Key terms

• Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.
• Ability to pay

  The idea that taxes should be levied on a person according to how well that person can shoulder the burden / afford to pay
• Absolute poverty

  The number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. The United Nations definition is a severe and persistent deprivation of basic human needs
• Ad valorem tax

  An indirect tax based on a percentage of the sales price of a good or service. An increase in an ad valorem tax causes an inward shift in the supply curve
• Adam Smith


  One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea
• Adverse selection


  Where the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information; e.g. health insurance
• Alcohol duties

  Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.
• Allocative efficiency

  Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.
• Asking price

  The price at which a security, commodity or currency is offered for sale on the market - generally the lowest price the seller will accept.
• Asymmetric information

  Occurs when somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together. A situation in which some agents have more information than others and this affects the outcome of a bargain between them
• Automation

  A production technique that uses capital machinery / technology to replace or enhance human labour
• Average cost

  Average or unit cost (AC) is the total cost divided by the number of units of the commodity produced.
• Average fixed cost

  Fixed costs are costs of production which are constant whatever the level of output. Average fixed costs are total fixed costs divided by the number of units of output, that is, fixed cost per unit of output
• Barriers to entry

  Factors which make it difficult or expensive for new firms to enter a market in order to compete with existing suppliers. Examples of barriers to entry include the effect of patents; brand loyalty among consumers; the high costs of buying capital equipment and also the need to win licences to operate in certain markets.
• Barter

  The practice of exchanging one good or service for another, without using money
• Basic economic problem

  The basic problem is that there are infinite wants but finite (non-renewable) resources with which to satisfy them
• Black market

  An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand (or a shortage) for a commodity
• Bottlenecks


  Any factor that causes production to be delayed or stopped – this may reduce the price elasticity of supply of a product
• Brand

  A distinctive product offering which is created by the use of a logo, symbol, name, design, packaging or combination thereof. The key in designing and building a brand is to differentiate it from competitors.
• Buffer stock

  Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
• Bulk-buying

  The purchase by one organisation of large quantities of a product or raw material, which often results in a lower price because of their market power and because it is cheaper to deal with one customer and the deliveries can be on a larger scale.
• Buyer's market

  A market that favours buyers because supply is plentiful relative to demand and therefore prices are relatively low. The opposite of a seller's market.
• By-product

  A by-product is a good or service that is produced as a consequence of producing another good or service.
• Capacity utilisation

  The extent to which a business is making full use of existing factor resources
• Capacity-building


  Efforts to develop human skills or infrastructures within a community or organisation
• Capital goods


  Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from "financial capital", meaning funds which are available to finance the production or acquisition of real capital
• Capital-intensive


  A production technique which uses a high proportion of capital to labour
• Capitalist economy


  An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property.
• Carbon capture and storage

  The process of trapping and storing carbon dioxide produced by burning fossil fuels
• Carbon credits


  An allowance to a business to generate a specific level of emissions – may be traded in a carbon market
• Cartel


  A cartel is a formal agreement among firms. Cartel members may agree on prices, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.
• Ceteris paribus


  To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus - all other influencing factors are held constant.
• Cigarette duties


  Cigs in the UK are taxed on 16.5% retail price + £154.95 per thousand cigarettes.
• Collusion


  Collusion is any explicit or implicit agreement between suppliers in a market to avoid competition. The main aim of this is to reduce market uncertainty and achieve a level of joint profits similar to that which might be achieved by a pure monopolist.
• Command and control


  Laws and regulation backed up by inspection and penalties for non-compliance
• Command economy


  An economic system where all resources are allocated by the government, with no markets (eg ex-Soviet bloc, North Korea).
• Common resources


  Goods or services that have characteristics of rivalry in consumption and non-excludability - grazing land or fish stocks are examples. The over-exploitation of common resources can lead to the "tragedy of the commons"
• Competition policy


  Government policy directed at encouraging competition in the private sector: e.g. the investigation of takeovers or restrictive practices
• Competitive market


  A market where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms
• Competitive supply


  Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce VCRs or DVDs.