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Abnormal profit is profit over and above the level of profit that will persuade the company to remain in the industry in the long run.

Absolute advantage refers to a country (or economic unit) being able to produce more of something than another country (or other economic unit) with the same input of resources. Usually it is used to refer to a situation where a country can produce more of all the commodities in question for the same input. It is clear which good each country should specialise in.

Accelerator principle is the relationship between investment and the rate of change of aggregate demand and/or income. The accelerator hypothesis predicts that it is the rate of change of income rather than its level that determines investment.

Accidental pollution is caused when something goes wrong, as in the case of the accident at the Chernobyl nuclear power plant in the former Soviet Union.

Acid rain results from burning sulphur or nitrogen to produce oxides, which then turn into acids (sulphuric, nitric, nitrous etc) when in contact with water in the atmosphere. The acid falls in a dilute form in rainfall.

Activity or participation rate is the ratio of the working population (employed and unemployed) to the total population, or to any section of it whether by age, sex or race.

Actual (or economic) incidence of a tax may in practice be passed on to someone other than the person or organisation paying it, for instance retailers may pass on an increase in tax wholly or partly to the consumer.

Ad valorem (by value) tax is a tax levied as a percentage of the selling price of the commodity, e.g. VAT.

Advances are overdrafts or loans made by banks to their customers and are the chief earning assets of banks.

Aggregate concentration ratio measures the share of total employment or output contributed by the largest firms in the whole economy, or in large sectors of it.

Aggregate demand is the total quantity of all goods and services demanded in a certain time period.

Aggregates are the total or sum of individual elements. For example, aggregate consumption is the sum of all the individual consumers’ consumption in the economy. Similarly, inflation is measured by the sum of all price changes aggregated by weighting into a single price index tracking movements in the overall level of prices.

Alienation is a sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour, because workers are not involved with the satisfaction of producing a finished product and do not feel part of a team.

Allocative efficiency means that resources are allocated according to consumers’ willingness to pay. It is argued that competitive markets are best at achieving allocative efficiency. It exists when it is not possible to bring about a Pareto improvement by changing the product mix. When the slope of the production possibility boundary is equal to the rate at which consumers as a whole are prepared just to substitute one good for another, then at this point there will be both technical (production) efficiency and allocative (product-mix) efficiency - both are needed for Pareto efficiency.

Allocative role This is the role of government in correcting the allocation of resources by the market, where this has been defective in some way.

Alternative energy New forms of energy which are less polluting.

Anthropocentric (centred on humankind), or light green, refers to the philosophical position which is only concerned with environmental problems to the extent that they affect humans.

Anti-competitive practices These are practices by one or more firms that are deemed to abuse dominant market positions; they include imposing unfair prices, limiting or controlling of production or markets and enforcing other firms to sign contracts with unfavourable obligations.

APEX (advanced passenger excursion) ticket This is a reduced-price ticket which must be bought at some specified time in advance and cannot be cancelled.

Arc elasticity is the average value of price elasticity of demand over a segment of the curve.

Asian crisis began in Thailand in 1997 when the country was unable to repay its debts, and governments and banks elsewhere severely curtailed their lending to a number of South East Asian countries. A loan package from the IMF plus action taken by the countries themselves had reduced the severity of the crisis by 1999.

Asian tigers is a term that was originally applied to the newly-industrialising countries of Asia and the Pacific, such as South Korea, Singapore and, more recently, Malaysia.

Asset stripping occurs when a company is taken over with the object of closing all or part of it down so that its assets may be realised. This can occur when a company’s real assets (land, capital equipment, etc.) have a greater value than its stock market valuation.

Assets are things owned by an individual or organisation, e.g. a bank (property, cash, stocks, bills etc.).

Austrian school This is a school of thought in economics that originated in Austria. It emphasises the importance of the individual and freedom of choice, while suggesting the role of the state should be minimised. The entrepreneur is seen as the crucial factor of production. It stresses the importance of the entrepreneur and innovation in capitalism, and prefers the autonomy of the individual to that of the state in economic activity in most circumstances.

Authoritarian politicians, on both the right and left wing, argue that the state should decide rather than the individual.

Automatic fiscal changes result from some change in the economy, e.g. an increase in unemployment automatically increases government expenditure on unemployment benefits. In fact, it is the case that deficits tend to increase automatically in times of recession and decrease in times of recovery. These fiscal weapons which automatically boost the economy during recession and dampen it in times of recovery are referred to as automatic stabilisers.

Autonomous consumption is consumption that is not dependent on income.

Autonomous investment is investment determined by exogenous factors.

Average There are three different types of average used in mathematics: arithmetic mean, median and mode, and it is best to look at the meaning of each of these in turn.

  1. Arithmetic mean This average is found by adding together all the values in a set (collection) of values, and dividing by the number of values, e.g. if the values are 1, 2, 2, 4, 6, then the mean is 3.
  2. Median If a set of values is arranged in order of size, then the median value is the middle value. If there is an even number of values then the median is the average of the middle two values, e.g. if the values are 1, 2, 2, 4, 7, then the median is 2.
  3. Mode The mode is the most frequently-occurring value in a set of values, e.g. if the values are 1, 2, 2, 4, 7 then the mode is 2.

Average fixed costs (AFC) are total fixed costs divided by output (the quantity of a good produced).

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

Average price level (P) can be calculated by adding the value of all transactions and dividing by the number of transactions. This could be done for all transactions, including intermediate transactions, or alternatively only for final production transactions.

Average propensity to consume (APC) is the proportion of income devoted to consumption.

Average propensity to save (APS) is the proportion of income devoted to savings.
The APS is calculated as: APS = S/Y

Average total costs (ATC) are total costs divided by output (quantity produced).

Average variable costs (AVC) are total variable costs divided by output.

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Baby boom The number of people born just after the Second World War in Europe was larger than normal, because the war had delayed many decisions to start a family. People born at this time are sometimes referred to as ‘baby boomers’.

Balance of payments is a record of a country’s monetary transactions with the rest of the world. The term is used to describe the difference between exports and imports. A surplus occurs when exports are greater than imports; a deficit occurs when imports are greater than exports. Overall there is a balance of payments, with any surplus or deficit on the current account of the balance of payments (exports and imports) being balanced out by movements of money on the capital account.

Balance of trade The balance of the receipts earned by selling exports, on the one hand, and the payments made to purchase imports from abroad, on the other.

Balanced growth actually means that all real parts of the economy are growing at the same proportional rate (balanced development, on the other hand, indicates the simultaneous development of all sectors of the economy).

Bank of England The UK’s central bank.

Bank for International Settlements (BIS) was established in 1930 and promotes cooperation between central banks and assists them in managing their monetary reserves.

Bank multiplier is the ratio of the increase in liabilities (increased value of customers’ accounts) that will follow from an increase in a bank's liquid assets.

Barriers to entry make it difficult for new firms to enter a market; in such circumstances the established firms, or incumbents, may be able to charge a higher price and make more profit than if entry to the market was relatively easy. Barriers to entry can be divided into structural barriers, which tend to occur naturally in an industry and include capital requirements and economies of scale, and behavioural or strategic barriers, the result of intentional decisions by the incumbents. Limit pricing is an example of the latter. Product differentiation, however, may be categorised as either type. Most consumer goods are naturally prone to a certain level of advertising in order to inform the public about the products, although established firms in these industries may also advertise with the express intention of raising costs for potential entrants. Incumbents can also use excess capacity, R&D expenditure and predatory pricing as intentional actions to ward off would-be entrants.

Barter is swapping goods without using money.

Bed and breakfast accommodation is bedroom-only accommodation offered to homeless people.

Beeching Report (1963) is the report that proposed major reductions in the UK track network because of a fall in demand and revenues.

Behavioural model of the firm is a theory of the firm developed in the 1960s, mainly associated with H.A. Simon. The firm is seen as a coalition of interest groups, including managers, shareholders, employees, customers and suppliers. Each group has goals and these may conflict. However, since each group has limited knowledge of the firm’s operations and of the aims of the other groups, a coalition of interests results. Satisficing rather than maximising behaviour ensues: a satisfactory level of sales, profits, wages or quality of product is sought. Each goal takes the form of an aspiration level.

Benefit principle argues that people should pay taxes in proportion to how much they benefit from government expenditure.

Benefit system This is the system of benefits for people who are unemployed, sick, disabled or retired.

Bequest valuations concern the wish to pass on environmental resources to the next generation.

Bilateral agreement This is an agreement between two countries about the rights of airlines based in one country giving them permission to carry passengers and overfly the other country, and to land at their airports.

Bilateral monopoly exists when a monopsonist is bargaining with a monopolist. This may the case, for example, when a monopsonist buyer of labour, such as the government, faces a monopolist seller of labour in the form of a trade union.

Bills of exchange are documents issued by companies to finance trade, for example an importer paying a supplier. They show a commitment to pay a sum of money at a specified future date, and can be discounted, i.e. sold before that date for less than their face value, for example to a bank which will give the supplier the money now and receive the full value on maturity.

Biodegradable A characteristic of manufactured products which means, once discarded, that they can be broken down into chemicals which do not pollute the environment.

Biodegradability The extent and speed at which man-made chemicals which are harmful to the environment break down into compounds which can be used safely by animals, plants and ecological systems.

Brand loyalty occurs when consumers associate good quality with a particular brand name (such as Rolex watches or Parker pens) and are therefore loyal to it in their purchases. To overcome brand loyalty a new firm may have to spend more on advertising than the incumbents.

Brand proliferation Established firms or incumbents may make it difficult for new firms to enter a market by each supplying several brands; such brand proliferation occurs among beers and lagers, breakfast cereals, cigarettes, and soaps and detergents.

Break-even chart A diagram to show the profit and loss position of a firm over a range of outputs; it usually uses linear total cost and revenue functions for simplicity.

Bretton Woods System This was an exchange rate system, adopted in 1944 and lasting until the early 1970s, whereby currencies were pegged or fixed to the dollar (although they could be adjusted in the long term, hence the term ‘adjustable peg system’) and the dollar was convertible into gold.

Brownfield sites are areas of land where derelict housing or factories need to be cleared before redevelopment is possible. Sometimes the land is polluted and is costly to improve.

Brundtland report (1987) promoted the idea of sustainable development (see Sustainability).

Budget is the annual statement, given by the Chancellor of the Exchequer in March, of the government’s spending and taxation plans for the coming fiscal year, 6 April until the following 5 April.

Budget deficit means that the government spends more than it collects in taxes.

Budget surplus means that the government receives more in taxes than it spends.

Budget line shows all the combinations of two products that can be purchased with a given level of income.

Building societies are specialist financial institutions owned by their customers that assist home buyers by providing finance, e.g. with mortgages, and they often enjoy special privileges from the state.

Bulk buying is the purchase by one organisation of large quantities of a product or raw material that 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.

Bureaucracy refers to the administration of an organisation using many layers of management, and complex procedures for decision making which can sometimes raise costs and make a firm less flexible.

Bus lanes are a good example of rationing. By giving priority to buses during the peak period, bus lanes speed up the buses and make them a more attractive alternative.

Business cycle describes the way in which capitalist economies have successful periods with high growth and low unemployment, alternating with recessions where output may actually fall and unemployment rises. In other words, it describes the tendency in capitalist economies to instability with periods of high employment and high growth (rising prices) being followed by periods of high unemployment and low or negative rates of growth.

Butter mountain The accumulated excess supply of butter resulting from the CAP, which was a particular problem in the 1980s and 1990s. There was also a beef mountain.

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Cabotage The provisions of the single market in air transport include the right of airlines to compete on the internal routes of another country.

CAP The common agricultural policy is the system of support for the agricultural industry of the EU.

Capital is defined as the stock of wealth existing at any one time. As such, capital consists of all the real physical assets of society. An alternative formulation would be that capital is all those goods that are used in the production of further output. Accountants and business people often refer to money as capital, but an economist would regard only physical assets as capital.

Capital allowances are allowances against corporation (profits) tax for investment spending.

Capital gain This occurs if the value of an asset increases over time (usually after allowing for inflation). Although land is regarded as a separate factor of production from capital, the term ‘capital gain’ is still used if land increases in value.

Capital gains tax is charged on any increase in the value of assets when they are sold (the house you live in is exempt).

Capital output ratio is the ratio of the value of capital to the value of output.

Capitalisation It is argued that the main effect of subsidies going to efficient farmers is to increase the value of agricultural land, where a subsidy or tax on a product is transferred into the capital value. Farmers appear not to be making very excessive profits, but that is because the cost of acquiring the land is set against profits.

Capitalism refers to the private ownership of the means of production. It is the organisation of production through the private sector. Usually economic decisions in such a system will be left to individuals interacting through market mechanisms. Hence the term free market is often used.

Capped interest rate mortgages have an interest rate which is usually variable, but which cannot rise above an agreed level, e.g. if the interest rate is capped at 6 per cent, then this is the maximum which can be charged.

Carbon tax is a tax proposed by the EU and levied on the carbon content of fossil fuels used to generate electricity.

Cardinal utility assumes that utility can be measured in units known as ‘utils’. As a result, if one selection of commodities is preferred to another, it can be stated by how much it is preferred.

Cash ratio is the ratio of cash (assets) retained to total deposits (liabilities) and has sometimes been used as a means of monetary control by the Bank of England.

‘Casino capitalism’ refers to the gambling aspect of capitalism as found in stock exchanges and foreign currency speculation, rather than its productive aspect.

Ceiling price is where the authorities stipulate a maximum price for a commodity.

Central banks are usually owned and operated by governments and their most significant functions are in controlling the currency and in implementing monetary policy. They do not generally trade with individuals.

Central business district (CBD) is the area in the centre of a town or city where the main retail and office buildings are located (and increasingly leisure activities). Land prices are usually higher as a result.

Certificates of deposit are certificates issued by financial institutions representing ownership of deposits of money held by them, usually tied up for a minimum period of time. The certificates can be sold by the owner, but the purchaser will have to wait until the date at which the deposit can be withdrawn.

Ceteris paribus All other things remaining constant. When everything else remains constant the effect of changing just one thing at a time can be seen.

CFCs Chlorofluorocarbons are a group of chemicals which break down ozone in the atmosphere.

Charges are prices in the UK’s welfare state, often not covering the full costs, e.g. for medical prescriptions and dental treatment.

Charter mark is a mark of good service given by the government to public sector or newly-privatised and regulated businesses.

Charter market This mainly operates to take package tour holiday makers to their destination.

Cheques are an instruction to your bank to transfer money to the account of the person or organisation to whom you have made out the cheque.

Chernobyl nuclear accident was a serious malfunction of a nuclear power plant in the former USSR in the 1980s, which resulted in atmospheric pollution across Northern Europe, and local pollution around the site of the power station, which still remains a serious problem today.

Classical dichotomy This doctrine states that nominal prices are determined by the quantity of money but that the quantity of money has no effect on real things, e.g. output and employment.

Classical economists. This term refers to early economists, starting with Adam Smith, prior to the ‘marginalist’ revolution of the 1870s that was introduced by Marshall into the UK. The school is characterised by reliance on average concepts and on the labour theory of value.

Classical or real wage unemployment occurs when the real wage is above the equilibrium level and stays there.

Clearing of cheques takes place when you have received a cheque and paid it into your bank account, and the bank has then passed it to the bank on which it was drawn and asked for payment. Of course, this is not done individually for each cheque, but centrally.

COBA is a computer program used by the Government to evaluate road investments, including the costs and benefits of building the road, and value of saving time, vehicle operating costs, road accident death or injury, etc.

Cobweb effects are found in unstable markets (particularly agriculture) resulting from time lags in production (see Chapter 6).

Cobweb theorem is a theory explaining the instability of certain markets (particularly agriculture) resulting from time lags in production.

Collective action is a solution to the public good problem that involves social incentives for the cooperative production of the public good, e.g. trade union collective wage negotiation.

Collective bargaining refers to the fact that trade unions negotiate on behalf of all their members. If agreement is not reached on a certain issue, such as the size of a wage rise, they may take action collectively to enforce their demands.

Collectivism is a system whereby economic decisions are taken collectively by planning committees and implemented through the direction of collectively-owned resources, either centrally or at local level. Communist and socialist systems usually use forms of collectivism, but all economies have areas of activity using collectivism, e.g. state-provided school education in the UK.

Collusion refers to cooperation between firms to limit competition; it can take the form of any or all of price, output or market share agreements; formal collusion is a price- or output-fixing ring known as a cartel, whereas informal collusion refers to some kind of price leadership.

Collusive arrangements are sometimes made between oligopolistic firms to increase their profits.

Commercial banks are the profit-motivated banks involved in high street banking activities.

Commodity money consists of products that may also be used as money.

Common Agricultural Policy (CAP) The common agricultural policy is the system of support for the agricultural industry of the EU.

Community charge was a system of local taxation, known as the ‘poll tax’, introduced by Mrs Thatcher’s Conservative Government to replace the rating system. Everyone paid the same amount, although some rebates were available. It was later replaced by the council tax after widespread protest.

Comparative advantage exists when one country is better at producing two goods than another country but has a relative advantage in one of the two (the country may be a little bit better at producing one good, but a lot better at producing the other good). Whenever the opportunity cost ratio of production between two or more commodities within a country differs from that of another country, there will be a comparative advantage. The country with the lowest opportunity cost of a product (measured in terms of the other product) has the comparative advantage in that product. It follows that the other country must have a comparative advantage in the other product. The basic principle is that the potential for mutual benefit arises whenever the rates of internal substitution between economic agents differ and the terms of trade between the agents provide an external exchange rate that lies between these internal rates. This principle applies to all exchange between any one economy and another; international trade is just one application of this principle.

Comparative statistics is the method of economic analysis where two equilibrium positions are compared, before and after a change in the market, in order to analyse the consequences of that change.

Competition policy The policy of the government directed at the regulation of monopoly; the legislation deals with restrictive practices between firms plus anti-competitive practices by one or more firms and the abuse of dominant positions; it also covers mergers that fall within the auspices of the legislation.

Complements Products that are usually consumed together, e.g. cars and petrol.

Composting Food waste and some garden waste can be turned into soil by composting in compost heaps in people’s gardens.

Comprehensivisation of schools Comprehensive schools are non-selective secondary schools taking students from 11 or 12 to either 16 or 18 years of age. They replaced the previously selective system in many areas in the 1970s and 1980s, which placed the most able students in Grammar schools at the age of 11.

Compulsory competitive tendering (CCT) is a system where public sector bureaucracies have to compete with alternative bids from the private sector for the production of services.

Conglomerate merger, or conglomerate integration, refers to the combination of two firms with no obvious common link between them.

Conspicuous consumption is consumption designed to impress others rather than something that is wanted for its own sake.

Consumer cooperative This is a registered retail business that is owned essentially by the people who shop there and who wish to make a minimum deposit on a share in the organisation.

Consumer expenditure deflator is a measure of the rate of inflation that is slightly wider than the RPI in that it includes some categories of people (such as those living in institutions) who are excluded from the RPI.

Consumer sovereignty The idea that it is consumers who are in control of the market by deciding which products to buy.

Consumer surplus is the difference between what people are willing to pay over and above the market price, summed over all consumers.

Consumption function is a model of the relationship between consumption and income.

Contestable markets are markets where the threat of potential competition provides the pressure to keep prices at a reasonable level, e.g. bus routes. If price is raised sufficiently, new entrants will be attracted into the market. Thus, it is a market in which entry is relatively easy. A perfectly contestable market is one in which both entry and exit is free and without cost, and in which any profit at all immediately attracts new entry.

Contracted out means that a part of production is produced by another organisation, e.g. cleaning.

Contraction in demand/supply A movement along the supply or demand curve to the left, resulting in a lower level of output.

Correlation exists when there is a connection between two variables. The closer the two variables move together, the higher is the degree of correlation. The maths behind this measure is beyond the scope of this book.

Cost-benefit analysis (CBA) is a type of investment appraisal that considers social as well as private costs and benefits.

Cost-push inflation occurs when increasing costs of production push up the general level of prices.

Costs of inflation can be divided into those costs where the rate of inflation has been perfectly anticipated and is fully taken into account in prices and incomes and the ostensibly much larger costs that result from imperfectly anticipated inflation which is not fully allowed for in economic transactions.

Council housing is housing owned by local authorities, which is rented out to local people.

Council tax is the current system of local taxation in the UK and is based on the value of a house or other home, which replaced the community charge and, before that, the rates system.

Counterfeit is fake (forged) money, bills etc.

Credit cards are a means of card payment that gives the payer credit, usually involving a credit limit and a minimum monthly repayment.

Credit unions are much more important in the USA and Europe than in the UK. They are generally small and usually have been established by a group of individuals with a common interest, such as farmers.

Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of one good (B) to changes in the price of another good (A).

Crowding-out A theory that private sector activity can be reduced by the state increasing its expenditure. It is argued that government borrowing may starve industry of funds and force up interest rates. This argument is put forward by monetarists and neo-classicists but is hotly disputed by Keynesians.

Customs and excise duty Customs duty may be levied on goods coming into the country, but this only accounts for 1% of government revenues. Excise duty is levied on a commodity, no matter where it is produced; it is an indirect tax.

Cycle of deprivation A sociological idea that poor households with low educational achievement, low aspirations and income often pass these problems on to the next generation.

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Dearing Report on Higher Education (1997) suggested changes in the finance of higher education in the UK, proposing tuition fees and student loans for their living expenses.

Debit cards are a means of card payment that reduces the payer’s bank account, much like the cheque system.

Deep green is the ecological approach which values all living systems, valuing the environment for itself and not just for its value to humankind.

Deficiency payments are made on many products to bring prices up to a guaranteed level and enable farmers to compete with imports.

Deficits (current account) A situation where imports exceed exports, resulting in a net outflow of money from the country.

Deflationary fiscal policy means using fiscal restraint to slow down the economy and reduce inflation.

Deflator is an index of price changes used to remove the effects of price changes in ‘nominal’ or current price measures and so reveal ‘real’ or constant price changes.

Degree of monopoly Rather than monopoly being an ‘either/or’ situation, we can say that the extent of market domination or degree of monopoly increases the higher a firm’s industry and market share; the lower the price elasticity of demand for its product, the lower the cross elasticity with other products and the higher the barriers to new entry.

Demand The demand for a commodity is the quantity of the good that consumers wish to purchase over a specific of period of time. The demand curve shows the amount that consumers wish to purchase at any given price, all other things being constant.

Demand-deficient or cyclical unemployment exists when there has been a fall in the aggregate demand for goods and services, and a recession ensues.

Demand-pull inflation occurs when aggregate demand exceeds the value of output (measured in constant prices) at full employment.

Demand side Factors influencing aggregate demand.

De-merit goods are goods which people should be discouraged from consuming, e.g. heroin.

Demographic change occurs when there is an increase in the number of people in a population, or changes in the proportions in each age group.

Demography is the study of populations, their growth, characteristics and structure.

Demutualisation is the sale by customers to the private sector of building societies or similar mutually owned organisations.

Dependent variable is the variable whose behaviour is being explained by the influence of the independent variable.

Depletion of the ozone layer is the reduction of the layer of ozone which protects the earth from ultra violet radiation, caused by a group of chemicals called CFCs used as propellants for spray cans and refrigerants for fridges and freezers, but now banned from use.

Depreciation rate is the rate at which capital in a physical asset is used up as the asset becomes worn out or obsolete.

Deregulation The removal of regulations, usually done to free up the market.

Derived demand for the factors of production When a firm demands a factor of production it is said to be a derived demand, i.e. the factor is not demanded for itself but for the use to which it can be put.

Detached houses are free-standing houses which are not attached to any other house.

Developing countries are those where real per capita income is low when compared with that of industrialised nations.

Development Areas are geographical areas that are performing poorly in economic terms and need government intervention to encourage firms to relocate or new local enterprises to start.

Development Corporations are independent organisations set up with the objective of developing a region, or area, e.g. the Docklands Development Corporation was established to attract business to the London docks area after most sea transport had moved to deep-water ports.

Development economics is concerned with the problems of, and economic policies towards, relatively poor countries.

Diminishing marginal rate of substitution The curvature of the indifference curve is based on the idea of diminishing marginal rate of substitution, where the rate of exchange of X for Y changes along the whole length of the curve. If indifference curves were straight lines, then the marginal rate of substitution would be constant.

Direct debits are regular payments from your bank account to someone else's account where the amount can be varied by the owner of the destination account.

Direct taxes are those which are levied directly on people’s incomes, the most important being income tax.

Director General of Fair Trading is a government officer responsible for advising the Secretary of State for Trade and Industry on mergers, monopolies and restrictive practices (see Chapter 23).

Disbenefit The opposite of benefit. Something you would have to be paid for if you were to be persuaded to accept it, e.g. work.

Discount houses are peculiar to UK banking and make their money by discounting bills of exchange with funds mainly borrowed from the commercial banks.

Discount market is the market for bills, called the discount market because the final repayment value of the bill is reduced by the discount rate (equivalent to the interest rate) when it is purchased.

Discretionary fiscal changes are those policies which are a result of some conscious decision taken by the government, e.g. changes in tax rates or in the pattern of expenditure.

Diseconomies of scale exist when costs rise as output rises.

Disequilibrium We use the idea of equilibrium, or balance, as a device to help us understand markets, but in many markets there is a constant state of disequilibrium with prices constantly on the move.

Disequilibrium unemployment occurs when the real wage rate is above the equilibrium level. It arises because trade unions have secured wages above the market-clearing level, or due to minimum wage legislation, or because there has been either a fall in the aggregate demand for goods and services or an increase in the aggregate supply of labour.

Disintermediation refers to the situation where, if not all financial institutions were subject to some kind of restriction on their lending (through, say, the imposition of a statutory liquidity ratio for banks only), then lending activity would simply shift from the banks to these other institutions.

Dissaving is running down savings or borrowing.

Distortions in a market result from interventions from the government which alter people’s behaviour in an undesirable way.

Distributed time lag This is associated with manufactured goods. For example, if there is an increase in the demand for cars, then manufacturers can respond to this by using their factories more intensively. However, if this does not satisfy the demand, then supplying more will have to wait upon the building of new factories. The response is thus more complex and distributed over time.

Distribution of electricity is the local movement of electricity to the customer.

Distributive role This role of government is concerned with adjusting the distribution of income which results from the operation of the market.

Diversification is the strategy adopted by some organisations of being involved in the production of a number of different products, possibly in completely different markets. It has the advantage that, if there are problems in one market, then profits from the other markets keep the organisation going.

Dividends are the amount paid to shareholders from a company’s profits.

Division of labour refers to the dividing up of productive tasks into narrower specialisations. According to Adam Smith, this is one of the main ways of increasing productivity and output in an economy.

Double coincidence of wants For barter to work, you must want what the other person has and they must want what you have.

DTI is the Department of Trade and Industry.

Dual economy refers to the notion that development can create a distinct split between the subsistence part of an economy where wages are very low and the newly-industrialising section which uses more capital-intensive techniques and where wages are higher.

‘Dump the pump’ campaign was a public campaign against the petrol tax escalator which succeeded in preventing further automatic rises in petrol tax in the UK. It was a political campaign mounted particularly by the road haulage industry but gaining wider support.

Dumping Selling a product abroad below the domestic price to clear overproduction.

Duopoly is a special case of oligopoly where provision of a good or service is by two producers only.

Dynamic analysis considers markets that may never be in a state of equilibrium.

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Eastern Bloc refers to the group of formerly Communist states in Eastern Europe, dominated by the USSR.

Eco-labelling A marketing solution to environmental problems, drawing the attention of the consumer to the environmental advantages of choosing a brand or product by emphasising its environmental benefits.

Economic goods Goods or services that are scarce in relation to the demand for them. This means that a price can be charged. The establishment of property rights could also turn a previously free good into an economic one.

Economic growth is an increase in the real GDP of a nation, i.e. the money in the economy, GDP-adjusted for inflation. This must grow faster than population growth for people to feel better off. It occurs when there is an increase in the overall output of the economy caused by an increase in the economy’s productive capacity. It can also be thought of as an outward shift in the production possibility frontier.

Economic problem refers to the scarcity of resources in relation to human wants and needs. It is scarce in the sense that it forces individuals and societies to have to make choices.

Economics A standard definition is that economics is ‘the human science which studies the relationship between scarce resources and the various uses which compete for these resources’.

Economies of concentration When a number of firms in the same industry band together in an area, they can derive a great deal of mutual advantage from one another. Advantages might include a pool of skilled workers, a better infrastructure (such as transport, specialised warehousing, banking, etc.). It can be seen that economies of concentration are a form of external economy.

Economies of disintegration This refers to the splitting off or subcontracting of specialist processes which can be thought of as an aspect of economies of concentration.

Economies of range are the cost reductions per passenger kilometre available to airlines that fly on longer routes.

Economies of scale exist when the expansion of a firm or industry’s output allows the product to be produced at a lower unit cost.

Education regulator (OFSTED) or Office of Standards in Education is the UK regulator for schools.

Effective demand Keynesian economics distinguishes between the level of demand implied by price levels (nominal demand) and the level of demand as determined by the actual volume of demand. Hence, relative prices in the economy may be those which could correspond to full employment but the actual volume of aggregate demand might still be insufficient to produce full employment.

Effective incidence of a tax measures who actually pays the tax after prices have been changed to take account of the imposition of a tax, e.g. if petrol tax rises, petrol prices may rise, shifting the incidence on to the consumer.

Efficiency in its simplest sense in economics means minimising the costs of production, but in its wider sense means allocating resources in the economy in the best way possible. It refers not just to the idea of producing at lowest cost, but also to the idea of allocating resources according to people’s preferences as expressed by their willingness to pay.

EFTPOS stands for Electronic Funds Transfer at Point Of Sale.

Elastic demand Demand is price elastic when a percentage cut in price brings about a greater percentage expansion in demand so as to increase total revenue.

Eligible liabilities are a subset of liabilities that the Central Bank counts when calculating liquidity ratios.

Employment refers to those people in some form of paid work.

Endowment insurance policy A policy which is paid into over a set period and which yields a lump sum payment at the end of the period (or on the death of the policyholder if this is sooner) which can be used for paying off a mortgage.

Endowment life assurance is a type of life assurance that also acts as a savings scheme, paying out after a specified number of years, even if the person is still alive. The money is usually invested on the stock exchange.

Endowment mortgages require that no repayment of capital is made until the end of the period. Instead payments are made into an endowment insurance policy.

English Regional Development Authorities (RDAs) are responsible for regional development.

Enterprise is the organising and risk-taking function of an organisation. In a business owned by one person it is easy to identify as the contribution of the entrepreneur (see below), but in larger organisations or the public sector it is sometimes more difficult to identify.

Enterprise culture exists when the development of new businesses by ordinary citizens is considered normal and is encouraged by society.

Enterprise Zones Areas of the economy which are given exemption from certain types of taxation and planning regulation for a period of time to stimulate their development.

Entrepreneur is an individual who organises other factors of production and takes risk with capital. It is not only the owner of an organisation who acts in an entrepreneurial way, and in larger organisations, managers may be entrepreneurs. Entrepreneurs in public or voluntary organisations that have objectives other than making a profit are sometimes referred to as social ‘entrepreneurs’.

Environmental impact assessment (EIA) is an assessment of environmental impact which does not include economic values, and is often undertaken alongside cost-benefit analysis.

Endogeneous means inside the system or model.

Equality of opportunity is the equity principle often used in education. It is not possible for students to have equal ability, but equality of opportunity to succeed is something the system can move towards.

Equilibrium price The price which exactly balances supply and demand, meaning that the market is at rest, and no changes in price or quantity will occur unless the conditions of supply and demand change. It occurs where the demand curve cuts the supply curve and is the point at which the wishes of buyers and sellers coincide, leaving no surplus or shortage of the product.

Equilibrium unemployment occurs when the aggregate demand for labour in the economy equals the aggregate supply of labour. It arises due to mismatches in labour supply and demand in particular markets or regions.

Equimarginal utility is the condition of consumer equilibrium where the amount of marginal utility per pound spent is the same for all products.

Equity The principle of justice or fairness (also used to mean the portion of an asset owned by an individual). What exactly is fair is a subjective matter and depends on the individual’s values. In economics it means fairness or justice and relates to the distribution of income and wealth.

ERM was the exchange rate mechanism of the EU, a system of linking EU currencies together at fixed exchange rates, with a little fluctuation in value allowed either way. It was replaced by monetary union when the majority of European countries adopted a common currency, the euro.

EU (the European Union) is a trading bloc of Western European countries, which is currently slowly expanding into Eastern Europe as well. It has common external tariffs (taxes on imports) but free trade between its members.

Eurocurrencies are any deposits held in a financial institution that are not denominated in the national currency, i.e. if a British bank has holdings of euros.

Eurocurrencies market This began as the eurodollar market, which referred to the holding of US dollars in European banks. Today a eurocurrency is any holding of currency in a financial institution which is not denominated in the national currency. This has been much reduced since the introduction of the euro replaced most EU member states’ national currencies.

European Bank for Reconstruction and Development (EBRD) was set up in 1991 to promote private enterprise and to foster market-oriented economies in Central and Eastern Europe.

European Exchange Rate Mechanism (ERM) In this arrangement certain European Community countries were meant to act together to keep their exchange rates within agreed bands of permitted fluctuations.

European Regional Development Fund (ERDF) is part of the broader EU Structural Funds.

European Single Market This is the idea that European countries belonging to the European Union are operating one market with common regulations about products and (for some countries) also a single currency, which was initiated by the Maastricht Treaty.

Excess demand is the surplus of demand over supply that occurs when price is held below the equilibrium level. The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price.

Excess supply A situation where supply exceeds demand as a result of price being held above the equilibrium level. The surplus of production over sales that occurs when price is set above the equilibrium level (see Figure 9.1).

Exchange rate is the rate of exchange between nations’ currencies. Exchange rates are the price that one currency is in terms of another.

Excise duty is a specific (or unit) tax that is levied per unit of the commodity, irrespective of its price.

Existence values are values placed on the environment in stated preference questionnaires that express willingness to pay for the continued existence of an environmental resource, without necessarily using it.

Exit means the possibility of leaving a market, which may sometimes be difficult for a company without making a loss.

Exogeneous means outside the system or model.

Expansion path shows the least cost factor combinations for various levels of expenditure.

Exponential growth is cumulative growth at a steady rate that starts off slowly but then rises rapidly.

Export-led growth policies denote the gradual removal of trade barriers, such as tariffs and quotas, by certain developing nations and the opening up of particular industries, which may be subsidised, to international competition.

Extension in demand/supply A movement along the supply or demand curve to the right, resulting in a higher level of output.

External benefits are benefits which result from the private actions of an individual or organisation, but which accrue to someone else, for instance individual vaccination against disease reduces the chance of everyone getting the disease. External benefits are sometimes referred to as social benefits.

External costs are costs which result from the private actions of an individual or organisation, but which fall on someone else, e.g. pollution from industry. External costs are sometimes referred to as social costs.

External economies are those which are gained when a number of organisations group together in an area. These must be distinguished from internal economies.

External growth of the firm occurs through mergers and takeovers, of which there are three main types: horizontal, vertical and conglomerate.

External marginal benefit (EMB) Marginal benefit is the additional benefit received as a result of an additional unit of output of a product. If this is received by people who have not paid for the product, it is referred to as an external marginal benefit.

Externality An externality is a side-effect of economic activity that affects people or companies not directly involved in that activity. Externalities are costs imposed on third parties by producers or consumers. They are said to exist when the action of producers or consumers affects not only themselves but also third parties, other than through the normal workings of the price mechanism.

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Factor incomes Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit. These payments are the incentive which is used to persuade the owners of these factors of production to supply them to the market.

Factor returns are other terms for factor incomes.

Factor rewards or Factors of production are the resources needed to produce goods and services. These have traditionally been classified under four headings: labour, land, capital and enterprise.

Fiat money is based solely on the faith of the public in its value and is not ‘backed’ by stocks of a valuable commodity like gold.

Fibre-optic cable replaced traditional wire transmission of telephone calls and is able to carry many calls simultaneously, reducing cost and making entry into the market easier. It vastly increases the capacity of cables to carry information.

Fiduciary issue is any currency issued that is not fully backed by gold.

Final transactions are transactions that are involved in the purchase of goods and services that make up GDP, rather than transactions that involve partly-finished goods.

Finance houses (hire purchase companies) These institutions, which are involved in hire purchase, obtain some of their funds from the money market.

Financial intermediaries are those institutions that channel funds from lenders to borrowers, e.g. banks.

Fine tuning is the use of fiscal and monetary policy to manage the economy by manipulating aggregate demand; hence it is also referred to as demand management policy.

Firm This is the unit of ownership and control.

First optimality theorem If, in all markets, there is perfect competition, no externalities, public goods or market failure connected with uncertainty, then the resulting allocation of resources will be Pareto efficient.

Fiscal drag Where progressive taxes are concerned, inflation will mean that the Chancellor of the Exchequer takes an increasingly larger portion of a person’s income as increased money wages raise them from a lower to a higher tax bracket.

Fiscal policy refers to the regulation of the economy through government spending and taxes.

Fiscal restraint is a policy of holding back the economy by reducing government expenditure or increasing taxes.

Fiscal stance of the government refers to the expansionary or contractionary nature of its fiscal policy depending on its potential impact on the level of economic activity, i.e. spending, output and jobs. If the government raises its expenditure and/or lowers taxes this will either increase the budget deficit or reduce the budget surplus and can have an expansionary (or ‘reflationary’) effect on the economy by shifting the aggregate demand curve to the right. Such a loosening of fiscal policy may also lead to a rise in inflation and a worsening of the current account of the balance of payments. Alternatively, a reduction in the budget deficit or an increase in the budget surplus can have a contractionary (or ‘deflationary’) impact on demand. This tightening of fiscal policy may be accompanied by a fall in inflation and an improvement in the balance of payments.

Fixed capital refers to those investment goods that are demanded only because they are needed for the production of other goods.

Fixed costs (FC) are those costs that do not alter with output in the short run.

Fixed-interest mortgages charge the same rate of interest as is agreed at the beginning of the mortgage.

Flag carrier refers to an airline that is nominated by a country as a designated airline under bilateral agreements, which can benefit from the rights laid out in such agreements.

Flat price is any price that is artificially imposed by law.

Flexible labour markets is a general term used to describe the reforms of trade union legislation from the 1980s onwards which have made restrictive practices more difficult and hiring and firing easier and cheaper options.

‘Floating’ voter is someone who is undecided about which political party to vote for and is capable of being persuaded to change his or her mind.

Floor prices refer to where a minimum price is set by the authorities. If the price falls below this level, the authorities may intervene in the market to buy up surplus stocks in order to maintain the price.

Flow pollutant is a pollutant that enters the environment, creates a harmful effect, but does not build up in the environment.

Flue gas desulphurisation is the technique of removing sulphur from the chimney flues of fossil fuel-burning power stations by placing alkaline filters in them.

Foreign aid is the giving of financial assistance by richer countries to poorer nations, through grants, loans or technical assistance.

Foreign direct investment (FDI) is what multinational firms engage in when setting up plants or subsidiaries abroad.

Formal (or legal) incidence of a tax means it falls upon the person or organisation legally responsible for paying the tax.

Formula funding is the system of funding schools using a formula based on the number of students that they attract.

Fossil fuel levy This was a tax paid by electricity generating companies using fossil fuel, which was used to subsidise nuclear power and renewable energy, but which was phased out in the mid 1990s.

Fossil fuels comprise coal, oil and gas.

Franchise operators are the companies that win the franchise to operate a service.

Franchised means that the running of a business is handed over to another organisation for an agreed period of time, usually in return for a payment by the franchisee.

Franchises are contracts by which companies agree to operate a service for a period of time, subject to meeting service quality indicators from the franchisor. The award of the franchise contract is usually made after competitive bidding.

Franchising In such an arrangement one party, the franchisor, sells the right to another, the franchisee, to supply and market the product, possibly for a specified period of time. The franchisor supplies the brand name, parts and materials and managerial advice, whereas the franchisee, who pays an initial fee and receives a percentage of the sales or profits, supplies capital and local market knowledge.

‘Free at the point of use’ is a phrase used in the NHS to indicate that the customer (the patient) does not pay for services, although there may be prices charged between organisations within the NHS, for instance from a primary care trust to a hospital for treatment of its patients.

Free riding is the action of individuals taking advantage of a public good provided by other individuals or groups without payment or participation in the good’s reduction.

Freight transport is the transport of goods.

Friedman, Milton He is credited with inventing monetarism.

Frictional or search unemployment refers to those people displaced by the normal workings of the economy.

Full employment occurs where all those who wish to work at the prevailing wage do so. After the Second World War, UK governments were committed to maintaining ‘full employment’. This was partly a response to the high unemployment in the 1930s and partly a commitment to the soldiers returning from the War. It has never been possible to create zero unemployment.

Functions are a mathematical relationship where one variable affects another.

Fundholding is the term used to describe the NHS system of giving larger GP practices a budget based on the number of patients registered with them, which is then used to purchase treatments from hospitals. This system is now being replaced by PCTs.

Funding is the conversion of short-term government debt into longer-term debt.

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Gains from trade is the increase in output resulting from specialisation, and then trade, between two or more countries.

Game theory is a mathematical technique applied to the different strategies of oligopolistic firms; it attempts to analyse the decision-making behaviour of rival firms.

Gate of entry is an airport that can be used as an international airport for scheduled flights under bilateral agreements.

GDP (Gross Domestic Product) measures the value of the output of the whole country’s economy. It includes investment goods as well as consumption goods, and goods produced by the public sector (see Chapter 15).

General Agreement on Tariffs and Trade, The (GATT) was established in 1947 and attempts to promote the liberalisation of trade through ‘rounds of negotiations’; it has been succeeded by the World Trade Organisation (WTO).

General equilibrium means analysis of a problem in the context of the whole economy.

Generation of electricity is the production of electricity by burning fossil fuels, or using nuclear energy or other means.

Gentrification is the process of turning a run-down, often inner urban area into a fashionable, usually middle class area, partly by improving the fabric of the property, but also the area’s reputation.

Giffen goods are those where a fall in the price of the good causes a fall in the demand. Giffen goods are purchased in smaller quantities when the price falls. This usually relates to people on low incomes whose diet is heavily based on a single type of food, which takes up most of their income.

Global warming is the hypothesis that the increased production of certain gases (CO2, methane and CFCs among others) since industrialisation has resulted in a gradual heating of the earth, possibly raising sea-levels and affecting weather patterns.

Globalisation is the process by which societies and markets across the world are become more similar to each other with similar cultures and product ranges. It is the process of greater economic and cultural integration as a result of the development of global brands and transnational companies.

GM crops are genetically modified crops which have their DNA altered to make them resistant to insecticides or have other desirable properties. There is some concern about them because of increased use of insecticides and cross-pollination with unmodified versions of the crop.

Government failure occurs when government intervenes in the economy to correct market failure, but also fails also to meet consumer demands by allocating resources properly, for instance by spending too little on healthcare, or spending too much on bureaucracy.

Government stocks differ from bills in that they are longer-term loans to the government and carry an annual rate of interest. Although most government stocks carry a repayment date, some do not, particularly those raised in wartime.

GP practices are the GPs’ (general practitioners’) business comprising the doctors’ surgery and the patients registered there. GPs may operate singly or in partnerships.

Grandfathering is where slots at airports are allocated to airlines on the basis of which airlines held them in the past.

Green belts around the edge of cities to prevent them sprawling into attractive recreational space around the city will raise land values at the edge of the city and in the green belt surrounding the city. Development is severely limited in the green belt.

Greenhouse effect is another name for global warming.

Gresham’s law states that ‘bad money drives out good’. Most forms of commodity money will suffer from Gresham’s law.

Gridlock occurs when road congestion gets so bad that the traffic in a wide area comes to a standstill and cannot progress.

Gross Domestic Product - see GDP.

Gross investment is investment before the subtraction of estimated depreciation, i.e. the amount of capital stock that has been used up by current production.

Gross wage rate is the wage paid to an employee plus the costs of employing that person, such as employer’s national insurance contribution.

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Harrod-Domar model extended Smith’s approach by emphasising the importance of savings and efficiency.

Hatfield train accident A serious rail accident that highlighted the need for widespread track replacement.

Hayek, Friedrich The most prominent member of the Austrian school of thought in the second half of the twentieth century. Austrians are in favour of minimising the role of the state.

‘Haze’ is the cloud of pollution over Southern Asia.

Health Authorities are part of the bureaucratic structure of the NHS with responsibility for an area or region of the country.

Heterodox Drawing eclectically on various schools rather than conforming to narrow traditions.

Hicks-Kaldor criterion is the principle, used in cost-benefit analysis, that if the gainers from a change in the economy could in principle compensate the losers, then the change is good and should go ahead (no actual compensation is required).

Home-working. This is a pattern of employment found particularly in the clothing industry, where employers send work out to people who work in their own homes. Since they do not come to a place of employment, such workers can be regarded as self-employed, usually receiving payment for their output rather than their time. Paying someone for what they produce, rather than how long they work, is called piecework.

Homogeneous output is where output is all of one quality or type, or is capable of being graded into a small range of qualities or types.

Horizontal merger, or horizontal integration, occurs when two firms in the same industry and that are at a similar stage of production combine. For example, if an oil company which already owned a string of petrol stations were to take over another competitive chain, this would be horizontal integration.

Housing Associations Voluntary (non-profit making) organisations which run and build housing for rent (and sometimes later purchase).

Housing benefit is a means-tested benefit to assist in the payment of housing rental costs.

Hubs are airports that act as junctions for airline routes (as illustrated in Figure 14.6).

Human capital means the investment in people (education or training) which raises their productive potential. Education and training add to the productivity of the workforce, and so can be regarded as (human) capital that is wanted not for its own sake but for the increased production of other goods and services. However, some economists argue that education can at least partly be regarded as a consumption good which is wanted for its own sake.

Hyperinflation is runaway inflation where the value of the currency is rapidly reduced and the currency becomes difficult to use, as its value falls noticeably on a daily basis.

Hypothecation means that the Government spends the same amount on a given sector of the economy as it raises in taxes from that sector.

Hypothetical market bias is a problem with stated preference techniques, which ask people to state values for things that they have no experience in buying or selling.

Hysteresis The tendency for equilibrium levels of a variable to gravitate towards actual values.

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Ideology is a belief about the nature of the world and/or the morally correct way to respond to it, e.g. Marxism.

Imperfect competition These are markets that are not perfect. In imperfectly competitive markets firms are price-makers; they have the power to determine their own prices. In imperfect markets the products are not perfect substitutes for each other. As a result, all imperfect competitors share the characteristic that the demand curve for their individual firm’s product slopes downward, i.e. if the firm raises its prices it will not lose all its customers as it would under perfect competition. Conversely, it can sell more of the product by lowering its prices.

Imperfectly competitive market This is one in which one or more of the assumptions of perfect competition does not hold true; in such markets firms are price-makers.

Implicit and explicit costs For resources not owned by the firm their opportunity costs are simply the prices the firm has to pay for their use. Thus, explicit costs are those that the firm is contracted to pay, such as wages, rates, electricity, etc. In the case of resources owned by the firm their costs are implicit; they are what the resources could earn in their next best alternative use.

Import levy is a tax on imported goods which has the effect of increasing their price.

Import substitution policies, by which domestic industries are heavily protected in order to replace imports, were popular among developing economies in the period immediately after the Second World War.

Incidence of a tax is the proportion paid in practice by consumers and producers.

Income accounting identity National income º National Expenditure º National product.

Income effects are the changes in consumption which result from changes to real income as opposed to changes in relative prices. The income effect in relation to taxes argues that, as taxes are reduced, after-tax total income will rise. Assuming that leisure is a normal good, more leisure will be demanded and there will be a disincentive effect of lower taxes.

Income elasticity of demand measures the degree of responsiveness of demand (the quantity demanded of a product) to changes in income (see Chapter 5).

Independent variable The variable which is used to explain the behaviour of the dependent variable.

Index number is any number, usually starting with a value of 100 in a base year, which tracks the growth in prices or quantities of production. An index is a method of expressing the change of a number of variables through the movement of just one number. The technique consists of selecting a base, which is given the value of 100, and then expressing all subsequent changes as a movement of this number.

Index-linked financial assets rise in value by the rate of inflation, thus protecting the real value of the investment paid.

Indifference map This is a set of indifference curves showing combinations of two products which give the same level of utility, each at progressively higher levels of utility.

Indirect taxes are not paid directly on income but usually levied on expenditure.

Indivisibilities Sometimes it is not possible to produce output in single units, for instance bus journeys come by the bus load.

Induced investment is investment which is determined by the level of income.

Industrial relations refers to the relationship between workers and their employees, who are often represented by trade unions for the negotiation of wages and other aspects of the work process. When this relationship goes wrong there may be strikes or other forms of protest.

Industrial revolution This occupied most of the second half of the eighteenth and the first half of the nineteenth centuries. The demand for British manufacturing goods in overseas markets and a spate of technical innovations, especially the creation of steam power, produced the necessary conditions for the rapid development of large-scale manufacturing industry.

Industry An industry is all the firms concerned with a particular line of production.

Inelastic demand Demand is price inelastic when a percentage cut in price brings about a smaller percentage expansion in demand so as to decrease total revenue.

Inelastic supply means that supply will not increase very much even if price increases.

Inferior goods are goods that have a reduced consumption (are purchased in less quantity) as income rises.

Inflation is the persistent increase in the average price of goods and services in an economy. Provided incomes are also rising modest levels of inflation need not be a problem.

Informal markets, sometimes also known as black markets, occur when a flat or ceiling official price is imposed, and a parallel informal market develops where the prices may be much higher, for instance in the case of Cup Final tickets, or for petrol or food during periods of rationing.

Information technology is used in the computer, telecommunications and televisual industries.

Inner cities are the areas immediately around the central business district that have often suffered economic and social decline as industry has relocated (usually outwards).

Insatiability of human wants is the reason for this scarcity. Despite continuous economic growth, we do not seem to have reached the point where human wants are satiated - or satisfied.

Insurance companies provide compensation to people who have suffered a loss as a result of an accident, in return for an annual payment. They also invest heavily on the stock exchange for endowment policies that pay out on an agreed date, but will also pay out if the insured dies before that date.

Intensive farming Using farming techniques designed to maximise output per acre (hectare), including fertilisers and insecticides.

Interbank market is the borrowing and lending which goes on between banks.

Intergenerational equity means fairness or justice between generations. This becomes an issue when the actions of the current generation create costs for future generations (e.g. global warming).

Intergenerational externality occurs when the actions of one generation affect the next because the effects of the pollution are long term rather than short term (e.g. global warming).

Intergenerational pollutants are created by one generation but have their effects on later generations - the best example being global warming.

Interline centres are airports where people change planes.

Intermediate technology refers to capital equipment and techniques of production that are relevant to developing economies, i.e. that are cheap to purchase and easy to use.

Intermediate transactions are transactions that do not make up final GDP, but are concerned with buying or selling partly-finished goods.

Intermodal competition is competition between different modes of transport, e.g. rail and air between London and Glasgow.

Internal economies of scale are those obtained within one organisation.

Internal economies are reductions of costs that are achieved because of internal changes within an organisation. External economies result from a large number of organisations in the same or similar industries being able to exploit a pool of skilled labour, information, or specialised supply firms.

Internal growth of the firm can occur when it invests in new plant and equipment; it can take the form either of increased penetration into one’s existing market or via some kind of diversification strategy involving new products and/or new markets (perhaps in other countries).

Internal market Although services in the welfare state are often provided free or at reduced cost, it is still possible to set up an internal market within, for instance the health service with competition between hospitals or doctors, and revenues for services delivered, patients treated etc.

Internalised When the effect of an externality is internalised, a tax, a subsidy or an organisational change brings the impact of the externality back to the organisation or individual that caused it.

International agreement An agreement which is legally binding under international law.

International Airlines Trade Association (IATA). This is the trade organisation of the international airline industry, which was also responsible for price fixing when it operated as a cartel from the late 1970s onwards, prior to liberalisation of the industry.

International equity means fairness or justice between nations.

International Monetary Fund (IMF) was established in 1947 to oversee the international monetary system. Each member country contributes a quota to the fund based on its national income and share of world trade; should a country experience a balance of payments crisis, it could borrow from the fund. The IMF now has over 180 members.

Investment is the production of new physical capital such as buildings and machines.

‘Invisible hand’ of the market theorem Adam Smith invented this term to explain how supply responded to demand, the market ‘clearing’ as if by an invisible hand. His idea was of an ‘invisible hand’ clearing the markets, and suggests that markets left to themselves will allocate resources in such a way that supply equals demand in all markets.

Inward migration is the movement of people into an area from outside that area.

IPEX Last-minute purchase of tickets at a reduced price.

ISAs are individual savings accounts which may be held in cash or stocks and shares, and avoid taxation. ISAs replaced PEPs and TESSAs (tax exempt special savings accounts), although you can still hold these, and there is a TESSA-only ISA.

Isocost lines show all the combinations of factors of production that can be purchased for the same amount; the slope of an isocost line shows the ratio of the relative prices of the factors of production.

Isoquant If the various combinations of factors of production which produce the same amount of output are plotted as a graph this produces an isoquant or equal product curve; a number of isoquants on a graph gives an isoquant map.

ISPs are Internet service providers who provide a gateway into the Internet for their users.

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J-curve This plots the course of the balance of trade following a change in the exchange rate. As demand elasticities are greater in the longer term but low in the short term, it is likely that the initial effect is the opposite of the longer-term effect. For example, a devaluation may cause an initial deterioration in the balance of trade before it improves in the longer run.

Joint costs are costs that are shared between two different types of output (usually fixed costs), with the consequence that it is difficult to allocate the joint cost between them (e.g. a freight train and a passenger train using the same railway track).

Joint stock company This may be described as an organisation consisting of persons who contribute money to a common stock, which is employed in some trade or business, and who share the profit or loss arising. This common stock is the capital of the company and the persons who contribute to it are its members. The proportion of capital to which each member is entitled is his or her share.

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Keynes, John Maynard (1883-1946) This famous Cambridge economist wrote one of the most influential books of the twentieth century, The General Theory of Employment, Interest and Money (1936). This book, usually called simply The General Theory, led to what is often described as the Keynesian ‘revolution’ in economics. In contrast to microeconomic models of supply and demand, Keynes emphasised fluctuations in the levels of aggregate flows around the economy. From the mid-1940s until the early 1970s Keynes’s economics was the foundation stone of macroeconomic policy making.

Keynesians believe in intervention in the demand side of the economy to reduce unemployment. This school was at the height of its popularity in the 1950s and 1960s.

Kinked demand curve model This is a theory of oligopolistic price behaviour developed by P.M. Sweezy; it assumes that an oligopolist expects rival firms to follow any price decrease it makes but not follow any increase.

Kyoto agreement of 1997 The agreement to cut CO2 emissions, which has now been ratified by all countries except the USA.

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Labour may be defined as the exercise of human mental and physical effort in the production of goods and services. It should be noted that human mental and physical effort is also needed in many leisure activities, such as playing chess or gardening, but unless these activities produce output which is sold in the market place, they do not count as production in conventional calculations of the size of the economy.

Labour market discrimination occurs when factors such as gender, race or age mean that otherwise identical workers receive different rates of pay for the same job or have different chances of recruitment or promotion.

Labour market flexibility refers to the ability for workers to move easily and speedily between different tasks and jobs. It is claimed that this can be achieved by measures such as reduced unemployment benefits, lower trade union rights, the abolition of wage floors and the promotion of training schemes (see Chapter 39).

Laffer curve states that tax revenue will be zero at two tax-rates - 0% and 100%. In between these two tax rates, revenue must first rise and then fall. There must be some point where revenue is at a maximum, beyond which further tax rises are counterproductive.

Laissez-faire The belief that internal and external trade should be left to regulate itself became known by the French expression laissez-faire (from laissez faire, laissez passer’, which is best translated as ‘let things be’). In the context of the market this means no intervention by the state in the market.

Lame ducks are failing companies that may be nursed back to health by the state but are eventually returned to the private sector.

Land sounds an easy factor of production to define, but is much wider than most people realise, including all the free gifts of nature. Thus, included within the definition are all mineral resources, climate, soil fertility, etc. The sea, since it is a resource for both fishing and mineral exploitation, would also fall within the definition of land!

Landfill sites Areas used to dispose of household and industrial waste by filling in an area of lower ground.

Landfill tax The introduction of a tax on landfill makes this way of disposing of rubbish less attractive.

Law of diminishing marginal utility states that as the consumption of any good increases in a given period of time, the additional satisfaction gained from each unit of it decreases. In this chapter the law is applied to income.

Law of diminishing returns If one factor of production is fixed in supply and successive units of a variable factor are added to it, the extra output derived from the employment of each successive unit of the variable factor must eventually decline.

Law of increasing costs examines what happens to production, and therefore to costs, as all factors of production are increased.

Law of two-thirds states that as the volume of a container (pipe, ship, plane) is doubled, its surface area is increased by only two-thirds. This is an engineer’s ‘rule of thumb’ based on the mathematics of volumes and surface areas.

Lead-free petrol Lead was used as a catalyst in petrol to make it burn more efficiently, but this kind of petrol is now banned. In the transitional period, before a complete ban, petrol without lead was marketed as ‘lead-free’.

League tables are constructed to assess which schools and universities have the best results, to provide information to prospective students and their parents. There are arguments about the criteria used, particularly the value-added debate.

Least cost factor combination If we combine the isocosts and the isoquants on one diagram we can demonstrate how a firm could achieve the least cost combination. This occurs when an isoquant is just tangential to an isocost. The least cost factor combination occurs where the rate of substitution is equal to the ratio of the relative prices of the factors of production.

Least squares The line of best fit is the one which has the smallest total of the squares of the distances of the dots from it.

Legal tender is anything that must be accepted in settlement of a debt.

Leisure industry comprises a highly diversified set of activities, including holidays, reading and watching television, eating out, DIY and gardening and sport. Most, but not all, leisure activities are services. However, it also covers the consumption of complementary manufactured goods such as books, televisions, stereos, sporting goods and so on.

Leisure preference As real wages have risen over the last century people have taken the opportunity not only to consume increased quantities of goods and services but also to reduce the length of the working week. They have, therefore, consumed part of the income as increased leisure.

Leisure time is defined as any time when a person is not working.

Length of haul (air transport) Short haul are usually internal flights within a country, or between neighbouring countries; medium haul are flights across continents; and long haul are flights between continents.

Liabilities are amounts which an individual or organisation may have to pay.

Libertarian politicians can also be found on the left and the right, who stress the importance of individual choice and freedom.

Limit pricing refers to the practice whereby incumbent firms, assuming barriers to entry exist, hold their price below the level at which short-run profits are maximised, in order to deter new entry. If costs are lower than those of a new entrant, instead of trying to maximise their own short-run profits, the incumbents may eliminate the potential for profits on the part of the entrant by charging a price only up to the level of the new firm’s costs.

Limited liability means that an investor’s liability to debt is limited to the extent of their shareholding. The principle of limited liability is extremely important to a company. It means that, if the company goes bankrupt, the owners of a limited company can only lose the amount of money that they put into the it.

Linear functions give us straight lines on a graph, which is reasonable for some economic relationships but not others. It would not work for average costs for instance, which have a saucer shape.

Liquid assets are cash or other assets that can easily be turned into cash.

Liquidity preference The desire to hold money rather than other forms of wealth. Changes in liquidity preference will cause changes in the demand for money.

Liquidity ratio is the percentage of a bank’s total assets that it holds in liquid form.

Liquidity trap refers to the situation in which an increase in the money supply is absorbed into idle balances at low rates of interest, leaving investment and aggregate demand unchanged.

Load factor is a measure of transport efficiency and can be calculated by dividing passenger kilometres by seat kilometres and multiplying by 100 to give a percentage. It shows how full planes are, on average.

Local authorities are a tier of local government.

Local authority bills are bills issued by local authorities to raise money, with the agreement of Parliament. They form part of the national debt.

Local education authority is a branch of local government concerned with the provision of education.

Local monopolies are monopolies over a restricted geographical area, usually a region of a country.

Long run Given time, all the factors may be varied, i.e. new buildings can be constructed, more land acquired, etc. The period of time in which all factors may be varied and in which firms may enter or leave the industry is defined as the long run.

Long run average cost curve (LRAC or LAC) is often described as an envelope curve of all the short-run average cost curves; it shows the minimum attainable unit cost for each and every level of output.

Long-haul transport means long distance transport.

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M4 corridor is the area on either side of the M4, stretching from Slough towards Bristol, which has attracted many of the new IT industries.

Maastricht Treaty (1992) This treaty made way for the development of the European single market.

Macroeconomic targets These are the economic aggregates that any government will be concerned with setting at an acceptable level. They are the balance of payments, inflation, growth and unemployment.

Macroeconomics is concerned with the behaviour of broad aggregates affecting the whole economy, e.g. the total level of investment or the volume of employment. In microeconomic theory we are concerned with such things as the determination of employment in particular industries, but in macroeconomics we consider the general level of employment in the economy. Similarly, a microeconomic view can be used to explain the determination of the relative prices of products, i.e. the price of one product in terms of other products, whereas in macroeconomics we are concerned with the general level of all prices in the economy.

Management buy-out is a form of privatisation where the existing management of a company buys the company from the state. A management buy-out can also happen in the private sector, where the management buys out the shareholders.

Managerial theories of the firm These originated in the 1950s and 1960s and apply particularly to large firms in which, it is assumed, there is a divorce between ownership and control. Shareholders, the owners of the firm, are interested in maximising profits, while the managers, it is argued, have other objectives, such as maximisation of sales, growth or their ‘utility’ and from these they obtain prestige, power and increased monetary rewards.

Marginal cost (MC) may be defined as the cost of producing one more (or less) unit of a commodity. It is the total value of the resources used in producing the last unit of production. In the short run this will only include variable costs, but in the long run all costs must be included.

Marginal efficiency of investment (MEI) shows the relationship between the rate of interest and the actual rate of investment per year.

Marginal physical product (MPP) is the change to total output resulting from the employment of one more unit of a variable factor.

Marginal productivity is the additional productivity attributable to an increment of one unit of a factor of production. It is most often used in connection with capital and labour.

Marginal propensity to consume (MPC) is the proportion of any addition to income that is devoted to consumption. It is calculated as:

Marginal propensity to save (MPS) is the proportion of any addition to income that is devoted to savings. It is calculated as:

Marginal rate of substitution is the rate at which a consumer is willing to exchange one unit of one product for units of another. It is given by the slope of the indifference curve.

Marginal revenue is the change in total revenue from the sale of one more unit of a commodity.

Marginal revenue product (MRP) may be defined as the change to a firm’s revenues as a result of the sale of the product of one more unit of a variable factor.

Marginal utility is the additional satisfaction, or utility, derived from the consumption of each additional unit of a product. The law of diminishing utility argues that this will decrease with each successive unit consumed in a given period of time.

Market failure occurs where the market fails to meet consumers’ demands, chiefly in the cases of public goods and externalities (see Chapter 27), but also where there is strong market power. It is used in two senses, one where the market fails to exist entirely (as in the case of a public good), and a more limited meaning where markets fail to allocate resources in the best way (e.g. because a monopolistic firm restricts output to raise price). In other words, market failure occurs when the market does not meet people’s preferences, usually as a result of problems of property rights (public goods and externality) or too much market power (monopoly). Some people extend this to situations where the distribution of income is inequitable (unfair). However, since it is difficult to agree about what might be fair, the argument often does not extend to income distribution, which is seen as a separate problem.

Market instruments are policies such as taxes or subsidies, which alter prices.

Market or seller concentration ratio measures the share of employment or output of the few largest firms in a market or industry.

Market structure indicates the degree of competitiveness of a market. The structure of a market is indicated by those characteristics that determine the conduct of firms or how they behave (i.e. their pricing policies) and ultimately their levels of performance (e.g. their profitability). The key structural ‘characteristics’ of a market are the number and relative size of firms in a market (i.e. the level of market concentration), the extent of the freedom that firms have to enter and leave a market and the nature of the product (i.e. the degree of similarity between the products of the various firms in a market).

Market supply curve In the same way that the market demand curve is a horizontal summation of individual demand curves, so market supply is the horizontal summation of firms’ supply curves.

Mark-up pricing is a pricing procedure, also known as cost-plus pricing, whereby a firm adds a percentage mark-up above unit or unit variable costs; there is ample evidence that many firms price according by following such a procedure.

Marshall-Lerner criterion This states that devaluation will only improve the balance of trade if the sum of the elasticities of demand for exports and imports is greater than unity.

Marxist economists follow Marx’s ideas on the economy, concentrating on its instability and injustice (see Chapter 47).

Maturity (of a bill or bond) refers to the amount of time left before repayment is due; the closer to repayment, the more mature.

MDC (marginal damage curve) measures the marginal costs of the pollution itself.

Means-tested benefits are withdrawn from people as they improve their income (thus contributing to the poverty trap). It is contrasted with universal benefits, which are paid regardless of income.

Means testing is the use of a person’s income to decide whether they are entitled to a welfare state benefit, or to calculate how much benefit they should be paid.

MEC schedule The Marginal Efficiency of Capital relates the desired stock of capital to the rate of return (yield) an additional unit of capital will produce.

Medium Term Financial Strategy (MTFS), a key instrument in the government’s attempt to control the money supply from 1980 to 1985, sets diminishing targets for the growth of the money supply in order to try to squeeze inflation out of the system. In most years the target rates were exceeded.

Merchant banks are the wholesalers in banking. It is often said that commercial banks live on their deposits while merchant banks live on their wits. They act more like banking brokers, putting those with large sums of money to lend in touch with potential borrowers, and by offering a wide range of financial advice to companies and even to governments.

Merger refers to the combination of two (or more) organisations to form a single new legal entity.

Merit goods and services These are products that are allocated to the members of the public, not according to the consumers’ preferences but according to the paternalistic judgements of the government. They can be defined as those products or services that are not distributed through the price system but on the basis of merit or need. This idea is based on the principle of paternalism, i.e. what people should consume for their own good, rather than what they want to consume.

Microeconomics At its simplest, microeconomics is concerned with small parts of the economy and the interrelationships between these parts.

Minimum efficient scale (MES) is that level of output where the long-run average cost curve first reaches its minimum point or where all economies of scale have been fully utilised.

Minimum wage is the minimum hourly rate payable to employees under the National Minimum Wage Act 1998 to prevent exploitation of low-paid workers. It is set annually by government and varies between age groups.

Mixed economy All economies are mixed economies, i.e. a mixture of public and private sectors. The term is usually reserved for economies that are not predominantly capitalist or socialist, but in the middle of the range with substantial public and private sectors, as in many European countries. An economy with components of both collectivism and free enterprise. All economies are mixed with varying proportions of state and privately owned production.

Monetarism is the name often given to the resurgent neo-classical macroeconomics of the 1970s and 1980s led by Milton Friedman of Chicago University. It concentrates on the importance of controlling the money supply to create monetary stability. The monetarists saw changes in the money supply as the main determinant of aggregate demand and asserted that the free market economy is essentially stable, e.g. that the long-run aggregate supply curve is vertical. The policy implication is that a pre-set target rate of expansion of the money supply can determine the rate of inflation, and employment and growth could find their own ‘natural’ levels. Monetorists rejected the concentration on using taxes and government spending to control the economy, advocated by their adversaries, the Keynesians.

Monetarists The name given to economists, notably Milton Friedman and the ‘Chicago School’, who led the resurrection of neo-classical ‘macro’ economics in the 1960s through to the 1980s. Monetarists emphasised the efficiency of free markets but accepted that sharp fluctuations in the money supply could cause unwanted short-term distortions in the information provided by prices. This in turn, they claimed, caused short-lived fluctuations in macro-economic variables for the duration of the period of money illusion. To avoid this, they advocated strict control of the money supply. As this proved hard to do in practice, neo-classical macro policy shifted to a more general avoidance of fluctuations in aggregate demand. Monetarists believe that the economy is best left to regulate itself, except for the money supply, which needs to be controlled to prevent inflation. This school was at the height of its popularity in the 1970s and 1980s.

Monetary inflation refers to the notion that inflation is caused solely by a more rapid increase in the quantity of money than in output.

Monetary Policy Committee (MPC) This is chaired by Sir Eddie George, the Governor of the Bank of England. The Chancellor of the Exchequer lays down a target for inflation and the job of the MPC is to set interest rates so as to achieve this within a specified band of error.

Monetary policy is the direction of the economy through the supply of money and its price, the rate of interest.

Money Anything which is readily acceptable as a means of payment or in settlement of debt.

Money illusion refers to the tendency for people to be fooled by changes in prices or wages when no real change has taken place.

Monomania is the pursuit of one activity to the detriment of all others, e.g. workaholics or alcoholism - some kind of addiction is usually implied.

Monopolistic competition When there are a large number of sellers producing a similar but differentiated product, then a state of monopolistic competition is said to exist. Thus, seller concentration is quite low and the products tend to be fairly close substitutes. Such a market is also characterised by the frequent entry and exit of firms. It is called monopolistic competition because, owing to imperfections in the market, each organisation has a small degree of monopoly power.

Monopoly Monopoly lies at the opposite end of the competitive ‘spectrum’ to perfect competition. It literally means a situation where there is only one seller of a commodity, although in practice a dominant firm may be able to exert a considerable amount of monopoly power with far less than 100 per cent of the market.

Monopoly power is the power that results from a single producer or provider of a good or service. This power will be greater, the more inelastic demand is.

Monopsony exists when there is only one buyer of a commodity or resource.

Montreal Protocol An international agreement to phase out CFCs.

Mortgage If a property is ‘mortgaged’ to the lender, this means that it may become the lender’s property if the purchaser is unable to keep up the repayments.

MRC (marginal reduction curve) is the cost of reducing an externality at the margin by whatever means is available. The costs of reducing the externality are ranked in order of cost, with the cheapest being implemented first.

Multinational firms or corporations (MNCs) are firms that have production facilities (i.e. plants that they own and control) in more than one country.

Musgrave, Richard He was credited with presenting the arguments used for government intervention in the market where markets fail to meet certain criteria.

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NATA is the new framework that sets the environmental assessments alongside the assessment of the road in term of transport costs, time saving and loss of life. Whereas the old framework gave pre-eminence to those costs that could be valued and downplayed those that could not be valued, the new framework attempts to place them on a more equal footing.

National Debt is the accumulated debt of the government or the total amount of borrowing. It is the total amount owed by the government, consisting of all government expenditure that has not been funded by taxes or other revenues. It is the accumulated borrowings of the government that have not yet been repaid. It is mainly held in the form of government bonds or treasury bills.

National flag carriers are the airlines that represent a country, e.g. British Airways for the UK.

National Grid is the system of distributing high-voltage electricity from the generating companies to the local distribution networks.

National income is the sum of all productive incomes in an economy, or the value of the output of the economy.

National insurance See social security contributions.

National insurance payments are paid by employers and employees. They were originally designed to cover the costs of the welfare state (the benefit system and health service) but are no longer sufficient to do so.

National minimum wage is a statutorily agreed limit below which any wage is not allowed to fall. This was imposed in the UK in April 1999.

National product is the output of all goods and services produced by an economy over a specific period of time. As this output is the real income of the economy for the period, national product is also known as national income.

National Rail The company that is responsible for the rail track network.

Nationalised industries are businesses owned by the government which sell their products in the market.

Natural levels of output and employment/unemployment For neo-classical economists, these are reached through the voluntary choices of millions of economic agents responding to the real constraints of economic scarcity. They represent a considered balance between wants and scarcity and as such constitute a desirable and self-correcting equilibrium of the economy.

Natural monopoly is a situation where the benefits of competition would be outweighed by the costs of duplication, and is often found in industries where there is an extensive network of pipes, wires, cables, tracks etc. It is a market situation where unit costs continue to fall beyond the level of market demand and just one firm can benefit from economies of scale. Natural monopolies are created because competition would result in the wasteful duplication of expensive infrastructure such as rail track, gas pipelines and electricity cables. In most such cases a Network exists which transports the service to the customer.

Natural rate of unemployment (sometimes also known as the non-accelerating inflation rate of unemployment or NAIRU) is the rate of unemployment below which inflation increases. It is also the rate of unemployment where, on a graph, the vertical long-run Phillips curve cuts the horizontal axis.

Near money consists of assets which are likely to be accepted as payment.

Negative bids Where losses are expected from running a franchised service, negative bids are made so that the franchise operator is paid to compensate for such losses.

Instead of paying for a franchise, the franchisee receives payment for running the business. This is usually in return for meeting social objectives, such as providing transport in remote areas.

Negative equity occurs when the value of a home falls below the value of the mortgage that has been used to buy it. The equity that a person holds in their home is the proportion that they actually own. If their mortgage is larger than the value of the house (which can happen in a period of falling house prices), then they have negative equity.

Negative income tax is a system of taxation where people are paid money by the Inland Revenue if they earn less than a threshold income, but pay into the Inland Revenue if they earn above that threshold. It can be thought of as an integrated tax and benefit system.

Negative slope A line has positive slope if it slopes downwards from left to right.

Neo-classical economics is a school or paradigm of economics that usually argues that the market works best, except in certain specified conditions of market failure (defined elsewhere). It is a utilitarian school of thought that believes that individuals are usually the best judge of their own welfare.

Neo-classical school This school of thought is the dominant school of economics today and emphasises the market consequences of well-informed individuals acting to maximise their self-interest. Its predictions often rely on market clearing but policy makers today usually mix in elements of Keynesian economics to form a pragmatic macroeconomics in which short-term fluctuations can occur around long-term ‘natural’ equilibria.

Neo-classical synthesis is the incorporation of Keynesian elements into essentially neo-classical aggregate demand and supply analysis.

Neo-classicists or new classicists are a group of economists who emphasise the importance of competitive markets for the successful running of the economy.

Net investment is investment after the subtraction of estimated depreciation, i.e. the amount of capital stock that has been used up by current production.

New technology In theory this could refer to any new technology, but recently refers to information technology and biotechnology.

New Towns Act 1946 was the Act of Parliament that allowed for the setting up of new towns such as Milton Keynes.

New Town Corporations are organisations given power by the government to develop a new town.

Newbury bypass was a famous road proposal (now built) which led to conflict between environmentalists and the government.

Newly-industrialising countries (NICs) are those developing economies that have experienced more rapid economic development in recent times.

NHS (The National Health Service of the UK) This is the organisation which provides most of the healthcare in the UK and also produces most of it.

Nitrous oxides are chemicals that combine nitrogen and oxygen.

Nominal rate of interest is the actual rate of interest paid, without any adjustments for inflation.

Non-excludability is the characteristic of a public good that prevents individual ownership or property rights over the good.

Non-linear functions Any function which does not give a straight line when plotted as a graph is a non-linear function.

Non-price competition refers to competition between firms other than by price; it includes branding, advertising, competitions and free offers, after-sales service and even research and development of new processes and products.

Non-profit-making organisations may pay themselves a rent (see Chapter 25) in the form of high wages or advantageous conditions of employment.

Non-rejectability is the characteristic of a public good that makes it difficult for people to reject public goods even if they don't want them, e.g. aircraft noise near an airport (a local public good).

Non-rival in consumption is the characteristic of a public good that results in zero marginal cost for an additional consumer enjoying the good.

Non-tradables are products which are not normally imported or exported, e.g. haircuts.

Normal distribution This is a distribution of values which is evenly distributed on each side of the mean. It also has other properties (beyond the scope of this book) which give it a bell shape as in Figure 2.3(a).

Normal good is a good with a positive income elasticity of demand. Normal goods are purchased in greater quantity when income rises.

Normal profit is the minimum amount of profit that is necessary to keep the firm in the industry. It represents the opportunity cost of supplying capital to a business. Any profit in excess of this is termed abnormal profit (or pure, excess or supernormal profit).

Normative means subjective, or including value judgements.

Normative statements are based on value judgements.

North-South divide refers to the gap in property prices and incomes between the North and South of England.

Nuclear fusion is a method of obtaining energy by fusing two hydrogen atoms, which is currently uneconomic. Nuclear power currently comes from fission, which involves uranium 235 decaying into other elements.

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OECD is the Organisation for Economic Co-operation and Development, an organisation of developed countries.

Ofcom is the regulator for the telecommunications industry.

Ofgen is the regulatory body for the energy industry. Note that Ofgen is a misnomer, and should read Ofgem (Office of gas and electricity markets).

Oftel was the regulator of telecommunications industry after privatisation, replaced by Ofcom, which also covers other media because of the convergence of these technologies.

Ofwat is the regulatory body for the water industry.

Oil crises In the 1970s, because of the dependence on relatively few countries for the supply of oil, a sharp increase in its price created large problems for much of the world economy, creating inflation and unemployment together with deficits on the balance of payments. Sudden increases in the price of oil can still cause problems, but a larger number of countries are now oil producers.

Oligopolistic competition exists when there are relatively few competitors in an industry.

Oligopoly The word oligopoly, like monopoly, is derived from the Greek and means a situation where there are only a few sellers of a commodity. In other words, there is a high degree of seller concentration. ‘Few’ is never strictly defined, but can mean anything from two to, say, 10 firms. The situation where just two firms dominate a market is known as a duopoly and is regarded as a special case. In a few instances, such as cement, steel and aluminium production, oligopolists produce virtually identical products and compete in terms of prices; they are referred to as perfect oligopolies. However, in most cases oligopolies are characterised by a high degree of product differentiation and little price competition and are known as imperfect oligopolies.

OPEC is the organisation of petroleum exporting countries which has from time to time restricted the supply of oil in order to force up its price.It acted as a cartel with particular success in the 1970s. The increased number of non-OPEC oil producers has made this more difficult recently.

Open economy is one that trades with the rest of the world.

Open-market operations These are the sale or purchase of securities by the Bank of England on the open market with the intention of influencing the volume of money in circulation and the rate of interest.

Open skies policy is the idea that any airline should be able to fly between any pair of destinations in the world, creating greater competition in the industry.

Operational pollutants result from the normal operation of technology, as distinct from accidental pollution.

Operational pollution It is helpful from the point of view of policy to make a distinction between operational pollution that occurs as a normal by-product of industrial activity and accidental pollution.

Opportunity cost is the forgone alternative of any product or consumption decision.

Optimal plant and company size is the size where costs are minimised, i.e. when all economies of scale have been obtained, but diseconomies have not set in. Sometimes the size of a firm or plant is also limited by the size of the market.

Optimal pollution is the level of pollution where the marginal costs of the pollution are equal to the marginal costs of reducing it.

Optimality is achieved in an ideal world if competitive markets allocate resources in the best possible way to meet people’s demands, backed by willingness and ability to pay. There may still be questions of equity (fairness), however.

Optimum allocation of resources occurs when all firms are operating in conditions of perfect competition and hence equate price with marginal cost; in long-run equilibrium every commodity would also be produced at minimum average cost.

Optimum efficiency or optimum capacity is the level of output at the minimum point of the short-run average cost curve.

Opting out describes the process by which schools were allowed to opt out of local authority control and receive funding directly from central government, thus reducing the bureaucratic control of local authorities over schools, and speeding up the adoption of a quasi-market in education.

Option values are values placed on the environment in stated preference questionnaires that express willingness to pay for the option of using an environmental resource at some future point.

Ordinal numbers are ranks rather than integers (i.e. first, second, third, and so on, rather than one, two, three). There are three relationships with ordinal numbers: greater than (>), less than (<) and equal to (=), which are applied to utility in indifference curve analysis.

Organisation for Economic Co-operation and Development (OECD) arose in 1961 from the Organisation for European Economic Co-operation (OEEC); it fosters growth and economic stability between its 29 members and aids the development of developing countries.

Organisational slack Both the managerial and behavioural theories incorporate the concept of organisational slack. Where there is a lack of competition members of the firm may receive payments over and above what is required for the continued existence of the organisation; in other words, a firm is likely to produce at above minimum cost. Slack can accrue to any member of a firm, but managers are thought to be in the best position to receive such payments, which can take the form of higher salaries and fringe benefits or reduced effort.

Overhead costs are costs that are attributable to a product, but not directly related to the direct costs of producing it. These costs can include development and design costs, marketing and selling costs, and the administrative costs of running the organisation.

Owner-occupied sector is made up of property which is owned by the households living in the property, or which is being bought by them using a mortgage.

Ozone Oxygen is found in two main molecular forms in the atmosphere: with two atoms of oxygen (O2), which is the type we breathe; and with three atoms (O3) which is known as Ozone. It is an irritant to the lungs at ground level, and is regarded as a pollutant.

Ozone friendly refers to products that don't emit gases harmful to the ozone layer.

Ozone friendly is a marketing description denoting the absence of CFCs in a product, no longer used since CFCs were phased out.

Ozone hole Scientists discovered a hole in the ozone layer over the Antarctic in the 1980s, a discovery that speeded up policy to phase out CFCs.

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Package holiday companies These companies put together a ‘package’ of services (transport, hotels, excursions, insurance etc) which enables them to sell holidays in a mass market.

Package holiday industry in the UK is an imperfect oligopoly (and see Chapter 8). It is dominated by four large firms and the product that these firms sell is highly differentiated. A fringe of smaller firms exists but there are barriers to becoming one of the larger players.

Pareto efficiency requires that it must not be possible to change the existing allocation of resources in such a way that someone is made better off and no one is made worse off.

Pareto improvement is a movement towards the ideal position of Pareto efficiency, which is never reached in an imperfect world. It is defined to occur if at least one person is made better off and no one is made worse off as a result of a change to the economy (see Chapter 27).

Paris Convention (1919) decided that the air space over a country belongs to that country and as a result led to a system of bilateral agreements between pairs of countries.

Park and ride schemes encourage motorists to park their vehicles on the edge of towns and travel into the centre on subsidised public transport.

Partial equilibrium analysis is an analysis of a part of the economy, such as a single market.

Participation rates represent the proportion of the population that is economically active.

Particulate matter (PM10 ) are tiny specks of carbon, resulting mainly from diesel, causing major problems for people with lung conditions and asthma sufferers.

Partnership, as defined by the Partnership Act 1890, is ‘the relation which subsists between persons carrying on a business in common with a view to profit’.

Passenger kilometre is the unit of measurement of transport consumption. Each kilometre travelled by each passenger is added together to give total passenger kilometres.

Paternalism is the idea that the individual is not always the best judge of their own welfare and that the government or other authority is better able to make decisions for them.

Paternalistic policy is based not on individuals’ choices, but on the views of the government about what those choices should be, i.e. what is good for them.

Peak and off-peak demand refer to the high and low points in demand, which are not a problem when the good is storable (e.g. electricity). Variability of demand in transport occurs with commuters travelling in the peak period in the mornings and evenings. Other times are referred to as off-peak.

Peak load pricing is the principle of allocating both fixed (capital) costs and variable costs to the peak demand, while only allocating variable costs to the off-peak demand. It is appropriate in the case of non-storable products such as transport.

Pecuniary ‘external effects’ are the effects of prices and the reallocation of resources in one sector of the economy upon other sectors of the economy, which also have an effect on the welfare of certain sectors of the economy. For instance, as more people own cars, fewer people use buses. If buses are less full as a result, bus companies will have to charge a higher price in order to break even. The decision of richer people to buy cars makes poorer people who use buses worse off.

Pedestrian-only zones are a form of regulation, which also ration the amount of road space available to the motorist. This is a zoning solution to an externality problem (see Chapter 13).

Pension funds Some financial institutions specialise in the investment of people’s savings, mainly on the stock exchange, to provide them with a pension in their old age.

PEPs are personal equity plans that allow a certain amount of savings to be put into stocks and shares without the profit being taxed. PEPs have now been replaced by ISAs.

Perfect competition is the highest form of competition that can exist. In perfect competition firms are price-takers, i.e. they have no power to affect the market price, although they can sell all they want to at this prevailing price. In other words, individual firms face a perfectly elastic demand curve for the product. For a state of perfect competition to exist in an industry, the following conditions have to be met:

Perfect knowledge of all products and prices seems unlikely in all but the simplest of economies, but this is an assumption made by economists to define the best situation a market can attain. Real markets can then be compared with this ideal.

Permanent income and life-cycle hypothesis The hypothesis that people, in the short run, consume according to an estimation of their permanent income level. If their income were suddenly to increase (or decrease) they would, in the short run, go on spending roughly the same amount because they regard the change as only temporary.

Petrol tax escalator was the policy (in the 1990s) of increasing the tax on petrol in each successive year at a rate faster than inflation.

Philanthropic industrialists Philanthropy is the practice of rich people using their wealth to benefit those who are less well off. In the nineteenth and twentieth centuries these people were often industrialists.

Phillips curve is the trade-off between inflation and unemployment put forward by Phillips on the basis of statistical evidence and Keynesian theory. It is based on work by Professor A.W.H. Phillips and shows the relationship between unemployment, inflation and wage rises in the UK economy from 1861 to 1957. It appears to show that, for the period indicated, the nearer the economy is to full employment, the greater would be the rate of inflation.

Pigou was an economist credited, among other contributions, with the invention of the externality concept.

Planning permission is required to build new property or add to old property.

Planning regulations are rules that restrict what types of development may take place in each area, and control the use of existing buildings.

Plant or establishment This is the unit of production in industry: it can be a factory, a shop, a farm, a hotel or any economic unit that carries on its business at one geographic location.

Point elasticity is the value of price elasticity at any one point on the curve.

Political economy An older name for economics that is now usually reserved to describe schools of thought that believe that theory is inevitably affected by political perspective. The word ‘political’ emphasises that economic beliefs are intertwined with political beliefs and that evidence is usually interpreted and absorbed within a school of thought rather than providing an objective means of deciding between schools.

Political lobby is a pressure group on politicians to represent the interests of one group in society.

Poll tax is another name for the community charge, emphasising the payment is per head rather than based on income or wealth. (Poll tax was replaced by Council tax.)

Popular capitalism means the involvement of large sections of the population in capitalist activities such as home ownership or speculation on the stock exchange.

Population growth is the annual percentage rate at which the population is increasing. It is determined by a combination of the birth rate, the death rate, and migration, or the net figure from immigration and emigration.

Portfolios of bills, stocks, loans, etc. are a collection of assets owned by an individual or organisation to reduce risk. If all your wealth is in one type of asset, then if it does badly you could lose all your money.

Positive means objective, or without value judgements.

Positive slope A line has positive slope if it slopes upwards from left to right. The two variables either increase together or decrease together depending on whether you are moving up or down the line.

Positive statements Concern what is, was, or will be and can in principle be settled by reference to facts. In practice this is usually far more problematic than it sounds.

Positivists study what is, rather than what ought to be. Some economists argue that it is difficult in practice to separate positivist from normative (e.g. welfare) economics.

Post-Keynesian School This is a group of Keynesians who add the idea of market power to Keynes’s model and emphasise the role of uncertainty in the economy (see Chapter 47). It rejects technical expositions of Keynes emphasising equilibrium and continues to emphasise that the fundamental insights of Keynes concerns uncertainty, expectations, the nature of money, time and movements in quantities rather than prices.

Poverty line This is a level of income below which people are considered to be poor.

Poverty trap This is a situation which occurs when the tax and benefits system overlap, resulting in very high marginal tax rates which create a disincentive effect.

Predatory pricing refers to the situation where a large and financially powerful firm prices one or more of its products below costs and, by covering any losses from the funds generated from within other parts of the organisation, intends to secure the demise or the takeover of a smaller rival or rivals.

Preventive medicine is treatment to prevent disease before it happens, rather than to cure it afterwards.

Price-consumption line shows the changes in the combination of products that would be consumed as one price changes and with a fixed level of income.

Price discrimination is the principle of raising prices on inelastic segments of the market while lowering them on elastic segments. In order to work, the segments of the market must be separable in some way and some degree of market power is required. You are able to charge higher prices for more inelastic demands. This discriminating monopoly is said to exist when different buyers or groups of buyers, in separate market segments, are charged two or more prices for the same product, for reasons not associated with differences in costs.

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to changes in its price.

Price elasticity of supply measures the degree of responsiveness of quantity supplied to changes in price.

Price floor Where a minimum price is set by the authorities. If the price falls below this level, the authorities may intervene in the market to buy up surplus stocks in order to maintain the price.

Price indexation Linking a payment (e.g. pensions) to the rate of inflation, so that it rises in line with prices.

Price mechanism A system where the economic decisions in the economy are reached through the workings of the market.

Price stabilisation is a policy of intervention by the government in a market (often agriculture), selling the stocks of the product when prices are too high (thus forcing the price down) and purchasing the product for storage when the price falls too low (thus pushing the price back up). It is notoriously difficult to get this balancing act right, and surplus stocks often accumulate (see Chapter 11).

Prices and incomes policy is where the government takes measures to restrict the increase in wages (incomes) and prices.

Prices, nominal and real Nominal prices are prices as measured in monetary units, e.g. £2.95. Real prices are the price of one thing in terms of another, e.g. how many eggs to a loaf of bread.
Primary banks are those which are mainly concerned with the transmission of money, i.e. clearing cheques, paying standing orders and so on.

Primary care trusts (PCTs) are a relatively new structure in the internal market of the NHS where services provided in the community, such as GP surgeries, district nursing etc. are supplied by a trust covering a population of approximately 100 000.

Principle of net advantage refers to the fact people choose their job and move to achieve the greatest net advantage having considered both the pecuniary and non-pecuniary advantages of jobs.

Private costs are costs of an activity that fall on the individual or organisation responsible for that activity.

Private rented sector consists of property owned by individuals or companies and then rented out to households who either cannot afford to buy their own property, or are currently choosing not to do so.

Privatisation The sale to the private sector of organisations or assets owned by the government (publicly-owned) (see Chapter 24).

Producer surplus The difference between price and the opportunity cost of production.

Product differentiation This is the extent to which similar products are perceived to be different by consumers; the differences may be due to actual physical differences in, say, quality or they may be the result of advertising and policies to develop a particular brand image.

Production denotes the total amount of a commodity produced by turning factors of production into output.

Production efficiency occurs when it is not possible to increase the output of one good without decreasing the output of another.

Production function describes the relationship between output and the factors of production used to produce that output.

Production lags are time gaps between planning, producing and selling a product.

Production possibility boundary A diagram showing all the possible combined outputs of a pair of goods in the economy.

Production possibility frontier If it is not possible to increase output of one good without decreasing production of another, then an economy is said to be on its production possibility frontier - there will be many such combinations possible, each of which will be production (or ‘technically’) efficient.

Productivity is often measured in terms of output per worker, in a given period of time. It is the amount of a commodity produced per unit of resources used. Productivity taking account of all inputs is difficult to measure and so one of the most common methods is simply to take the total output and divide it by the number of workers to give labour productivity. Measures that take account of all factors are known as total factor productivity measures.

Profit maximisation condition for all types of competition is where marginal cost equals marginal revenue, MC = MR.

Promissory note is a written promise to pay the bearer the sum written on the note.

Propensities to consume and save are the amounts saved and consumed expressed as proportions of income.

Protected tenancies are tenancies that cannot be unilaterally terminated by the landlord.

Protectionism occurs when a country protects its own industries from competition from overseas by introducing quotas (a maximum number of imports of a product in a given year) tariffs (taxes on imports) or other policies that have the same effect.

Provision of goods and services can be contrasted with production. For the government to provide goods and services, all they need to do is pay for them, leaving production to the private sector.

Proxy In this context a proxy is something that is used to stand for something else. For instance, we wish to tax carbon dioxide, but it is easier to tax the carbon content of fossil fuels.

Public and private companies Legally speaking, a public company is a company limited by shares (or guarantee) which has been registered as a public company with the Registrar of Companies. It has two or more members and can invite the general public to subscribe for its shares or debentures. A private company is any company that does not satisfy the requirements for a public company. In common with a public company it has two or more members. Thus the essential distinction between a public and a private company is that the former may offer its shares or debentures to the public while the latter cannot.

Public corporation is used to describe an industry owned by the state, but set up as a separate organisation and run much like a company.

Public expenditure covers all areas of spending by government.

Public good characteristics are non-exclusion, non-rivalry in consumption and non-rejectability.

Public goods and services Public goods are those where consumption of the product by one person does not diminish the consumption by others. Another way of putting this is that the marginal cost of production for an extra person is zero.

Public provision occurs where government pays for a service to be provided - but does not necessarily produce that service.

Public rented sector Properties owned by (usually local) government.

Public sector is that part of the economy controlled by the government.

Public Sector Borrowing Requirement (PBSR) (now known as the Public Sector Net Cash Requirement or PSNCR). The difference between the expenditure of the public sector and the revenues it collects by way of taxation.

Public Sector Net Cash Requirement (PSNCR), which used to be referred to as the Public Sector Borrowing Requirement (PSBR), describes the borrowing details of the government should it run a budget deficit.

Public service obligation (PSO) is the term used for the subsidy given to the railways for meeting social objectives, first introduced in 1974.

Public subsidy is a payment by the government, usually to encourage some activity that the market would not provide on its own.

Public transport infrastructure means the system of transport on which market economies depend, including roads, railways and supertrams (see Chapter 13).

Pump-prime is an initial rise in aggregate demand engineered to induce further private sector increases in aggregate demand. In an extreme case simply the announcement that the government intended to ‘reflate’ the economy could lead to such a virtuous circle.

Purchaser-provider split is the organisational separation of the purchaser and the provider of a public sector service, in order to allow an internal market to develop.

Purchasing power parity (PPP) compares prices in different countries and adjusts the exchange rates until prices are on average the same in those different countries.

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Quangos (quasi-autonomous non-governmental organisations) are usually regulatory bodies financed by the state but not formally a part of it.

Quasi-market is a term used to describe situations when some of the characteristics of the market are introduced into the public sector, e.g. the internal market in the NHS.

Quasi-money has some but not all of the characteristics of money, e.g. book tokens and luncheon vouchers.

Quintiles are divisions of 20% or one fifth of a total figure. In this context the top quintile would be the top fifth of the income distribution.

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R&D is research and development (investment in R&D is lower in the UK than in most of its main competitors).

Radioactive waste is the waste materials from nuclear power generation, which need to be stored since no good method of disposing of them has been found.

Railtrack is the company that was set up to run the track network after privatisation of the UK rail industry. The company owned the track network following privatisation of the railways in the UK, prior to being put into receivership and now part of National Rail.

Rate of natural increase or decrease in population is arrived at by comparing the birth rate and the death rate,

Rate of return regulation regulates an industry by limiting the maximum rate of return it can earn on its capital. There is an indirect relationship with the price that the companies in the industry can charge.

Rate support grant is the amount that was available from central government for local authorities to add to their revenue from rates.

Rate-capping occurs when central government places a limit on the amount of tax a local authority can raise.

Ratification The process by which individual countries’ parliaments accept a treaty negotiated on their behalf by government ministers or officials.

Rating system was the system of local taxation for much of the last century, based on the rental value of property. It was replaced partly because of the increase in owner occupation, making capital value of properties more appropriate.

Rationing is a situation where there is insufficient output to meet demand and some criterion is used to decide who should get how much of the product in question. For instance, everyone should be allowed a certain minimum amount of food in wartime when there is a shortage, or public sector housing should be allocated to those who have been waiting longest. Pricing can be thought of as a special case of rationing where the criterion is willingness to pay for the product.

Real money balances effect or the ‘Pigou effect’ This asserts that, if wages and prices are flexible, then at output and employment levels less than the ‘natural’ market-clearing equilibrium levels, there will be falling prices. With a constant quantity of money in the economy, the real value of the stock of money is thereby increased. Eventually wealth increases to the point at which aggregate demand begins to increase significantly and so eventually the economy returns to its natural equilibrium.

Real national income is national income adjusted for inflation.

Real rate of interest is the rate of interest adjusted for inflation. A slightly inaccurate but widely used version of this is the nominal rate of interest minus the rate of inflation. For a correct version this value must be discounted back by the rate of inflation, but this is beyond the scope of this book.

Rebasing an index in the process of changing an index so that a new year appears as the base year with a value of 100.

Recession is technically a six-month period (two successive quarters) in which output of an economy falls, but is sometimes used more loosely to refer to falling growth rates that result in periods of rising unemployment. The term is sometimes used rather more loosely to describe a period of rising unemployment.

RECs are the regional electricity companies which distribute electricity at the local level and who are also the main sellers of electricity.

Recycling Reusing the materials in discarded products to manufacture new products.

Redistribution ‘in kind’ means giving people goods and services (e.g. housing and education) instead of money.

Redistribution of income is taking income from some people in an economy and giving it to others, usually through the tax-benefit system.

Regeneration is the process of reversing the economic and social decline of an area.

Regional disparity is the difference in economic performance of different regions in an economy.

Regional economic planning councils are responsible for the economic strategy of a region.

Regional electricity companies run the local electricity distribution networks.

Regression is a statistical technique for estimating the relationship between two or more variables.

Regressive supply A situation in which an increase in price results (unusually) in a reduction in supply.

Regressive taxes remove a lower percentage of a person’s income as the person becomes richer.

Regulation is control of the economy by quantitative or qualitative regulations (e.g. on the technology used or the nature of the output), rather than relying on incentives to change behaviour, using taxes or subsidies.

Regulatory capture occurs where the regulatory body adopts the arguments of the industry they are supposed to be regulating.

Renewable energy is energy use which does not use up the stock of the planet’s fossil fuels or other resources, and includes wind power, wave power and solar energy.

Rent control is the imposition by the government of a price ceiling in the housing market. Rent controls were floor prices in the private rented sector as a policy for helping poorer households.

Replacement ratio refers to the rate of unemployment benefit relative to average earnings.

Repos Financial institutions which are temporarily short of liquidity sell their assets, with an agreement to buy them at an specified time and price in the near future.

Rescheduled debt denotes the fact that banks and the governments of developed countries have delayed the repayment date for loans and/or have spread the repayments over longer periods.

Reserve This is an amount of money put on one side by an organisation for unexpected problems.

Restrictive practices are any agreements between firms that prevent, restrict or distort competition; they include price fixing, limiting or controlling production or markets and sharing of markets or sources of supply. They are meant to limit trade or productivity and can exist between workers, or between companies.

Returns to scale Economies of scale reduce the unit cost of production as the scale of production increases, but can include reduced input prices, as the power of the organisation increases; returns to scale are concerned with physical input and output relationships, and occur when fewer factors of production are needed for each unit of output (on average) as the scale of output increases.

Revealed preference is a method of valuation that depends on people revealing the valuation of an environmental benefit or cost indirectly, for instance by whether they purchase a house near a noisy road or airport.

Revenue pool is sharing the revenue, irrespective of which airline the passengers choose to fly with.

Right to buy In the 1980s the government gave council house tenants the right to buy the properties they were renting at a subsidised price which was lower, the longer the period of tenancy.

Rio environmental summit in Brazil (1992) was the first international meeting at which countries agreed to limit their output of CO2.

Risk-averse means preferring a safe outcome to one that is risky, but the outcome might be very bad results rather than very good ones.

Road congestion is a situation of excess demand by drivers for use of a road at a particular point in time, resulting in queues of traffic.

Road pricing solution The use of direct pricing of motorists for the use of the road to deal with the problem of excess demand known as road congestion.

Rolling stock means rail vehicles - train carriages, freight wagons and train engines (see Chapter 14).

Roscos or rolling stock companies were set up as part of the privatisation process to own and lease rolling stock to rail franchise holders.

RPI (the Retail Price Index) is the general index of retail prices in the shops.

RPI ± X is the regulatory formula adopted after privatisation for average price levels, which were required to increase at the rate of inflation minus a figure ‘X’, which represented the expected increase in efficiency. In rare cases where input prices were rising (e.g. energy), X could be a positive figure.

RPIY index takes out the effects of changes in the rate of indirect taxes.

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Savings banks are concerned mainly with the savings market, although they will lend these savings long term to commercial companies in order to make a return for their savers.

Savings rate is the proportion of national income that is saved, sometimes expressed as a percentage.

Savings ratio is the amount of savings expressed as a percentage of disposable income.

Say’s Law A ‘law’ put forward at the beginning of the nineteenth century by the French economist Jean-Baptiste Say (1767-1832). He argued that ‘supply creates its own demand’ but this does not necessarily hold for a monetary economy.

Scarcity of resources Scarcity does not mean that resources are rare or severely limited in quantity, but rather that there are not enough of them to meet economic demand.

Scatter diagrams are a way of presenting data as points on a graph.

Scheduled market This is timetabled and open to bookings from all members of the public.

School of thought A group of researchers who may disagree on details but who share a general vision and theoretical framework as to how particular things, such as an economy, work.

Scientific method involves the testing of hypotheses against empirical evidence in order to produce a body of accepted theory.

Scope of a tax This is the range of items on which the tax can be raised.

Seat kilometres are calculated by multiplying the total number of seats times the number of kilometres travelled (see also passenger kilometre).

Secondary banks are those that are mainly involved in dealing with other financial intermediaries and providing services other than the transmission of money. A good example is the merchant banks.

Secured loans are loans where the bank takes something, such a mortgage of a property, an assurance policy or a bill of exchange, as collateral security in case the loan is not repaid.

Self-sufficiency means producing all or most of the products needed for your own economy.

Semi-detached houses are attached to another house on one side but not the other.

Serpell Report is a government report on the finances of the railway, making recommendations about further track reductions (see Figure 14.3).

Service industries produce output that is not manufactured (e.g. banking, insurance).

Set-aside One solution to the problem of excess supply has been the introduction of set-aside. This is a policy where farmers are paid not to produce anything on a proportion of their land.

Shadow prices are imputed prices that are intended to reflect more faithfully the true social costs and benefits of a project. For example, the value of the time saved by an individual following an improvement in transport facilities is often approximated using that person’s average hourly wage for working drivers (leisure time is worth less than this).

Share flotation is the selling of new shares on the stock exchange.

Shift in demand/supply A movement in either a demand or supply curve which can be to the left or the right, resulting in a change in the level of output at each price. This results from a change in the conditions of demand or supply, i.e. one of the constant factors behind that curve changing.

Short rents are for a limited period only, with no right for the tenant to continue in occupation after the end of the period.

Short run The period of time in which at least one factor is fixed in supply, for an organisation, is defined as the short run.

Short tenancies were introduced by the Housing Act 1988, which meant the tenancy was only protected for the period of the letting.

Short-haul transport means short distance transport.

Shut-down conditions The firm will continue in production in the short run as long as it covers its variable costs, or, to put it another way, if the price of the product is above average variable cost.

Sight deposit is any bank account from which you withdraw money without notice or penalty of lost interest.

Simultaneous equations are a method for finding the point where two lines on a graph cross, without having to draw the graph. Supply and demand curves can be thought of as a simultaneous equations system.

Single Regeneration Budget (SRB) was the main source of funding for regeneration in the UK in the 1990s.

Sites of special scientific interest (SSSIs) are areas of the country which are protected to some extent because of their biological, archaeological, geological or other scientific interest.

Sitting tenants are tenants who have a protected tenancy and cannot legally be removed from the property.

Skewedness This occurs when the mean, mode and median do not coincide. Often, in economic data, the mode and median will be to the left of the mean. The distribution curve will climb steeply and then fall more slowly, as Figure 2.3(b).

Slot This is a take-off or landing time at a given airport.

Small firms are defined as those employing less than 100 people each.

Smog is a mixture of fog and smoke experienced in London before the compulsory introduction of smokeless fuels in the 1950s.

Social cost or externality is the imposition of cost on third parties who have no contractual agreement to accept the cost. Pollution is the most common example.

Social costs are costs imposed on society (such as pollution) which are not paid for by the producer. They result from the private actions of an individual or organisation, but are imposed on others as a result of economic activity, e.g. pollution from industry. They are the same as external costs.

Social economic engineering is an attempt to change the culture or the structure of society in order to meet a policy objective.

Social marginal benefit (SMB) is the marginal benefit in terms of willingness to pay by people demanding a private good, but also the willingness to pay by people and organisations receiving an external benefit.

Social security The insurance aspects of the welfare state such as health, unemployment benefit and pensions.

Social security contributions are payments made by employees and employers to cover the cost of the welfare state. In practice, additional money from general taxation is needed to cover the full cost of health, pensions and other benefits.

Socialism Socialists are those who believe that the means of production should be publicly owned.

Solar cells are a method of converting sunlight directly into electricity.

Sole trader This is a business organisation where one person is in business on their own, providing the capital, taking the profit and standing the losses themselves.

Special deposits are the deposits that the Bank of England has the power to call on the banks to place with it.

Special drawing rights (SDRs) are a form of international currency that was established in 1967 and allocated to each member of the IMF; SDRs can only be used by central banks to pay debts to each other or to the IMF.

Specialisation enables individuals to increase their skills in a narrower range of work and thus increase their productivity.

Specific tax is a duty levied per unit of the commodity, irrespective of its price. The main duties are on tobacco, alcohol and petrol.

Speculative demand is a situation where demand is increased because people believe that prices are going to rise in the future. This kind of situation can occur in the housing market, the stock exchange, or the foreign currency market. Prices nearly always fall back after a period.

Spill-over effect is another term for externality.

Stage A stage in air transport involves one take-off and one landing.

Stagflation A combination of stagnant output and high inflation.

Standard of living is the measure of how well off people are, and may include measures other than GDP per capita.

Standard rate of tax is the main band of tax paid by the majority of people on their income.

Stand-by tickets are available even more cheaply to travellers who are prepared to wait for a seat to be available.

Standing orders are regular payments from your bank account to someone else's account which are for a fixed sum.

Stated preference This is a method of attempting to work out people’s valuation of things which do not pass through the market, by asking them directly for their views.

Stock exchange crash The market in stocks and share is speculative, leading to prices rising to unreasonable levels at certain times. When the prices drop from these levels, it is known as a stock exchange crash, the most famous example being in 1929 in the USA and the most recent example being in the late 1980s. In both these cases a recession followed.

Stock pollutant This type of pollutant is one that does build up in the environment.

Stop-go cycle A repeated cycle generated by the government’s own economic actions. This could be caused by successive attempts to control conflicting economic targets or to manipulate short-term economic performance to influence voters, thereby creating an ‘electoral business cycle’.

‘Stop-go’ policy This is the policy of expanding the economy (e.g. by tax cuts) to reduce unemployment, but then having to reverse this policy because other problems arise, such as inflation and balance of payments deficits, resulting in a deflationary policy.

Strategic alliances (SAs) can be rather informal agreements between firms, sometimes called networks, such as in the airline industry whereby a number of firms will employ code-sharing arrangements so that customers can use several airlines on a single ticket. Alternatively, joint ventures are much more formal relationships, involving an exchange of ownership and the establishment of a newly-created organisation. Between these two extremes there are a whole host of other types of collaboration, such as licensing agreements, franchising and distribution and supply arrangements.

Strategic bias is a problem with the stated preference method of arriving at valuations because, as people are not actually required to pay the values they place on the environment, they may be tempted to overstate or understate the values in order to influence policy.

Strategic Rail Authority The new regulator of the rail industry.

Strike is the temporary withdrawal of labour in the hope of achieving an improvement in the terms and/or conditions of employment.

Strong and weak sustainability are two versions of the sustainability principle. In the strong version, no erosion of the earth's capital is permitted. In the weaker version, erosion of the capital is permitted provided it is accompanied by technical progress, which allows us to use the remaining capital more efficiently.

Structural unemployment results from a change in the structure of the economy, i.e. the decline of one industry and/or the rise of another. If the declining industries are concentrated in particular locations, it is known as regional unemployment. Alternatively, if the demand for labour is due to improvements in technology it is referred to as technological unemployment.

Student grants were a system of financing students’ living expenses, now largely replaced by loans and tuition fees.

Subsidies are payments made by the government to help people or organisations in difficulty, or to encourage particular types of behaviour (e.g. setting up businesses in areas of the country where unemployment is high).

Substitute Products that are alternatives for each other, e.g. butter and margarine.

Substitution effects are the changes to consumption resulting only from the change in relative prices, which therefore excludes any effect resulting from a change in real income that results from a change in one of the prices. The substitution effect in relation to tax rises argues that lower income tax will make take-home wages higher, thus making the opportunity cost of an hour of leisure greater, creating an incentive effect for lower taxes.

Sunk costs are costs that have been incurred in the past and cannot now be avoided. They are costs that cannot be recovered once a firm leaves an industry. Specialist capital equipment often falls into this category, as does most marketing costs, like advertising. Firms are unable to recoup these costs. These act as barriers to exit for incumbents given the large capital outlays involved.

Sunrise industries are new industries that promise to grow in the future.

Supply curve of the firm in perfect competition is its MC curve above AVC.

Supply side Factors influencing aggregate supply.

Supply-side economists believe that too much attention is given to the demand side of the economy, and economic growth is more easily achieved by cutting taxes, reducing regulations and making life easier for entrepreneurs.

Sustainability is the idea that economic growth should not be at the cost of reducing the earth’s wealth in terms of biodiversity and resources - sometimes referred to as earth capital.

Sustainable development means development that can be sustained, but following the Brundtland Report usually means economic growth that is not at the expense of the welfare of future generations. This term was originally made famous by the Brundtland Report in the 1980s and meant growth which is possible within environmental constraints, and which does not prejudice the living standards of future generations. Subsequently, financial and social meanings of the term have been added in relation to regeneration of areas of the country which have gone into relative decline.

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‘Take off into sustained growth’ is a phrase used by Rostow to define the point at which an industrial revolution became self-sustaining.

Takeover occurs when one company buys out another; if this happens without the consent of the acquired company’s management it is known as a hostile takeover.

Tangential point is the point where two lines just touch.

Tax base There are four tax bases on which tax can be charged: income, expenditure, wealth and existence.

Tax-benefit system is the system of taxes and benefits, which leads to income redistribution. People may be paying taxes and receiving benefits at the same time.

Tax revenues are the income received by the government from taxes.

Taxes and prices index (TPI) combines changes in taxes and prices in an attempt to find a measure that includes the public sector to a greater degree.

Technical efficiency is achieved if costs for a given output are minimised.

Technical fix is the solution to environmental problems by an as yet unknown scientific breakthrough. People adopting this idea often stress the importance of economic growth rather than the environment. It is a term used by optimists who believe that our current environmental problems will be solved by future technical inventions. New technology will make new products possible or old products better or cheaper.

Technology transfer The policy of giving more ecological technology to developing countries so that they avoid the use of more polluting technology.

Television licences are taxes since they must be paid if a household possesses and uses a television, even if they do not use the BBC channels which it is used to finance.

Tendering is the process of putting in a bid for a franchise, or contracting out, in competition with other tenders. The outcome may be decided by quality of service as well as price.

Tenure is the legal right that a person has over a property, e.g. ownership or private rental.

Thatcherism is the collection of ideas promoted by Mrs Thatcher, the UK’s Prime Minister in the 1980s, which included privatisation, monetarism, and less intervention by the government in the economy.

‘Third Way’ combines market economics and ‘flexible labour markets’ with the government-provided welfare state.

Tight monetary policy consists of restricting the money supply, or raising interest rates, usually to slow down inflation.

Time deposits are interest-bearing bank accounts which require notice of withdrawal if interest is not to be lost.

Time lags often occur in the production process, particularly in agriculture, when decisions about the quantity to be produced are made well ahead of the actual sale. Demand and the price may change in the interval, creating a problem for the producer.

Time slots are designated periods for take-off and landing at airports.

Total costs (TC) are the costs of all the resources necessary to produce any level of output.

Total revenue is the total amount of money gained by selling at a particular price and is equal to price times quantity (P × Q).

Tourism multiplier Spending by tourists has benefits not just for tourism and tourist-related industries, but in others such as retailing, financial services, transport and so on. The spending adds to incomes and jobs in these industries and this additional income is then spent by the people working in them on consumption goods and services, which in turn creates a further round of income and job creation, and so on; hence, a multiplier effect has been initiated (see also Chapter 32 for a more detailed explanation).

Track costs are the costs of providing the track on which transport runs: rails in the case of railways; roads in the case of cars and lorries.

‘Tracking the mark’ was a policy followed in the late 1980s of linking the value of the pound to the German Mark (Deutschemark) at quite a high value, prior to entering the exchange rate mechanism (ERM).

Tradable permits work by allowing firms to buy the right to pollute from the government. The government can set the global amount of pollution that they will allow in any given year. The firms are then either allocated the permits in line with their current pollution levels (sometimes called grandfather rights) or have to bid for the rights. Once the pollution permits have been distributed, a market is established and firms can buy and sell the permits.

Trade union is an organisation of workers who exist to negotiate on the terms and conditions of employment of its members.

Transactions costs are the costs of setting up and running a market, and defining or maintaining property rights, e.g. ticket production and checking on public transport.

Transfer payments are payments, usually from the government to individuals, which are concerned with transferring income to poorer people in society, and are not payments for output. As these are not payments for productive services, they are therefore deemed to have nothing to do with the creation of the national product in the current year.

Transfrontier pollution is pollution which originates in one country but which adversely affects another.

Transitional relief The shift to a uniform business rate caused difficulties for some authorities, who had previously received a large part of their revenue from local business rates, which required some ‘transitional relief’ while they adjusted to the new situation.

Transmission of electricity is the large-scale movement of electricity at high voltages from generators to regional electricity companies.

Transmission mechanism is the process and links whereby a change in one thing brings about changes in others, e.g. the links between changes in the money supply and changes in consumption and investment.

Treasury bills are a means of borrowing short term that is used by the government. They are a promise by the government to pay a specific sum, e.g. £100 000, 91 days (three months) after the date on which the bill is issued. The percentage reduction in price is known as the discount rate. Treasury bills usually have a life of 91 days. They are sold at a discount, below their face value, which gives the purchaser a return when they are redeemed. The ‘rate of discount’ is the equivalent of the rate of interest, except it is over only three months rather than a year.

Trusts are the form of public sector organisation that allows some independence from government departments. Although they are separate legal entities, they receive most of their funding from the government. Parts of the welfare state are trusts set up as semi-independent business units.

Tuition fees are payments made by UK university students, covering part of the cost of their courses.

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Ultraviolet (UV) radiation is a form of radiation from the sun largely screened out by the ozone layer, which in excessive quantities can cause skin cancer and affect agricultural productivity.

Underlying rate of inflation The RPI without the mortgage interest element is often referred to as the underlying rate of inflation.

Unemployment refers to those people who are actively seeking jobs. As a result, they are included among the economically active. It exists when labour that is seeking work is unable to find any. It also refers to the number of people unemployed.

Unemployment rate is the number of unemployed expressed as a percentage of the working population.

Uniform business rate With the introduction of the council tax, the right of local authorities to vary the rate charged on local businesses was taken from them and centralised. All businesses are thus on a national system of rate charging, the uniform business rate, with the revenue being distributed locally in proportion to population.

Unitary elasticity Demand has unitary price elasticity when a percentage cut in price brings about an exactly equal expansion of demand so as to leave total revenue unchanged.

Universal benefit systems are systems in which benefits are paid irrespective of income and there is no means testing.

Usury Making money from lending money and charging interest (some people would suggest the term only applies if the interest is excessive).

Utilitarians were a school of philosophy, which gained influence in the nineteenth century and gave rise to modern economics.

Utilitarian philosophers were a number of eighteenth and nineteenth century philosophers who based their arguments on the idea of utility or satisfaction, the most well known being Jeremy Bentham.

Utilitarianism is the school of philosophy that led to the development of modern economics, based on the principle of utility and its maximisation.

Utility is a measure of satisfaction, which was thought to be measurable in the nineteenth century but which is now accepted as subjective. It is the amount of happiness that an individual derives from the consumption of goods and services.

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Value is how much something is worth. In economics this usually equal to the price people pay for it, but sometimes there isn’t a price (e.g. pollution), which makes working out value difficult.

Value-added debate This is the argument that the output of schools should be measured, not by the exam success of their students, but by the improvement in the performance of students during the period they are at the school. This argument has also been put forward in assessing the performance of universities.

Value-added tax (VAT) is the common tax of all EU countries, which is levied on the difference between a company’s sales and its purchases of raw materials and components, i.e. on the value the company has added to the production process.

Value-free means objective analysis, free of value judgements. Some people take the view that this is not possible in the social sciences, the method of analysis betraying some basic assumption about society, e.g. analysing the economy from the viewpoint of the individual suggests the individual is more important than society as a whole.

Value judgement This is an ethical position that a person holds about what is right or wrong - usually about income distribution, property rights or the environment. It is a fundamental ethical belief about what is the preferred state of the world.

Value of coefficients are important in determining the category of elasticity; the negative value or sign can be ignored in this regard:

  1. If elasticity is exactly equal to one then demand has unitary price elasticity.
  2. If elasticity is greater than one but less than infinity then demand is price elastic.
  3. If elasticity is less than one but greater than zero then demand is price inelastic.

Variable costs (VC) are those which vary with output. Variable costs are zero when output is zero and rise directly with output. They are costs other than fixed costs, e.g. changing fuel prices. All costs are variable in the long run, since they can change over a period of time.

VAT (Value Added Tax) is a tax on the value added at each stage of production. In practice, this is collected by taxing the value of output at each stage of production but allowing firms to claim back tax on their purchases of other firms’ outputs. It is an indirect tax on expenditure levied in EU countries.

Vehicle excise duty is an annual payment by vehicle owners that contributes to the upkeep of the roads system.

Velocity of circulation (V) is the speed at which money circulates in the economy in a given period of time. It can be calculated by dividing the value of all transactions in a given period of time by the chosen measure of the money supply.

Vertical disintegration means the breaking up of a company into different processes in the chain of production.

Vertical integration exists when companies at different stages of the production process merge, e.g. airlines and package-holiday companies.

Vertical merger, or vertical integration, is a combination of two firms at different stages of production in the same industry; vertical integration can either involve a firm expanding backwards towards its sources of supply or forwards towards its markets.

Vicious circle of poverty affects the poorest nations in the world, as low incomes lead to low savings, which in turn restrict the supply of capital, which retards the rate of economic growth, which leads to low incomes and so on.

Volatile organic compounds (VOCs) result from the burning of fossil fuels and may be carcinogenic (cancer forming).

Voluntary sector With the retreat of the state, noted in Chapters 9 and 10, this sector has grown in importance. This sector can be a mixture of rented and owner-occupied property, as occupiers are sometimes able to switch between renting and purchasing. While finance for this sector usually comes from the state, the operation of the sector is by independent voluntary trusts.

Voter-consumer Voters are, in part, demanding a range of public sector outputs when voting for a political party and in this sense are also acting as consumers when they vote. Individual voters may not have to pay for their share of this output if other people pay more tax.

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Wage premiums are the higher average wages that unionised workers receive compared with their non-unionised counterparts.

Wages Councils were used to set wages in areas where trade unions were not strong. In this sense the system worked a little like the minimum wage today. The wages councils were abolished in the 1980s.

Wagner’s law proposes that the share of public expenditure in the economy will rise as incomes rise.

Waiting lists are a form of rationing based on how long people have been waiting for treatment and how serious the condition is. Waiting lists arise in social housing when demand exceeds supply at the current rent levels.

Warehousing costs are the costs of storing a product in a warehouse.

Wealth The total stock of assets that contribute to our standard of living.

Weighting Most indexes (sometimes called indices) require weighting. Because an index combines lots of different items in one value it is necessary to make allowance for their relative importance.

Welfare economics is the study of what the economy ought to be like and will involve a discussion of ethics, particularly the distribution of income.

Welfare state This consists of services provided and sometimes produced by the government, largely free of charge such as health or education.

White Papers are statements of government policy.

Wholesale prices index tracks the growth of prices at the wholesale level before they reach the retailer.

Willingness to pay is another way of describing the demand curve, with each point on it representing the willingness of someone to pay for a unit of the product. These individual ‘willingnesses’ to pay can be added together to calculate total willingness to pay, or the area under the demand curve.

Wind turbines situated in windy (usually mountainous) areas of the country are using indirect solar energy. In Iceland geothermal energy is used by pumping water down to hot parts of the earth’s crust (which are near the surface), which then returns as steam to drive turbines.

Windfall gains were received by some sitting tenants, who were offered cash sums to give up their tenancy, or prices below the free market rate to purchase their properties.

Windfall tax is a one-off tax on a gain which, like a windfall apple, falls into your lap without any effort on the part of the recipient.

Wine lake A similar problem to the butter mountain, dealt with by turning it into vinegar.

Worker cooperative This is a registered form of business that is owned and controlled by some or all of its employees, who share any profits.

‘Workfare’ schemes attach the receipt of benefits to unemployed or low-income individuals.

Workforce or working population is the total supply of labour. It comprises those of working age who are available for work and it is determined primarily by non-economic factors such as the size of the population and its age and sex distribution. It may also be influenced by institutional factors such as the school-leaving age and social attitudes to, for example, women working.

Working capital consists of the stocks of raw materials and semi-manufactured goods.

Working families tax credit is a payment made to lower-income families with at least one person working. The objective is to maintain the incentive for people to work, even though they lose benefits.

World Bank or International Bank for Reconstruction and Development (IBRD) was established in 1947 as a sister organisation of the IMF; its chief function is to finance long-term projects in developing countries.

World Trade Organisation (WTO) is the organisation formerly known as GATT, which is responsible for reducing barriers to trade. It was established in 1995 as a successor to GATT and is responsible for administering multilateral trade agreements between its members, such as those achieved in the GATT rounds of negotiations.

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X-efficiency is a term that applies to the minimisation of cost that occurs in perfect competition.

X-inefficiency is that part of inefficiency resulting from a failure to minimise costs (as opposed to inefficient allocation of resources).

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Yuppiefication AYuppy is a ‘young urban professional’. Yuppiefication means moving up-market often in a trendy way.

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Zero rated means an item of expenditure on which the rate of VAT is zero.

Zoning is an environmental policy that works by keeping the potential victims of pollution in different areas from the pollution. This only works for local pollutants such as noise or local air quality.

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