Command economy An economy where all economic

decisions are made by a central planning process.

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.