Cambridge A Level Economics (9708) –

Glossary of Key Definitions

Part 1: AS Microeconomics (Units 1–8)

1.1 Basic Economic Ideas and Resource Allocation

Scarcity: The fundamental economic problem where resources are limited but wants are
unlimited.

Opportunity cost: The next best alternative forgone when a choice is made.

Factors of production: The resources used in production — land, labour, capital, and
enterprise.

Production possibility curve (PPC): A curve showing the maximum possible combinations of
two goods that can be produced using all resources efficiently.

Allocative efficiency: When resources are distributed to produce the goods and services
most wanted by society.

Productive efficiency: When goods and services are produced at the lowest possible cost
using given resources.

1.2 Demand and Supply

Demand: The quantity of a good or service that consumers are willing and able to buy at
different prices over a period of time.

Supply: The quantity of a good or service that producers are willing and able to sell at
different prices over a period of time.

Market equilibrium: The point where demand equals supply, determining the equilibrium
price and quantity.

Consumer surplus: The difference between the maximum price a consumer is willing to pay
and the actual market price.

Producer surplus: The difference between the market price received by producers and the
minimum price at which they would have been willing to supply.

1.3 Price Elasticities

Price elasticity of demand (PED): The responsiveness of quantity demanded to a change in
price, measured as percentage change in quantity demanded divided by percentage change
in price.
Income elasticity of demand (YED): The responsiveness of quantity demanded to a change
in income.

Cross elasticity of demand (XED): The responsiveness of demand for one good to a change
in the price of another good.

Price elasticity of supply (PES): The responsiveness of quantity supplied to a change in

price.

1.4 The Price System and Market Failure

Price mechanism: The process by which prices adjust to allocate resources in markets
through signals and incentives.

Market failure: When the free market fails to allocate resources efficiently, leading to
welfare loss.

Externality: A cost or benefit to a third party not involved in the economic transaction.

Positive externality: A benefit to society not reflected in the market price.

Negative externality: A cost to society not reflected in the market price.

Public good: A good that is non-rivalrous and non-excludable (e.g., street lighting).

Merit good: A good under-consumed if left to the market because individuals underestimate
its benefits (e.g., education).

Demerit good: A good over-consumed if left to the market because individuals

underestimate its harm (e.g., cigarettes).

Asymmetric information: When one party in a transaction has more or better information
than the other.

1.5 Government Microeconomic Intervention

Indirect tax: A tax on expenditure (e.g., VAT, excise duty).

Subsidy: A payment by the government to producers to encourage production or reduce

prices.

Price ceiling (maximum price): A legally imposed upper limit on price, below the market
equilibrium.

Price floor (minimum price): A legally imposed lower limit on price, above the market
equilibrium.

Tradable permits (cap-and-trade): Licences allowing firms to pollute up to a limit, which

can be bought and sold.
Nationalisation: Transfer of ownership of firms from private to government control.

Privatisation: Transfer of ownership of firms from government to private sector.

Regulation: Rules imposed by government to control business behaviour.

1.6 Labour Market

Derived demand for labour: Labour is demanded because of the demand for the goods and
services it helps to produce.

Marginal revenue product of labour (MRP): The additional revenue generated by employing
one more worker.

Trade union: An organisation of workers formed to protect their interests and bargain for
better pay and conditions.

Minimum wage: A legally imposed lowest wage rate that employers can pay workers.

Monopsony: A labour market with only one main buyer (employer) of labour.

1.7 The Distribution of Income and Wealth

Income: The flow of earnings from the use of factors of production (e.g., wages, rent, profit).

Wealth: The stock of assets owned by individuals or firms at a point in time.

Lorenz curve: A diagram showing the distribution of income or wealth in an economy.

Gini coefficient: A numerical measure of inequality based on the Lorenz curve, ranging from
0 (perfect equality) to 1 (perfect inequality).

Poverty: A state where an individual or household lacks sufficient income to meet basic
needs.

Absolute poverty: When income is below the minimum required for basic necessities.

Relative poverty: When income is significantly below the average for society, leading to
exclusion.

Part 2: AS Macroeconomics (Units 9–12)

Gross Domestic Product (GDP): The total monetary value of all final goods and services
produced within a country in a given period, usually one year.

Real GDP: GDP adjusted for inflation, showing the actual volume of output.

Nominal GDP: GDP measured at current market prices without adjusting for inflation.

Aggregate demand (AD): The total planned spending on goods and services in an economy
at a given overall price level.
Aggregate supply (AS): The total output that firms in an economy are willing and able to
produce at a given overall price level.

Inflation: A sustained increase in the general price level of goods and services in an
economy over time.

Deflation: A sustained fall in the general price level of goods and services.

Disinflation: A fall in the rate of inflation (prices still rise, but at a slower rate).

Unemployment: The number of people in the labour force who are willing and able to work
but cannot find a job despite actively seeking work.

Labour force: The total number of people employed plus unemployed who are actively
seeking work.

Balance of payments (BOP): A record of all financial transactions made between consumers,
businesses, and the government in one country with others.

Current account: Part of the balance of payments that records trade in goods and services,
income, and current transfers.

Fiscal policy: The use of government spending and taxation to influence aggregate demand
and economic activity.

Monetary policy: The use of interest rates and control of the money supply by a central bank
to influence aggregate demand.

Supply-side policies: Government measures designed to increase the productive capacity

and efficiency of the economy.

Multiplier effect: The process by which an increase in autonomous spending leads to a

larger overall increase in national income.

Part 3: A2 Microeconomics (Advanced Micro)

Total cost (TC): The sum of fixed costs and variable costs of production.

Average cost (AC): Total cost divided by the quantity of output produced.

Marginal cost (MC): The additional cost of producing one more unit of output.

Economies of scale: Cost advantages that a business experiences as it increases production,

leading to a fall in average costs.

Diseconomies of scale: The disadvantages that firms experience as they grow, leading to
rising average costs.
Perfect competition: A market structure where there are many small firms, identical
products, perfect information, and freedom of entry and exit.

Monopoly: A market with a single dominant seller, often with high barriers to entry.

Oligopoly: A market dominated by a few large firms, often characterised by

interdependence and potential collusion.

Monopolistic competition: A market with many firms selling differentiated products and
relatively low barriers to entry.

Contestable market: A market with no significant barriers to entry or exit, meaning

potential competition constrains prices and behaviour.

Dynamic efficiency: When resources are allocated efficiently over time, with innovation and
technological progress.

X-inefficiency: When firms are not producing at the lowest possible cost, often due to lack of
competition.

Part 4: A2 Macroeconomics (Advanced Macro)

Economic growth: An increase in real GDP over time.

Economic development: A broader measure of progress in an economy, including

improvements in living standards, health, and education.

Human Development Index (HDI): A composite measure of development including income,

life expectancy, and education levels.

Terms of trade: The ratio of export prices to import prices, expressed as an index.

Globalisation: The increasing integration of economies worldwide through trade,

investment, migration, and technology.

Foreign direct investment (FDI): Investment by a firm in one country into business interests
in another country.

Exchange rate: The price of one currency in terms of another.

Fixed exchange rate: An exchange rate regime where the currency’s value is tied to another
currency or basket of currencies.

Floating exchange rate: An exchange rate determined by market forces of demand and
supply.

Protectionism: Government policies designed to restrict international trade to protect

domestic industries.
Trade liberalisation: The removal or reduction of trade barriers, such as tariffs and quotas.

Customs union: An agreement between countries to remove trade barriers between

members and adopt a common external tariff.

Economic union: A group of countries with not only free trade and a common external tariff
but also harmonised economic policies, and sometimes a common currency.

International Monetary Fund (IMF): An international organisation that provides financial

assistance and advice to member countries facing balance of payments difficulties.

World Trade Organization (WTO): An international organisation that regulates global trade
and resolves disputes between member states.