the quantity demanded or supplied of a product) to a change in another economic variable (such as its price or income). Calculation of Elasticity PED = % change of quantity demanded / % change ...

Positive economics Positive economics deals with areas of the subject that can be proven to be right or wrong. Normative economics Normative economics deals with areas of the subject that are open to personal opinion and belief. Ceteris paribus All other thi...

Taxes Charges that are imposed by governments on people and business. Direct taxes Taxes the income of people and firms; involving payment of the tax by the taxpayers directly to the government. Indirect taxes A tax that is levied on the spending to buy g...

Market failure The failure of the market to allocate resources efficiently. Market failure results in allocative inefficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable...

Monopolistic competition A market is monopolistically competitive if there are many firms producing differentiated products and there are no barriers to entry or exit. Assumptions of monopolistic competition There are many sellers and buyers The product is d...

A monopoly A market where one firm dominates the market for a good that has no substitutes and where significant barriers to entry exist. There is only one seller (price maker) The product is unique, there are no substitutes There are very high barriers to e...

Oligopoly A market where a few large sellers dominate the market for an identical or differentiated good, and where there are significant barriers to entry. Assumption The dominance of the industry by a small number of firms. The importance of interdependence...

Perfecr competition Characteristics of perfect competition There are many buyers and sellers The product is homogeneous There is free entry into and exit from the market and buyers and sellers have perfect information No individual firm has any influence o...