Glossary

Every term, in one place

The same 46 definitions the lessons link to inline, wherever a sentence uses them — gathered here so a definition is never more than one page away.

A

ad valorem taxpercentage tax, ad-valorem tax: An indirect tax charged as a fixed percentage of price rather than a fixed £ amount — the £ amount added grows as price rises, which pivots the supply curve rather than shifting it in parallel.
adverse selectionadverse-selection problem: A hidden characteristic that already exists and is already known unevenly between the two parties before a contract is signed — a driver's true accident-proneness, an applicant's true health — which skews who chooses to buy at a price set on the population average, typically pushing average cost up for the informed side over time. Distinct from moral hazard, which is a behaviour change that happens after the contract exists, not a difference in pre-contract information.
asymmetric informationinformation gap, information asymmetry: One party to a transaction or relationship knowing less than the other — here, a regulator lacking the detailed cost and performance information a firm has about itself, which limits how well it can set a price cap, profit cap, or quality standard.

C

ceteris paribus: 'All other things being equal' — the assumption that lets an economic model isolate the effect of one variable at a time by holding everything else that could also affect the outcome constant. What breaks this assumption is exactly what turns a movement along a curve into a shift of it.
command economyplanned economy: An economic system in which a central planning authority, rather than the price mechanism, decides what, how, and for whom to produce, typically alongside state ownership of the means of production.
common resourcecommon-pool resource, common pool resource, open-access resource: A good that is rival but non-excludable — a fish stock in international waters, or a national park at peak visitor numbers — a different failure mode from a public good, since restricting access is the practical problem here, not restricting consumption once access is granted.
consumer surplusCS: The difference between the maximum price a consumer was willing to pay for a good and the price they actually paid, summed across every unit bought — not the price itself. The phrase 'the difference between' is specifically what the knowledge mark requires, confirmed repeatedly in examiner reports.
consumption externality: An externality arising from the act of using a good, not from making it — it shifts marginal private benefit away from marginal social benefit, leaving the supply (cost) side untouched. Vaccination (positive) and passive smoking (negative) are the standard examples.
cross elasticity of demandXED: How responsive quantity demanded of one good is to a change in the PRICE of a different good: %ΔQd(B) ÷ %ΔP(A). Positive means the two goods are substitutes, negative means complements, and a value close to zero means they're economically unrelated.

D

demand curveindividual demand curve, market demand curve: The graphical relationship between the price of a good and the quantity of it demanded, holding every other determinant of demand constant — downward sloping because of diminishing marginal utility, and the single curve that a movement moves along or a shift moves entirely.
diminishing marginal utilityDMU, law of diminishing marginal utility: The point at which each additional unit of a good starts adding less extra satisfaction than the unit before it — marginal utility is still positive and total utility is still rising, just more slowly. Not the same as total utility falling (marginal utility has turned negative by then), and not the same as decreasing marginal RETURNS (a production, not consumption, concept) — both are among the most commonly confused pairs on this paper, confirmed across four separate examiner series.
division of labourspecialisation, specialization: Splitting a production process into narrow, repeated tasks performed by different workers, rather than one worker completing the whole process alone — raises output per worker through practice, saved time, and more scope for innovation, at the cost of monotony and dependence on the rest of the specialised chain. Named explicitly in the spec via Adam Smith's account of it.

E

economic good: A good that is scarce relative to demand, so obtaining more of it has a genuine opportunity cost — someone gives something up to produce or acquire it. Almost everything a course in economics studies is an economic good; a free good is the deliberate exception used to sharpen the definition.
externalityexternalities: A cost or benefit of a transaction that falls on a third party who never agreed to it, so it never enters the buyer's or seller's own decision — one of the spec's five named sources of market failure. Classified as arising from production (shifts the cost curve) or consumption (shifts the benefit curve), and as positive or negative.

F

financial markets: Markets that channel funds between savers and borrowers and let ownership and risk be traded — the spec names five roles: facilitating saving, making funds available to businesses and individuals, facilitating exchange of goods and services, providing forward markets in commodities and currencies, and providing a market for equities.
free good: A good so abundant relative to demand that it can be used at zero opportunity cost — using more of it takes nothing away from anyone else's use of it. Rare in the strict sense: most goods that feel 'free' are only free at the specific point of access, not free to produce or distribute everywhere.
free market economy: An economic system in which the price mechanism, not a central authority, decides what, how, and for whom to produce, with resources privately owned and the state's role kept minimal. Contrasted with a command economy, and rarely found in pure form — nearly every real economy is a mixed economy.
free-rider problemfree rider problem, free-riding: The result, derived directly from non-excludability, that a rational individual's payoff from not paying for a public good is at least as good as paying for it — since their own consumption doesn't depend on their own payment — so voluntary private provision collapses toward zero even where the good's total social benefit exceeds its cost.
functions of moneymoney: Anything widely accepted as payment, serving three functions: a medium of exchange (removing the need to barter), a measure and store of value (a stable unit that holds its worth between earning and spending it), and a method of deferred payment (letting a transaction be agreed now and settled later). Specialisation makes barter increasingly impractical, which is exactly why deep specialisation depends on money existing.

I

income elasticity of demandYED: How responsive quantity demanded is to a change in consumer income: %ΔQd ÷ %ΔY. Positive marks a normal good (necessity if between 0 and 1, luxury/superior if above 1); negative marks an inferior good, where quantity demanded falls as income rises.
inferior good: A good whose quantity demanded falls as consumer income rises (negative income elasticity of demand) — consumers substitute toward goods they previously couldn't afford as income grows. The direction-of-shift error the exam most often catches candidates on when a real-income question doesn't specify which type of good is involved.

M

marginal costMC: The extra total cost of producing one more unit of output. In the short run, MC = wage rate ÷ marginal product of labour — which is why a rising marginal product pushes MC down, and a falling one (diminishing returns) pushes MC up.
marginal social benefitMSB: The full benefit to society of one more unit consumed — marginal private benefit plus any marginal external benefit enjoyed by third parties. Where MSB exceeds marginal private benefit, the market's stopping condition (MPB=MPC) is reached too early, at an output short of the socially optimal one.
marginal social costMSC: The full cost to society of producing one more unit — marginal private cost plus any marginal external cost imposed on third parties. Where MSC exceeds marginal private cost, the market's stopping condition (MPB=MPC) is reached too late, at an output beyond the socially optimal one.
market bubblespeculative bubble, asset price bubble, asset bubble: A self-reinforcing price rise where buyers purchase mainly because they expect the price to keep rising, rather than because of any change in the asset's underlying earning power or usefulness — detectable by checking whether the size of the price rise can be explained by a genuine change in fundamentals.
market failuremarket failures: An outcome where a free market produces more or less than the socially optimal level of output, because private decisions ignore some of the full social cost or benefit involved — the price mechanism, left alone, only weighs the costs and benefits falling on the buyer and seller directly involved in a trade, never on an affected third party. The starting justification for every method of government intervention the spec lists — intervention only has a purpose because a market failure exists for it to correct.
mixed economy: An economic system combining free market allocation for most goods and services with direct state provision and intervention elsewhere — correcting market failure, providing public goods, redistributing income, and maintaining the legal framework of property rights and contracts that a market itself depends on to function. The system every real-world economy actually is, to varying degrees.
moral hazardmoral-hazard problem: A change in behaviour that occurs after a contract is signed, because the contract has shifted the cost of a risk onto someone else — an insurer, a deposit guarantee, a taxpayer. Requires no hidden information at the point of signing at all, which is what distinguishes it from adverse selection.
movement along the demand curvemovement along demand: A change in quantity demanded caused only by a change in the good's own price, tracing a new point on the SAME demand curve — as distinct from a shift of the demand curve, which is caused by anything other than the good's own price.

N

normal good: A good whose quantity demanded rises as consumer income rises (positive income elasticity of demand) — split further into a necessity (YED between 0 and 1) and a luxury/superior good (YED above 1). Whether a specific good is normal has to be established from evidence, not assumed.
normative economicsnormative statement, value judgement: A statement containing an opinion about what ought to happen — 'should', 'better', 'fairer' — that cannot be resolved by evidence alone, because it rests on a value judgement rather than a testable claim. Most real policy debates combine a positive prediction with a normative choice about which outcome to prioritise.

O

opportunity cost: The value of the next-best alternative given up by a choice. Baked directly into how economic cost is defined here: total cost already includes the opportunity cost of the owner's capital and effort, which is exactly why breaking even on the accounting numbers (AR = AC) still counts as an acceptable outcome rather than a warning sign.

P

positive economicspositive statement, positive economic statement: A statement about what is, was, or will be — a claim that could in principle be tested against evidence and shown true or false, regardless of whether people currently agree on the answer. Distinct from a value judgement, which no amount of evidence alone can settle.
price elasticity of supplyPES, elasticity of supply: How responsive the quantity supplied of a good is to a change in its own price: PES = %ΔQs ÷ %ΔP. Always positive, because supply's upward slope means quantity supplied and price move in the same direction — unlike price elasticity of demand, no negative-sign convention is needed.
price mechanismthe price mechanism: The process by which price alone allocates a scarce good and coordinates buyers' and sellers' independent decisions, with no central planner — performing three functions at once: rationing (inducing buyers to cut back consumption of a scarce good), incentive (rewarding producers for supplying more), and signalling (telling resources outside the market where to move).
private good: A good that is both rival (one person's consumption reduces what's left for others) and excludable (a seller can prevent a non-payer from consuming it) — the combination that lets an ordinary market clear at a price, unlike a public good.
producer surplusPS: The difference between the price a producer actually received for a good and the minimum price they would have been willing to accept, summed across every unit sold — not simply 'profit,' and not the revenue itself.
production externality: An externality arising from the act of making a good, not from using it — it shifts marginal private cost away from marginal social cost, leaving the demand (benefit) side untouched. Classified separately from a consumption externality regardless of who eventually buys the output.
public goodpublic goods: A good that is both non-rival (one more person consuming it leaves exactly as much available to everyone else) and non-excludable (a non-payer cannot be prevented from consuming it). Both properties must hold — a good that is only one or the other (a common resource, a club good) is not a public good, and neither property is about who pays for the good, which is a common examiner-confirmed confusion (public good vs public sector).

S

scarcity: The basic economic problem: finite resources set against unlimited human wants, forcing a choice between alternative uses every time a resource is allocated. The reason opportunity cost exists at all — without scarcity, using a resource for one purpose would never require giving up another.
shift of the demand curvedemand shift, shift in demand: The entire demand curve moving to a new position because of a change in something other than the good's own price — substitutes/complements, real income, tastes, population size/age distribution, or advertising. A rightward shift means more is demanded at every price, not just at one.
specific taxper-unit tax, unit tax, specific indirect tax: An indirect tax charged as a fixed £ amount per unit sold, regardless of price — shifts the supply curve up by that constant amount at every output, a parallel shift rather than a pivot.
subsidygovernment subsidy, producer subsidy: A per-unit payment from government to producers, lowering the effective cost of supplying each unit — the mirror image of a specific tax, shifting supply down/right and splitting its benefit between consumers and producers by the identical elasticity rule that governs tax incidence.

T

tax incidenceincidence of a tax, incidence: The question of how the burden of an indirect tax actually splits between consumers (a higher price paid) and producers (a lower price received), regardless of which side the tax is legally collected from. The side with the lower price elasticity — demand or supply, whichever responds less — bears the larger share.

U

utility: The satisfaction or benefit a consumer gets from consuming a good or service — the quantity the rationality assumption says a consumer is trying to maximise. Measured only in relative terms (utils), never as an absolute number comparable between people.

W

welfare lossdeadweight loss, dead weight loss: The net loss to society from producing at the market quantity rather than the socially optimal one — the sum of every unit's individual gap between marginal social cost and marginal social benefit across the over- or under-produced range, drawn as the triangle between the two curves.