Economics: Every definition you need to know

Welcome to our comprehensive guide to A-Level Economics essentials! Whether you’re a student preparing for exams or someone looking to grasp fundamental economic concepts, this resource is designed to provide clarity and depth. From understanding market dynamics to unravelling macroeconomic forces, each definition is crafted to enhance your knowledge base.

The following are definitions with brief explanations and examples. Unlock our comprehensive content, including detailed explanations of all diagrams here.

Microeconomics

Market Failure:

Definition: Market failure occurs when the allocation of goods and services by a free market is not efficient, leading to either overallocation or underallocation of resources.
Examples: Externalities, public goods, monopolies, and imperfect information can all contribute to market failures.

Government Intervention:

Definition: Government intervention refers to actions taken by the government to influence economic activities and outcomes, typically through policies such as taxation, subsidies and regulation.
Examples: Imposing taxes to address negative externalities, providing subsidies for merit goods and regulating monopolies are forms of government intervention.

Government Failure:

Definition: Government failure refers to situations where government interventions lead to inefficient outcomes or unintended consequences, often due to bureaucratic inefficiency, regulatory capture, or unintended consequences of policies.
Examples: Subsidies that perpetuate inefficiencies in production, or regulations that stifle innovation, are instances of government failure.

Externalities (Production and Consumption):

Definition: Externalities are costs or benefits imposed on third parties who are not directly involved in the production or consumption of a good or service.
Positive Externalities in Production: When a firm’s production activities generate beneficial effects on society that are not captured in the market price (e.g., research and development spillovers).
Negative Externalities in Production: When a firm’s production activities impose costs on society that are not reflected in the market price (e.g., pollution from manufacturing processes).
Positive Externalities in Consumption: When consuming a good or service creates benefits for others beyond the buyer (e.g., vaccinations).
Negative Externalities in Consumption: When consuming a good or service imposes costs on others (e.g., second-hand smoke from tobacco consumption).

Market Structure:

Perfect Competition: Many buyers and sellers, identical products, free entry and exit, and perfect information.
Monopolistic Competition: Many sellers offering differentiated products, with some control over price due to product differentiation.
Monopoly: Single seller with significant control over price, barriers to entry.
Oligopoly: Few sellers dominating the market, interdependence among firms in decision-making.

Macroeconomics

Inflation:

Definition: Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power.
Causes: Demand-pull inflation (excessive aggregate demand), cost-push inflation (rising production costs) and built-in inflation (expectations of future price increases).

Central Banks (e.g., Bank of England):

Role: Central banks like the Bank of England control monetary policy, influencing interest rates and money supply to achieve macroeconomic objectives like price stability and full employment.

Recession:

Definition: A recession is a significant decline in economic activity lasting more than a few months, typically characterised by falling GDP, rising unemployment and reduced consumer spending.

Economic Cycle:

Definition: The economic cycle refers to fluctuations in economic activity over time, typically including periods of expansion, peak, contraction (recession) and trough.

International Trade and Globalisation:

International Trade: Exchange of goods and services between countries, influenced by factors like tariffs, exchange rates and comparative advantage.
Globalisation: Increasing interconnectedness of economies through trade, investment and technology transfer.

Balance of Payments:

Definition: The balance of payments is a record of all economic transactions between residents of a country and the rest of the world over a specific period, including the current account (trade balance) and financial account.

Expansionary and Contractionary Policies:

Expansionary Monetary Policy: Increases money supply or lowers interest rates to stimulate economic growth.
Contractionary Monetary Policy: Decreases money supply or raises interest rates to reduce inflation.
Expansionary Fiscal Policy: Increases government spending or decreases taxes to boost aggregate demand.
Contractionary Fiscal Policy: Decreases government spending or increases taxes to reduce aggregate demand.

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