401 terms
Aggregate demand and aggregate supply analysis
When the overall price level in the economy changes, economists show this by moving along the existing AD or AS curve. N
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
Certain events move the entire AD or short-run AS curve left or right. These shifts change the economy's total spending
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
Short-run AS shifts when firms' costs change temporarily. Long-run AS shifts only when the economy's total productive ca
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
Long-run aggregate supply (LRAS) shows the maximum output an economy can produce. When the economy's productive capacity
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
An AD/AS diagram shows where total spending and total output balance. That balance point sets the economy's price level
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
A shock is a sudden, unexpected event that shifts either total spending or total output in the economy. Demand-side shoc
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and aggregate supply analysis
AD/AS analysis is the core framework economists use to explain how the whole economy behaves — bringing together aggrega
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and the level of economic activity
Aggregate demand (AD) is the total spending on goods and services in an economy. When AD rises or falls, it directly cha
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and the level of economic activity
When spending in the economy rises, that extra money gets passed on and re-spent multiple times. Each round of spending
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and the level of economic activity
The marginal propensity to consume (MPC) measures the fraction of each extra pound of income that households spend. You
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and the level of economic activity
When households spend a larger share of any extra income they receive, each round of the multiplier process passes on mo
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aggregate demand and the level of economic activity
Changes in aggregate demand — the total spending on goods and services in an economy — directly influence the level of e
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Aspects of behavioural economic theory
People cannot always make perfectly rational decisions. Bounded rationality means limited information and brainpower res
Individual economic decision making
Aspects of behavioural economic theory
People do not always make perfectly logical decisions. Instead, mental shortcuts and outside influences push their choic
Individual economic decision making
Aspects of behavioural economic theory
Sometimes people make decisions that benefit others, even at a cost to themselves. They also care whether outcomes feel
Individual economic decision making
Aspects of behavioural economic theory
Behavioural economics challenges the traditional assumption that people always make fully rational decisions, arguing in
Individual economic decision making
Behavioural economics and economic policy
Choice architecture means deliberately designing the environment where people make decisions. Framing means presenting t
Individual economic decision making
Behavioural economics and economic policy
A nudge is a subtle change to the environment around a decision that steers people toward a better choice. It never bans
Individual economic decision making
Behavioural economics and economic policy
Governments can shape decisions by setting what happens automatically (default choice), limiting the available options (
Individual economic decision making
Behavioural economics and economic policy
Because people don't always make fully rational decisions, governments can use insights from behavioural economics — the
Individual economic decision making
Central banks and monetary policy
A central bank, like the Bank of England, manages a country's money supply, sets interest rates, and keeps the financial
Financial markets and monetary policy
Central banks and monetary policy
Monetary policy means the central bank uses three main tools to manage the economy. Those tools are interest rates, the
Financial markets and monetary policy
Central banks and monetary policy
The UK government sets the goals that monetary policy must hit. The main goal is to keep inflation low and stable, curre
Financial markets and monetary policy
Central banks and monetary policy
The MPC is a committee inside the Bank of England. It meets every six weeks and sets the bank rate — the benchmark inter
Financial markets and monetary policy
Central banks and monetary policy
The MPC looks at a range of economic data before deciding whether to raise, cut, or hold the bank rate. Key factors incl
Financial markets and monetary policy
Central banks and monetary policy
When a currency rises or falls in value, it changes the price of exports and imports. This shifts aggregate demand — tot
Financial markets and monetary policy
Central banks and monetary policy
The monetary policy transmission mechanism describes how a change in the bank rate ripples through the economy. It affec
Financial markets and monetary policy
Central banks and monetary policy
The Bank of England uses several tools to control how much money circulates in the economy. These tools include changing
Financial markets and monetary policy
Central banks and monetary policy
The Bank of England sits at the centre of the UK's monetary policy — the use of interest rates, money supply, and the ex
Financial markets and monetary policy
Commercial banks and investment banks
A commercial bank takes deposits from savers and lends money to households and businesses. An investment bank helps comp
Financial markets and monetary policy
Commercial banks and investment banks
Commercial banks accept deposits from savers and lend that money to borrowers. They also operate payment systems and cre
Financial markets and monetary policy
Commercial banks and investment banks
A commercial bank's balance sheet lists everything the bank owns (its assets) and everything it owes (its liabilities).
Financial markets and monetary policy
Commercial banks and investment banks
Commercial banks pursue three goals at once: staying liquid enough to meet withdrawals, earning profit on loans, and kee
Financial markets and monetary policy
Commercial banks and investment banks
A commercial bank wants to be liquid, profitable, and secure — but pursuing one goal can make the others harder to achie
Financial markets and monetary policy
Commercial banks and investment banks
Banks create new money every time they make a loan. The borrower's account grows, and that new deposit can be lent out a
Financial markets and monetary policy
Commercial banks and investment banks
Banks are not all the same: commercial banks take deposits and lend to households and businesses, while investment banks
Financial markets and monetary policy
Competition policy
Competition policy covers the rules governments use to stop firms abusing market power. In the UK, the Competition and M
The market mechanism, market failure and government intervention in markets
Competition policy
Competition policy can protect consumers and boost efficiency. But it also carries real costs — enforcement is expensive
The market mechanism, market failure and government intervention in markets
Competition policy
When firms gain monopoly power — the ability to dominate a market and push prices above competitive levels — consumers c
The market mechanism, market failure and government intervention in markets
Consumer and producer surplus
Consumer and producer surplus measure the total welfare a market creates. You can use them to show how monopoly and pric
Perfect competition, imperfectly competitive markets and monopoly
Consumer and producer surplus
Consumer surplus — the extra benefit buyers gain by paying less than they were willing to pay — and producer surplus — t
Perfect competition, imperfectly competitive markets and monopoly
Consumer behaviour
Economists assume consumers weigh up costs and benefits before every decision. They respond to incentives — rewards or p
Individual economic decision making
Consumer behaviour
Utility means the satisfaction a consumer gets from a good or service. Each extra unit consumed adds less satisfaction t
Individual economic decision making
Consumer behaviour
Consumers maximise utility by spending their money so that each purchase gives them the greatest possible satisfaction.
Individual economic decision making
Consumer behaviour
Rational consumers decide whether to do a little more or a little less of something. They compare the extra benefit of o
Individual economic decision making
Consumer behaviour
Traditional economics assumes consumers are rational — meaning they weigh up costs and benefits and make decisions that
Individual economic decision making
Contestable and non-contestable markets
A contestable market is one where new firms can enter and exit easily. Even a single dominant firm behaves competitively
Perfect competition, imperfectly competitive markets and monopoly
Contestable and non-contestable markets
Sunk costs are costs a firm cannot recover if it leaves a market. Hit-and-run competition is when a new firm enters brie
Perfect competition, imperfectly competitive markets and monopoly
Contestable and non-contestable markets
A contestable market is one where new firms can enter and exit easily, meaning even a single dominant firm faces competi
Perfect competition, imperfectly competitive markets and monopoly
Costs of production
Fixed costs stay the same no matter how much a firm produces. Variable costs rise and fall as output changes.
Production, costs and revenue
Costs of production
Total cost is everything a firm spends to produce a given output. Average cost is that total split across each unit prod
Production, costs and revenue
Costs of production
In the short run, at least one input — like a factory — stays fixed, so some costs cannot change. In the long run, a fir
Production, costs and revenue
Costs of production
Cost curves have specific shapes because adding more workers to a fixed factory first boosts efficiency, then causes ove
Production, costs and revenue
Costs of production
A firm's costs depend on two things: what it pays for its inputs and how much output those inputs produce. Higher wages
Production, costs and revenue
Costs of production
Understanding how costs behave is central to explaining why firms make the decisions they do. This subtopic breaks costs
Production, costs and revenue
Determinants of long-run aggregate supply
Long-run aggregate supply (LRAS) measures the maximum output an economy can produce at full capacity. Technology, produc
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of long-run aggregate supply
The vertical long-run aggregate supply (LRAS) curve marks the maximum output an economy can sustain. It shows the point
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of long-run aggregate supply
An economy's institutions — the rules, systems, and organisations that govern how it works — shape how much output the e
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of long-run aggregate supply
The Keynesian AS curve shows that the economy can produce more output without raising prices when spare capacity exists.
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of long-run aggregate supply
Long-run aggregate supply (LRAS) — the total output an economy can produce when all its resources are fully and efficien
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of short-run aggregate supply
Short-run aggregate supply (SRAS) tells us how much output all firms produce at different price levels. Higher prices en
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of short-run aggregate supply
When firms' costs rise, they supply less at every price level. This shifts the short-run aggregate supply (SRAS) curve t
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Determinants of short-run aggregate supply
Short-run aggregate supply (SRAS) — the total output that all firms in the economy are willing and able to produce at di
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
Discrimination in the labour market
Wage discrimination means paying different groups different wages for the same work. Three conditions must all be presen
The labour market
Discrimination in the labour market
Discrimination based on gender or ethnicity can push down wages for affected groups. It can also reduce how many people
The labour market
Discrimination in the labour market
Even when workers are equally productive, wage discrimination — paying different groups different rates for the same wor
The labour market
Economic growth and development
Economic growth means a country produces more output over time. Economic development means people's lives actually get b
The international economy
Economic growth and development
Less-developed economies share a set of common features that keep living standards low. These include low incomes, poor
The international economy
Economic growth and development
Economists use several measures to judge how developed a country is. The most important is the HDI, which combines incom
The international economy
Economic growth and development
Countries grow and develop faster when they invest in new machinery and infrastructure, and when they improve the skills
The international economy
Economic growth and development
Some countries stay poor because deep-rooted problems block investment and productivity. These barriers include corrupti
The international economy
Economic growth and development
Governments and international bodies use a range of policies to raise living standards in less-developed economies. Thes
The international economy
Economic growth and development
Aid means richer countries giving money or resources to poorer ones. Trade means countries buying and selling goods with
The international economy
Economic growth and development
A country can increase its GDP — the total value of goods and services it produces — without its citizens actually livin
The international economy
Economic growth and the economic cycle
Short-run growth means the economy produces more output by using spare capacity it already has. Long-run growth means th
Economic performance
Economic growth and the economic cycle
Several factors drive how fast an economy grows. Demand-side factors affect spending in the short run. Supply-side facto
Economic performance
Economic growth and the economic cycle
Economic growth raises living standards and creates jobs, but it can also cause inflation, inequality, and environmental
Economic performance
Economic growth and the economic cycle
Economic growth raises living standards and tax revenues, but it also creates costs. Faster growth can damage the enviro
Economic performance
Economic growth and the economic cycle
Economies move through a repeating pattern of fast growth, slowdown, and recovery called the economic cycle. Economists
Economic performance
Economic growth and the economic cycle
An output gap measures how far actual output is from the economy's full-capacity level. A positive gap means the economy
Economic performance
Economic growth and the economic cycle
Sudden events called shocks push economies into different phases of the economic cycle. These shocks can come from insid
Economic performance
Economic growth and the economic cycle
Economies do not grow at a steady pace — output (the total value of goods and services produced) rises and falls in a re
Economic performance
Economic methodology
Economics is a social science — a subject that studies how people make decisions about scarce resources. It uses evidenc
Economic methodology and the economic problem
Economic methodology
Economics uses scientific methods like forming hypotheses and testing them with data. But unlike chemistry or physics, e
Economic methodology and the economic problem
Economic methodology
A positive statement is a fact-based claim you can test against evidence. A normative statement is an opinion about what
Economic methodology and the economic problem
Economic methodology
A value judgement is a personal or moral view about what ought to happen. Economists and governments use value judgement
Economic methodology and the economic problem
Economic methodology
When people choose between economic options, two things shape their view. They look at the likely real-world outcomes, a
Economic methodology and the economic problem
Economic methodology
Economics is a social science — a discipline that studies human behaviour and decision-making using evidence and reasoni
Economic methodology and the economic problem
Economic resources
Economists sort every resource used to make goods and services into four groups: land, labour, capital, and enterprise.
Economic methodology and the economic problem
Economic resources
The environment — things like clean air, fresh water, and forests — exists in limited supply. Humans cannot use it witho
Economic methodology and the economic problem
Economic resources
Economists group everything used to produce goods and services into four factors of production: land (natural resources,
Economic methodology and the economic problem
Economies and diseconomies of scale
Economies of scale are cost advantages a firm gains as it grows. Internal economies come from inside the firm itself. Ex
Production, costs and revenue
Economies and diseconomies of scale
Diseconomies of scale occur when a firm grows so large that its cost per unit starts to rise. Poor communication and man
Production, costs and revenue
Economies and diseconomies of scale
Returns to scale describes how output changes when a firm scales up all its inputs together. This directly determines wh
Production, costs and revenue
Economies and diseconomies of scale
As a firm grows, its cost per unit first falls, then eventually rises. These two forces — economies and diseconomies of
Production, costs and revenue
Economies and diseconomies of scale
Some firms find that average costs fall as they grow, then stay flat — never rising again. Economists draw this as an L-
Production, costs and revenue
Economies and diseconomies of scale
The minimum efficient scale (MES) is the smallest output level at which a firm fully exhausts its economies of scale. At
Production, costs and revenue
Economies and diseconomies of scale
As a firm grows in the long run — the period in which all inputs can be varied — it can benefit from economies of scale,
Production, costs and revenue
Employment and unemployment
The UK measures unemployment in two main ways. The Claimant Count records people claiming unemployment-related benefits,
Economic performance
Employment and unemployment
Voluntary unemployment describes workers who choose not to accept available jobs. Involuntary unemployment describes wor
Economic performance
Employment and unemployment
Economists split unemployment into four types based on its cause. Each type — seasonal, frictional, structural, and cycl
Economic performance
Employment and unemployment
Both the overall level of spending in the economy and the behaviour of workers and firms can cause unemployment to rise
Economic performance
Employment and unemployment
Real wage unemployment happens when wages are stuck above the level that clears the labour market. More workers want job
Economic performance
Employment and unemployment
The natural rate of unemployment (NRU) is the level of unemployment that exists even when the economy runs normally. It
Economic performance
Employment and unemployment
Unemployment harms individuals by cutting their income and damaging their skills. It also weakens the whole economy by r
Economic performance
Employment and unemployment
Unemployment — when people who are able and willing to work cannot find a job — is one of the key indicators used to jud
Economic performance
Exchange rate systems
A floating exchange rate is the price of one currency in terms of another. Supply and demand in the foreign exchange mar
The international economy
Exchange rate systems
Governments can push their currency's value up or down using several tools. These include changing interest rates, spend
The international economy
Exchange rate systems
A fixed exchange rate gives businesses certainty but removes a government's freedom to adjust the rate. A floating excha
The international economy
Exchange rate systems
A currency union is a group of countries that share one currency. Joining one removes exchange rate uncertainty but also
The international economy
Exchange rate systems
A country's exchange rate — the price of its currency in terms of another — can be determined in very different ways dep
The international economy
Fiscal policy
Fiscal policy means the government deliberately changes how much it spends, how much it taxes, and whether it spends mor
Fiscal policy and supply-side policies
Fiscal policy
Fiscal policy — how governments tax and spend — works at two levels. It can steer the whole economy, and it can also cha
Fiscal policy and supply-side policies
Fiscal policy
Governments can boost or slow total spending in the economy by changing how much they spend or how much they tax. Spendi
Fiscal policy and supply-side policies
Fiscal policy
Governments can use spending and tax decisions to expand the economy's productive capacity. This shifts aggregate supply
Fiscal policy and supply-side policies
Fiscal policy
Governments use spending and taxes to shift resources across the economy. These decisions change who gets what, which se
Fiscal policy and supply-side policies
Fiscal policy
Governments spend money in several distinct ways. Each type serves a different purpose — from building hospitals to payi
Fiscal policy and supply-side policies
Fiscal policy
Governments collect taxes for several distinct reasons. These include funding public services, reducing inequality, corr
Fiscal policy and supply-side policies
Fiscal policy
A direct tax takes money straight from a person's income or wealth. An indirect tax adds to the price of goods and servi
Fiscal policy and supply-side policies
Fiscal policy
Taxes differ in how their burden changes as income rises. A progressive tax takes a larger share from higher earners, a
Fiscal policy and supply-side policies
Fiscal policy
Governments follow a set of principles when designing taxes. The most important principle is equity — taxes should be fa
Fiscal policy and supply-side policies
Fiscal policy
The UK government raises money through several different taxes. Each tax has a specific role and its own strengths and w
Fiscal policy and supply-side policies
Fiscal policy
Each year the government either spends more than it collects in tax (a budget deficit) or less (a budget surplus). Every
Fiscal policy and supply-side policies
Fiscal policy
A budget deficit has two parts: one that shrinks automatically as the economy grows (cyclical), and one that persists ev
Fiscal policy and supply-side policies
Fiscal policy
A budget deficit occurs when the government spends more than it collects in tax. A surplus is the opposite. Each has dis
Fiscal policy and supply-side policies
Fiscal policy
The national debt is the total amount the government owes from years of borrowing. A very large national debt can limit
Fiscal policy and supply-side policies
Fiscal policy
The Office for Budget Responsibility (OBR) is an independent body that checks and publishes forecasts for the UK economy
Fiscal policy and supply-side policies
Fiscal policy
Governments use fiscal policy — decisions about how much to spend, what to tax, and whether to run a budget deficit (spe
Fiscal policy and supply-side policies
Globalisation
Globalisation — the growing economic integration of countries worldwide — has been driven by cheaper transport, new tech
The international economy
Globalisation
Globalisation means the world's economies are becoming more connected. Countries trade more, money moves across borders
The international economy
Globalisation
Globalisation creates opportunities and problems for all countries. Less-developed countries can attract investment and
The international economy
Globalisation
Multinational corporations (MNCs) are companies that operate in more than one country. They drive globalisation by movin
The international economy
Globalisation
Over recent decades, economies around the world have become increasingly interconnected through the growth of trade, for
The international economy
Government failure
Government failure happens when a government tries to fix an economic problem but makes resource allocation worse instea
The market mechanism, market failure and government intervention in markets
Government failure
Governments can make economic problems worse for three key reasons. They may lack good data, pursue goals that clash wit
The market mechanism, market failure and government intervention in markets
Government failure
Sometimes government intervention makes resource allocation worse, not better. Instead of fixing a market problem, the p
The market mechanism, market failure and government intervention in markets
Government failure
When governments try to fix a problem in a market, their policy can accidentally create new problems they never planned
The market mechanism, market failure and government intervention in markets
Government failure
When governments step in to correct market failure — where markets allocate resources inefficiently — their intervention
The market mechanism, market failure and government intervention in markets
Government intervention in markets
When free markets produce bad outcomes — too much pollution, too little healthcare — governments use that failure as a r
The market mechanism, market failure and government intervention in markets
Government intervention in markets
Governments shape what gets produced and consumed in an economy. They do this by spending money, charging taxes, and set
The market mechanism, market failure and government intervention in markets
Government intervention in markets
Governments pursue several goals at once — such as fairness, growth, and a clean environment. The goal they prioritise s
The market mechanism, market failure and government intervention in markets
Government intervention in markets
Governments use tools like taxes, subsidies, and rules to fix markets that produce the wrong amount of a good. Each tool
The market mechanism, market failure and government intervention in markets
Government intervention in markets
When markets fail — producing outcomes that are inefficient or unfair, such as too much pollution or too little provisio
The market mechanism, market failure and government intervention in markets
Government policies to alleviate poverty and to influence the distribution of income and wealth
Governments use tools like progressive taxation and benefits to redistribute income and reduce poverty. Each policy shif
The distribution of income and wealth: poverty and inequality
Government policies to alleviate poverty and to influence the distribution of income and wealth
Policies that redistribute income and reduce poverty create trade-offs. They can improve fairness, but they may also aff
The distribution of income and wealth: poverty and inequality
Government policies to alleviate poverty and to influence the distribution of income and wealth
Governments use a range of tools — including progressive taxation (where higher earners pay a larger share of their inco
The distribution of income and wealth: poverty and inequality
How markets and prices allocate resources
Prices do three jobs at once: they tell producers and consumers what is scarce, they change behaviour by making some cho
The market mechanism, market failure and government intervention in markets
How markets and prices allocate resources
The price mechanism allocates resources through supply and demand. It does this well in some situations, but it also pro
The market mechanism, market failure and government intervention in markets
How markets and prices allocate resources
In a market economy, prices do far more than just show what something costs — they act as signals that communicate infor
The market mechanism, market failure and government intervention in markets
Imperfect information
Good decisions require accurate information. When people lack full information, they make choices that leave them worse
Individual economic decision making
Imperfect information
Asymmetric information exists when one person in a deal knows more than the other. This knowledge gap can push markets t
Individual economic decision making
Imperfect information
Good decisions depend on good information, but in reality people rarely have access to the full picture — this is known
Individual economic decision making
Inflation and deflation
Inflation means prices across the economy are rising over time. Deflation means they are falling. Disinflation means pri
Economic performance
Inflation and deflation
Prices across the economy can rise for two broad reasons. Either buyers are spending so much that firms push prices up,
Economic performance
Inflation and deflation
Fisher's equation shows that the total money spent in an economy equals the total value of goods sold. Monetarists use t
Economic performance
Inflation and deflation
When people expect prices to rise, they act in ways that actually cause prices to rise. Inflation expectations can becom
Economic performance
Inflation and deflation
Inflation erodes what money can buy, hurting people on fixed incomes and savers. High or unpredictable inflation also da
Economic performance
Inflation and deflation
Deflation means prices across the economy are falling over time. This sounds helpful, but it can trap the economy in a d
Economic performance
Inflation and deflation
When the global price of raw materials like oil or wheat rises, UK firms face higher production costs. Those firms pass
Economic performance
Inflation and deflation
Economic conditions abroad can push UK prices up or down. A boom overseas raises demand for UK exports and can increase
Economic performance
Inflation and deflation
Sustained rises in the general price level — inflation — and sustained falls — deflation — are among the most closely wa
Economic performance
Influences upon the supply of labour to different markets
People choose jobs based on more than just pay. Financial rewards (monetary factors) and non-financial rewards (non-mone
The labour market
Influences upon the supply of labour to different markets
People choose jobs for reasons beyond pay. Job satisfaction, job dissatisfaction, and working conditions all affect how
The labour market
Influences upon the supply of labour to different markets
The labour supply curve shows how many workers want a job as the wage rate changes. Higher wages attract more workers, s
The labour market
Influences upon the supply of labour to different markets
Several factors can increase or decrease the total number of workers available in an occupation at every wage rate. When
The labour market
Influences upon the supply of labour to different markets
Workers do not choose jobs based on pay alone — the number of people willing to work in a particular occupation is shape
The labour market
Macroeconomic indicators
Economists use a set of key statistics to judge how well an economy is performing. These include measures of output, pri
The measurement of macroeconomic performance
Macroeconomic indicators
To judge how well an economy is performing, economists rely on a set of macroeconomic indicators — statistical measures
The measurement of macroeconomic performance
Marginal, average and total revenue
A firm earns revenue by selling its output. Total revenue is all the money it receives. Average revenue is the amount ea
Production, costs and revenue
Marginal, average and total revenue
Average revenue (AR) is the price a firm receives per unit sold. Because price and quantity demanded are the same relati
Production, costs and revenue
Marginal, average and total revenue
Marginal revenue (the extra income from selling one more unit) always falls faster than average revenue (income per unit
Production, costs and revenue
Marginal, average and total revenue
When marginal revenue — the extra income from selling one more unit — is positive, total revenue rises. When marginal re
Production, costs and revenue
Marginal, average and total revenue
Revenue is the income a firm earns from selling its output, and it can be measured in three ways: total revenue (TR) — a
Production, costs and revenue
Market imperfections
Markets work best when buyers and sellers know exactly what they are buying and selling. When one side knows far more th
The market mechanism, market failure and government intervention in markets
Market imperfections
A monopoly is a market dominated by one firm. That firm can charge higher prices and produce less than is best for socie
The market mechanism, market failure and government intervention in markets
Market imperfections
Factor immobility means workers or capital cannot easily move to where they are needed most. This stops markets from all
The market mechanism, market failure and government intervention in markets
Market imperfections
Even when externalities are absent, markets can still fail because of structural flaws in how they operate. Information
The market mechanism, market failure and government intervention in markets
Market structure, static efficiency, dynamic efficiency and resource allocation
Static efficiency measures how well a market uses its resources at a single point in time. Dynamic efficiency measures w
Perfect competition, imperfectly competitive markets and monopoly
Market structure, static efficiency, dynamic efficiency and resource allocation
Productive efficiency means a firm produces at its lowest possible cost per unit. Allocative efficiency means the price
Perfect competition, imperfectly competitive markets and monopoly
Market structure, static efficiency, dynamic efficiency and resource allocation
Dynamic efficiency measures how well a market improves over time. It grows when firms invest in new technology, train wo
Perfect competition, imperfectly competitive markets and monopoly
Market structure, static efficiency, dynamic efficiency and resource allocation
Different market structures — from perfect competition to monopoly — produce very different outcomes for how well resour
Perfect competition, imperfectly competitive markets and monopoly
Market structures
Markets can be arranged on a spectrum. At one end, perfect competition has many firms competing fiercely. At the other e
Perfect competition, imperfectly competitive markets and monopoly
Market structures
Economists sort markets into categories called market structures. They use three key factors: how many firms compete, ho
Perfect competition, imperfectly competitive markets and monopoly
Market structures
Economists classify industries using the concept of market structure — the defining characteristics of a market, such as
Perfect competition, imperfectly competitive markets and monopoly
Merit and demerit goods
Economists label some goods as merit goods and others as demerit goods. These labels reflect society's opinion about wha
The market mechanism, market failure and government intervention in markets
Merit and demerit goods
Merit goods create positive externalities — benefits that spill over to people beyond the buyer. Demerit goods create ne
The market mechanism, market failure and government intervention in markets
Merit and demerit goods
Consumers often lack accurate information about how good or harmful a product really is. This causes them to buy too lit
The market mechanism, market failure and government intervention in markets
Merit and demerit goods
Some goods are classified as merit goods — things society considers under-consumed, like education or healthcare — while
The market mechanism, market failure and government intervention in markets
Monopolistic competition
Monopolistic competition diagrams show a firm earning supernormal profit in the short run. In the long run, new rivals e
Perfect competition, imperfectly competitive markets and monopoly
Monopolistic competition
Monopolistic competition describes a market where many firms sell similar but slightly different products. No significan
Perfect competition, imperfectly competitive markets and monopoly
Monopolistic competition
Firms in monopolistic competition compete by making their product stand out — through branding, quality, or service — ra
Perfect competition, imperfectly competitive markets and monopoly
Monopolistic competition
Monopolistic competition describes markets — such as restaurants or hairdressers — where many firms sell similar but dif
Perfect competition, imperfectly competitive markets and monopoly
Monopoly and monopoly power
A monopoly diagram shows how a firm that controls a market sets its price and output. It uses cost and revenue curves to
Perfect competition, imperfectly competitive markets and monopoly
Monopoly and monopoly power
Monopoly power is a firm's ability to set prices above competitive levels. Four key factors determine how much of that p
Perfect competition, imperfectly competitive markets and monopoly
Monopoly and monopoly power
A monopoly can harm consumers by raising prices and reducing choice. But it can also benefit the economy by funding inno
Perfect competition, imperfectly competitive markets and monopoly
Monopoly and monopoly power
A monopoly exists when a single firm dominates a market, giving it the power to act as a price maker — setting prices ab
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
An oligopoly is a market dominated by a small number of large firms. Each firm watches its rivals closely, because any d
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Oligopoly describes markets dominated by a few large firms. Those markets can still look very different from each other
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Economists define oligopoly in two ways. One looks at how the market is built — a few large firms dominating. The other
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
A concentration ratio measures how much of a market the largest firms control. Add up the market shares of the top firms
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Oligopolies either collude — secretly agreeing with rivals to fix prices or output — or compete independently against ea
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Firms in an oligopoly sometimes work together. Cooperation is legal joint activity. Collusion means secretly agreeing to
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
The kinked demand curve model explains why oligopoly firms rarely change their prices. Rivals copy price cuts but ignore
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Oligopolists often avoid competing on price because cutting prices triggers retaliation. Instead, they compete through a
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Several forces shape what oligopolists charge, produce, and spend. These forces include how rivals react, whether firms
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
In an oligopoly, each firm's decisions directly affect its rivals. Because firms know this, every pricing or output choi
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Oligopoly brings benefits like innovation and product variety, but also risks like high prices and collusion. Whether it
Perfect competition, imperfectly competitive markets and monopoly
Oligopoly
Markets dominated by a small number of large firms — a structure called oligopoly — behave very differently from more co
Perfect competition, imperfectly competitive markets and monopoly
Perfect competition
Economists use two linked diagrams to show how a perfectly competitive firm behaves. One diagram shows the whole market
Perfect competition, imperfectly competitive markets and monopoly
Perfect competition
Perfect competition rests on four key assumptions. Each assumption removes a firm's ability to control its price or earn
Perfect competition, imperfectly competitive markets and monopoly
Perfect competition
A price taker must accept the market price set by supply and demand. It cannot charge more or less than every other sell
Perfect competition, imperfectly competitive markets and monopoly
Perfect competition
Under perfect competition, resources end up used in the best possible way. Prices are driven down to the lowest sustaina
Perfect competition, imperfectly competitive markets and monopoly
Perfect competition
Perfect competition is a theoretical market model built on assumptions — including large numbers of producers, identical
Perfect competition, imperfectly competitive markets and monopoly
Positive and negative externalities in consumption and production
An externality occurs when a transaction affects someone outside it. The cost or benefit felt by that third party is not
The market mechanism, market failure and government intervention in markets
Positive and negative externalities in consumption and production
When a producer or consumer ignores costs they impose on others, they produce or consume too much. When they ignore bene
The market mechanism, market failure and government intervention in markets
Positive and negative externalities in consumption and production
When nobody owns a resource, producers and consumers can use it freely without paying for any damage they cause. This me
The market mechanism, market failure and government intervention in markets
Positive and negative externalities in consumption and production
Externalities arise when the actions of producers or consumers create costs or benefits that fall on third parties — peo
The market mechanism, market failure and government intervention in markets
Possible conflicts between macroeconomic policy objectives
An output gap measures how far an economy's actual output sits above or below its full potential. A negative gap signals
Economic performance
Possible conflicts between macroeconomic policy objectives
The Phillips curve shows the relationship between unemployment and inflation. In the short run, lower unemployment tends
Economic performance
Possible conflicts between macroeconomic policy objectives
The short-run Phillips curve tells policymakers they can trade lower unemployment for higher inflation. The long-run cur
Economic performance
Possible conflicts between macroeconomic policy objectives
Governments use different economic policies to reduce the tension between conflicting goals. Some policies work quickly
Economic performance
Possible conflicts between macroeconomic policy objectives
Governments aim to achieve low inflation, low unemployment, steady growth, and a stable balance of payments simultaneous
Economic performance
Price discrimination
Price discrimination means charging different customers different prices for the same product. Three conditions must exi
Perfect competition, imperfectly competitive markets and monopoly
Price discrimination
Price discrimination helps firms earn more profit by charging different prices to different customers. But it can harm c
Perfect competition, imperfectly competitive markets and monopoly
Price discrimination
Price discrimination is when a firm with market power — the ability to set its own price rather than accept the market p
Perfect competition, imperfectly competitive markets and monopoly
Price elasticity of supply
Price elasticity of supply (PES) measures how much the quantity supplied changes when the price of a good changes. You c
Price determination in a competitive market
Price elasticity of supply
Several factors determine how easily producers can increase output when prices rise. These factors make supply either el
Price determination in a competitive market
Price elasticity of supply
Price elasticity of supply (PES) measures how responsive the quantity supplied — the amount producers are willing to sel
Price determination in a competitive market
Price, income and cross elasticities of demand
Elasticity calculations measure how strongly demand reacts to a change. Each of the three types uses the same basic stru
Price determination in a competitive market
Price, income and cross elasticities of demand
Income elasticity of demand measures how much demand for a good changes when consumer income rises or falls. Normal good
Price determination in a competitive market
Price, income and cross elasticities of demand
Cross elasticity of demand measures how the demand for one good changes when the price of a different good changes. The
Price determination in a competitive market
Price, income and cross elasticities of demand
When a firm changes its price, total revenue either rises or falls depending on how sensitive customers are to that pric
Price determination in a competitive market
Price, income and cross elasticities of demand
Several factors determine how sensitive demand is to a price, income, or related-price change. Knowing these factors hel
Price determination in a competitive market
Price, income and cross elasticities of demand
Elasticity measures how sensitive demand is to a change in something — and this subtopic extends that idea beyond price
Price determination in a competitive market
Production and productivity
Production is the process firms use to turn inputs — like workers and machinery — into finished goods or services. A car
Production, costs and revenue
Production and productivity
Productivity measures how much output a firm produces per unit of input. Labour productivity specifically measures outpu
Production, costs and revenue
Production and productivity
At its core, production is the process of combining inputs — the factors of production such as labour (workers) and capi
Production, costs and revenue
Production possibility diagrams
A production possibility diagram shows the maximum combinations of two goods an economy can produce. It makes scarcity,
Economic methodology and the economic problem
Production possibility diagrams
Every point on the PPC boundary uses all available resources without waste — that is productive efficiency. But only one
Economic methodology and the economic problem
Production possibility diagrams
A production possibility diagram is a graph that shows the maximum combinations of two goods or services an economy can
Economic methodology and the economic problem
Profit
Profit is what a firm keeps after paying all its costs. A firm earns it when the money from sales exceeds everything it
Production, costs and revenue
Profit
Normal profit is the minimum a firm needs to stay in a market. Supernormal profit is any extra earned above that minimum
Production, costs and revenue
Profit
Profit does three jobs in a market economy. It signals where resources are needed, rewards risk-taking, and funds future
Production, costs and revenue
Profit
When a firm's total revenue — the income it earns from sales — exceeds its total costs, the difference is profit. A-leve
Production, costs and revenue
Public goods, private goods and quasi-public goods
A pure public good has two key features. One person using it does not reduce how much others can use it, and nobody can
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
A private good gets used up when one person consumes it, and sellers can stop others from having it. A public good does
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
A quasi-public good starts out like a public good but loses one of its key features under certain conditions. Congestion
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
Technology can change whether a good counts as a public good. When TV signals became encrypted, broadcasters could exclu
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
When a good is free to use once provided, people can enjoy it without paying. This removes any incentive for private fir
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
When everyone can freely use a shared resource, each person takes as much as they can. This individually rational behavi
The market mechanism, market failure and government intervention in markets
Public goods, private goods and quasi-public goods
Some goods cannot be provided effectively by the free market because they are non-rival — one person's use does not redu
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
Public ownership means the government owns and runs a firm or industry. This can serve society's needs, but it can also
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
Privatisation means the government sells a state-owned industry to private owners. Supporters say private firms perform
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
Regulation means governments set rules that firms must follow. It can fix market failures, but it can also create new pr
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
Deregulation means removing government rules from a market. It can boost competition and lower prices, but it can also a
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
Regulatory capture happens when a regulator starts protecting the industry it oversees instead of the public. The regula
The market mechanism, market failure and government intervention in markets
Public ownership, privatisation, regulation and deregulation of markets
When markets fail — producing the wrong quantity of a good or allowing firms to exploit monopoly power — governments mus
The market mechanism, market failure and government intervention in markets
Scarcity, choice and the allocation of resources
Scarcity exists because resources — the things used to produce goods and services — are finite. At the same time, human
Economic methodology and the economic problem
Scarcity, choice and the allocation of resources
Resources are limited, so every individual, firm, and government must choose how to use them. Deciding to use a resource
Economic methodology and the economic problem
Scarcity, choice and the allocation of resources
Every time you choose one thing, you give up the next best alternative. Economists call that sacrifice the opportunity c
Economic methodology and the economic problem
Scarcity, choice and the allocation of resources
At the heart of economics lies scarcity — the fact that resources such as land, labour, and capital are finite, while hu
Economic methodology and the economic problem
Specialisation, division of labour and exchange
Specialisation means workers or firms focus on one task or product. This raises output per worker and cuts the cost of p
Production, costs and revenue
Specialisation, division of labour and exchange
When workers specialise in producing one thing, they need a reliable way to trade for everything else. Money solves this
Production, costs and revenue
Specialisation, division of labour and exchange
When workers or firms focus on a narrow task or product — a process called specialisation and division of labour — outpu
Production, costs and revenue
Supply-side policies
Supply-side policies are actions a government takes to grow the economy's productive capacity. Supply-side improvements
Fiscal policy and supply-side policies
Supply-side policies
Supply-side policies are government actions that raise the economy's productive capacity. They do this by improving ince
Fiscal policy and supply-side policies
Supply-side policies
Governments can cut taxes to make working or investing more rewarding. This encourages people to work more and businesse
Fiscal policy and supply-side policies
Supply-side policies
Supply-side policies can reduce unemployment, keep inflation low, and help the UK sell more abroad than it buys. They do
Fiscal policy and supply-side policies
Supply-side policies
The natural rate of unemployment is the level of unemployment that persists even when the economy is healthy. Supply-sid
Fiscal policy and supply-side policies
Supply-side policies
Free market supply-side policies use market forces to grow the economy's productive capacity. They include cutting taxes
Fiscal policy and supply-side policies
Supply-side policies
Interventionist supply-side policies are actions where the government directly spends money or intervenes to boost the e
Fiscal policy and supply-side policies
Supply-side policies
Supply-side policies change how the whole economy performs, but they also change how individual markets and workers beha
Fiscal policy and supply-side policies
Supply-side policies
Supply-side policies are government actions designed to increase the productive capacity of the economy — in other words
Fiscal policy and supply-side policies
Technological change
Invention means creating a completely new idea or product. Innovation means turning that idea into something firms actua
Production, costs and revenue
Technological change
New technology changes how firms make things. It usually raises productivity — output per unit of input — and cuts costs
Production, costs and revenue
Technological change
New technology can create products and entire markets that never existed before. It can also wipe out existing markets b
Production, costs and revenue
Technological change
New technology can change who dominates a market and how many firms survive in it. A single firm with a powerful new tec
Production, costs and revenue
Technological change
Advances in technology reshape how firms produce goods and services, cutting costs, raising productivity (output per uni
Production, costs and revenue
The balance of payments
Every country records all its money flows with the rest of the world in a document called the balance of payments. This
The international economy
The balance of payments
The current account records four types of money flows between a country and the rest of the world. These are: physical g
The international economy
The balance of payments
A current account deficit means a country spends more on imports and transfers abroad than it earns from exports and inc
The international economy
The balance of payments
Several forces shape whether a country earns more from the rest of the world than it spends. Productivity, inflation, an
The international economy
The balance of payments
When money moves between countries as investment, it affects jobs, incomes, exchange rates, and the balance of payments
The international economy
The balance of payments
Governments use several tools to fix a current account imbalance. These tools either reduce overall spending in the econ
The international economy
The balance of payments
Governments use two main strategies to fix a current account deficit. Expenditure-switching redirects spending away from
The international economy
The balance of payments
Fixing a current account imbalance often clashes with other economic goals. A policy that reduces a deficit can also slo
The international economy
The balance of payments
A current account deficit or surplus affects a country's economy in real ways. Deficits can weaken the currency and buil
The international economy
The balance of payments
When a large economy fixes its trade imbalance, the policies it uses ripple outward and affect growth, jobs, and trade i
The international economy
The balance of payments
Every country keeps a record of its financial transactions with the rest of the world, known as the balance of payments,
The international economy
The circular flow of income
National income measures the total value of everything an economy produces, earns, or spends in a given period. Economis
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
Nominal income is the actual money amount you earn. Real income adjusts that figure for inflation, showing what your inc
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
Real national income measures how much an economy actually produces, after stripping out the distorting effect of rising
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
Money flows continuously between households and firms in a loop. At any point in that loop, the total value of income, o
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
Injections add money into the circular flow of income. Withdrawals remove money from it. The three injections are invest
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
When injections into the economy rise above withdrawals, national income grows. When withdrawals exceed injections, nati
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The circular flow of income
At the heart of macroeconomics is the idea that money flows continuously around the economy between households and firms
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The demand for labour, marginal productivity theory
Firms hire workers only because customers want to buy what those workers produce. Labour demand depends entirely on prod
The labour market
The demand for labour, marginal productivity theory
Firms decide how many workers to hire by comparing what each extra worker earns for the firm against the wage they must
The labour market
The demand for labour, marginal productivity theory
The labour demand curve shows how many workers firms want to hire at each wage rate. When wages rise, firms hire fewer w
The labour market
The demand for labour, marginal productivity theory
Several factors can shift the entire labour demand curve left or right. These include changes in product demand, worker
The labour market
The demand for labour, marginal productivity theory
Elasticity of demand for labour measures how much the quantity of workers demanded changes when the wage rate changes. S
The labour market
The demand for labour, marginal productivity theory
Firms hire workers not for their own sake but because those workers help produce goods and services that customers want
The labour market
The determinants of aggregate demand
Aggregate demand (AD) is the total amount of spending on goods and services across a whole economy at a given price leve
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of aggregate demand
Aggregate demand (total spending in the economy) has four components. Different factors drive each one up or down, shift
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of aggregate demand
When national income rises, firms need more capital to meet higher demand. The accelerator shows that this causes invest
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of aggregate demand
Saving means setting aside part of your income rather than spending it. Several factors — including interest rates, conf
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of aggregate demand
Saving means households set aside income instead of spending it. Investment means firms spend money on new capital goods
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of aggregate demand
Aggregate demand (AD) — the total spending on goods and services in an economy at a given price level — is made up of co
How the macroeconomy works: the circular flow of income, AD/AS analysis and related concepts
The determinants of the demand for goods and services
A demand curve is a graph that shows how many units of a good consumers will buy at each possible price. As price rises,
Price determination in a competitive market
The determinants of the demand for goods and services
A demand curve shifts when something other than price changes consumers' willingness or ability to buy. Factors like inc
Price determination in a competitive market
The determinants of the demand for goods and services
Demand — the quantity of a good or service that consumers are willing and able to buy at a given price — is not fixed; i
Price determination in a competitive market
The determinants of the supply of goods and services
A supply curve is a graph that shows how much of a good producers will sell at each possible price. As price rises, quan
Price determination in a competitive market
The determinants of the supply of goods and services
When the price of a good rises, firms earn more profit on each unit they sell. That extra profit motivates them to produ
Price determination in a competitive market
The determinants of the supply of goods and services
Several factors can cause producers to supply more or less at every price level. These factors shift the entire supply c
Price determination in a competitive market
The determinants of the supply of goods and services
Supply — the quantity of a good or service that producers are willing and able to offer for sale at a given price — is d
Price determination in a competitive market
The determination of equilibrium market prices
In a competitive market, buyers and sellers constantly push price toward one level. At that level, the amount buyers wan
Price determination in a competitive market
The determination of equilibrium market prices
Equilibrium is the market state where quantity demanded equals quantity supplied. Disequilibrium is any situation where
Price determination in a competitive market
The determination of equilibrium market prices
When buyers want more than sellers offer, price rises. When sellers offer more than buyers want, price falls. These pres
Price determination in a competitive market
The determination of equilibrium market prices
When buyers and sellers interact in a competitive market, price is driven toward an equilibrium — the point where the qu
Price determination in a competitive market
The determination of relative wage rates and levels of employment in imperfectly competitive labour markets
Real labour markets are not perfectly competitive. Monopsony power, trade unions, and imperfect information all distort
The labour market
The determination of relative wage rates and levels of employment in imperfectly competitive labour markets
A monopsony is a market with only one dominant employer. That employer uses its buying power to pay workers less and hir
The labour market
The determination of relative wage rates and levels of employment in imperfectly competitive labour markets
Real labour markets rarely match the perfectly competitive ideal — imperfections such as monopsony power (where a single
The labour market
The determination of relative wage rates and levels of employment in perfectly competitive labour markets
In a perfectly competitive labour market, wages and employment levels are set by labour supply and labour demand meeting
The labour market
The determination of relative wage rates and levels of employment in perfectly competitive labour markets
Market forces — the push and pull of labour supply and demand — set wage rates. Workers in high demand or short supply e
The labour market
The determination of relative wage rates and levels of employment in perfectly competitive labour markets
In a perfectly competitive labour market — one where no single employer or worker has the power to influence wages — pay
The labour market
The distribution of income and wealth
Income is money you receive regularly, like wages or benefits. Wealth is the total value of everything you own, like pro
The distribution of income and wealth: poverty and inequality
The distribution of income and wealth
Several forces shape how income and wealth spread across a population. These include wages, taxes, government benefits,
The distribution of income and wealth: poverty and inequality
The distribution of income and wealth
Equality means everyone gets the same share of income or wealth. Equity means everyone gets a fair share — which may not
The distribution of income and wealth: poverty and inequality
The distribution of income and wealth
Economists use the Lorenz curve to show how unevenly income or wealth spreads across a population. The Gini coefficient
The distribution of income and wealth: poverty and inequality
The distribution of income and wealth
Making incomes more equal can reduce poverty but may weaken incentives to work or invest. Greater inequality can boost g
The distribution of income and wealth: poverty and inequality
The distribution of income and wealth
Economies rarely share income — the money people earn — and wealth — the assets people own — evenly across the populatio
The distribution of income and wealth: poverty and inequality
The dynamics of competition and competitive market processes
Competition between firms produces benefits for consumers both quickly and over time. In the short run, prices fall. In
Perfect competition, imperfectly competitive markets and monopoly
The dynamics of competition and competitive market processes
Firms compete in more ways than simply cutting prices. Competition also pushes businesses to make better products, lower
Perfect competition, imperfectly competitive markets and monopoly
The dynamics of competition and competitive market processes
Creative destruction happens when new technologies or business models replace old ones. Innovative firms grow, and the b
Perfect competition, imperfectly competitive markets and monopoly
The dynamics of competition and competitive market processes
Competition between firms does more than push prices down — it drives businesses to cut costs, improve quality, and inno
Perfect competition, imperfectly competitive markets and monopoly
The influence of trade unions in determining wages and levels of employment
Trade unions — groups that negotiate pay on behalf of workers — are more powerful in some situations than others. Severa
The labour market
The influence of trade unions in determining wages and levels of employment
A trade union sets a minimum wage for its members. In a competitive market this cuts jobs, but in a monopsony — where on
The labour market
The influence of trade unions in determining wages and levels of employment
Trade unions — organisations that represent workers and negotiate on their behalf through collective bargaining — can pu
The labour market
The interrelationship between markets
Markets are connected. A change in price or supply in one market can shift demand or supply in another market entirely.
Price determination in a competitive market
The interrelationship between markets
Some goods are linked — buying, using, or producing one affects demand or supply for another. These five relationships d
Price determination in a competitive market
The interrelationship between markets
Markets rarely operate in isolation — a price change or supply shock in one market will typically ripple through to othe
Price determination in a competitive market
The law of diminishing returns and returns to scale
The short run is the period when a firm cannot change at least one input, such as its factory size. The long run is when
Production, costs and revenue
The law of diminishing returns and returns to scale
Total returns measure all output a firm produces. Average returns measure output per worker. Marginal returns measure th
Production, costs and revenue
The law of diminishing returns and returns to scale
When a firm keeps adding workers but cannot add more machinery, each extra worker eventually adds less output than the o
Production, costs and revenue
The law of diminishing returns and returns to scale
Returns to scale describes what happens to a firm's total output when it increases all of its inputs by the same proport
Production, costs and revenue
The law of diminishing returns and returns to scale
Returns to scale describe what happens to output when a firm increases all its inputs by the same proportion. Output can
Production, costs and revenue
The law of diminishing returns and returns to scale
How output responds to adding more inputs depends critically on whether a firm can change all of its inputs or only some
Production, costs and revenue
The meaning of market failure
Market failure happens when a market produces the wrong amount of a good or service. Society ends up with too much of so
The market mechanism, market failure and government intervention in markets
The meaning of market failure
Markets can fail in two ways. Partial market failure means a market exists but produces the wrong amount. Complete marke
The market mechanism, market failure and government intervention in markets
The meaning of market failure
Several distinct problems can cause markets to misallocate resources. These include ignored side-effects on third partie
The market mechanism, market failure and government intervention in markets
The meaning of market failure
Market failure occurs when the price mechanism — the system by which prices signal what to produce, how much, and for wh
The market mechanism, market failure and government intervention in markets
The National Minimum Wage
A national minimum wage sets a legal floor on pay, forcing wages above the market rate. This changes how many workers em
The labour market
The National Minimum Wage
A national minimum wage sets a legal floor on pay. It can raise living standards for low-paid workers, but it may also r
The labour market
The National Minimum Wage
A national minimum wage (NMW) is a legally enforced floor on the wage rate — the price paid per hour of work — set above
The labour market
The nature and purpose of economic activity
Economic activity means producing goods and services. Economies do this to satisfy needs — things essential for survival
Economic methodology and the economic problem
The nature and purpose of economic activity
Every economy must answer three core questions. These are: what goods and services to make, how to make them, and who re
Economic methodology and the economic problem
The nature and purpose of economic activity
At its core, economic activity is the process of producing goods and services in order to satisfy human needs — things e
Economic methodology and the economic problem
The objectives of firms
Traditional economic models assume every firm tries to make as much profit as possible. Profit is the money left over af
Perfect competition, imperfectly competitive markets and monopoly
The objectives of firms
A firm maximises profit by producing the quantity where the cost of making one extra unit equals the revenue that unit e
Perfect competition, imperfectly competitive markets and monopoly
The objectives of firms
In large companies, the people who own the firm (shareholders) are usually different people from the managers who run it
Perfect competition, imperfectly competitive markets and monopoly
The objectives of firms
Not every firm chases maximum profit. Firms can instead pursue goals like growing as large as possible, maximising sales
Perfect competition, imperfectly competitive markets and monopoly
The objectives of firms
Satisficing means a firm aims for an outcome that is 'good enough' rather than the best possible. Managers set a target
Perfect competition, imperfectly competitive markets and monopoly
The objectives of firms
Traditional economic models assume firms pursue profit maximisation — producing at the output where the extra cost of ma
Perfect competition, imperfectly competitive markets and monopoly
The objectives of government economic policy
Governments aim to manage the whole economy by pursuing four goals: steady growth in output, stable prices, low unemploy
The measurement of macroeconomic performance
The objectives of government economic policy
Governments often cannot hit all four economic targets at once. Policies that fix one problem can make another worse.
The measurement of macroeconomic performance
The objectives of government economic policy
Governments use macroeconomic policy — decisions about taxation, spending, and interest rates that affect the whole econ
The measurement of macroeconomic performance
The problem of poverty
Absolute poverty means lacking the basic necessities to survive, like food or shelter. Relative poverty means having muc
The distribution of income and wealth: poverty and inequality
The problem of poverty
Poverty has several root causes, including unemployment and low wages. It also produces serious consequences for individ
The distribution of income and wealth: poverty and inequality
The problem of poverty
Poverty can be measured in two distinct ways: absolute poverty, where people lack the basic resources needed to survive,
The distribution of income and wealth: poverty and inequality
The regulation of the financial system
Several official bodies oversee the UK's banks and financial markets. Each body targets a different type of risk to keep
Financial markets and monetary policy
The regulation of the financial system
Banks borrow money from depositors at short notice and lend it out for years. If too many depositors demand their money
Financial markets and monetary policy
The regulation of the financial system
Regulators force banks to hold minimum levels of liquid assets and own capital. These rules reduce the risk of a bank co
Financial markets and monetary policy
The regulation of the financial system
Moral hazard occurs when a safety net encourages riskier behaviour. Banks that expect a government rescue take bigger ri
Financial markets and monetary policy
The regulation of the financial system
Systemic risk means one bank's failure can drag down the whole financial system. That collapse then damages businesses,
Financial markets and monetary policy
The regulation of the financial system
Banks and financial markets can cause serious damage to the wider economy when they fail, so regulators — bodies with th
Financial markets and monetary policy
The structure of financial markets and financial assets
Money is anything that people widely accept as payment. It works because it has four key functions: it lets people buy t
Financial markets and monetary policy
The structure of financial markets and financial assets
The money supply is the total amount of money in an economy. Narrow money covers only the most liquid forms, like cash.
Financial markets and monetary policy
The structure of financial markets and financial assets
Financial markets are split into three types based on what they trade. The money market handles short-term borrowing, th
Financial markets and monetary policy
The structure of financial markets and financial assets
Financial markets connect people who have money to spare with people who need to borrow or invest it. This process funds
Financial markets and monetary policy
The structure of financial markets and financial assets
Debt means borrowing money that must be repaid, usually with interest. Equity means selling a share of ownership in a co
Financial markets and monetary policy
The structure of financial markets and financial assets
When market interest rates rise, bond prices fall — and when rates fall, bond prices rise. This happens because a bond p
Financial markets and monetary policy
The structure of financial markets and financial assets
Financial markets are the organised systems through which money, loans, shares, and currencies are bought and sold, and
Financial markets and monetary policy
Trade
Comparative advantage is a model that explains why countries trade. A country has comparative advantage in a good when i
The international economy
Trade
Absolute advantage means a country produces something using fewer resources than another country. Comparative advantage
The international economy
Trade
When countries focus on producing what they make most efficiently and then trade with each other, the world ends up with
The international economy
Trade
International trade lets firms sell to bigger markets, so they can cut costs by producing more. It also forces firms to
The international economy
Trade
International trade creates winners, but it also creates losers. Workers lose jobs when cheaper imports replace domestic
The international economy
Trade
The UK trades very differently today than it did fifty years ago. Several forces — including globalisation, deindustrial
The international economy
Trade
Protectionism means a government restricting imports or boosting exports to shield domestic industries from foreign comp
The international economy
Trade
Governments sometimes block or restrict imports to protect domestic industries. These protectionist policies create winn
The international economy
Trade
A customs union is a group of countries that remove trade barriers between themselves and charge the same tariffs on imp
The international economy
Trade
The Single European Market (SEM) allows goods, services, money, and people to move freely between EU member states. It r
The international economy
Trade
The World Trade Organisation (WTO) is an international body that sets the rules for trade between countries. It works to
The international economy
Trade
International trade is built on the idea of comparative advantage — the principle that countries benefit by specialising
The international economy
Uses of index numbers
An index number tracks how a variable changes over time by comparing it to a fixed starting point called the base year,
The measurement of macroeconomic performance
Uses of index numbers
Economists use index numbers to track how things like prices or national output change over time. The Consumer Prices In
The measurement of macroeconomic performance
Uses of index numbers
Index numbers are a tool economists use to track how a variable — such as the price level or real GDP — changes over tim
The measurement of macroeconomic performance
Uses of national income data
Economists use national income data to track whether people's lives are improving over time. But the raw numbers can mis
The measurement of macroeconomic performance
Uses of national income data
Economists use GDP per capita — a country's total output divided by its population — to compare living standards across
The measurement of macroeconomic performance
Uses of national income data
When comparing living standards between countries, money goes further in some places than others. Purchasing power parit
The measurement of macroeconomic performance
Uses of national income data
National income data — most commonly measured as GDP per capita (the total value of a country's output divided by its po
The measurement of macroeconomic performance