Cambridge IGCSE Economics

Key Words & Definitions

August 2024
Section 1: The basic economic problem
1.1 Wants: desires for goods and services.

1.2 Resources: factors used to produce goods and services.

1.3 The economic problem: unlimited wants exceeding finite resources.

1.4 Scarcity: a situation where there is not enough to satisfy everyone’s wants.

1.5 Economic goods: a product which requires resources to produce and therefore has an opportunity
cost.

1.6 Free goods: a product which does not require any resources to make and so does not have an
opportunity cost.

1.7 Factors of production: the economic resources of land, labour, capital and enterprise.

1.8 Land: gifts of nature available for production.

1.9 Labour: human effort used in producing goods and services.

1.10 Capital goods: human-made goods used in production.

1.11 Consumer goods: goods and services purchased by households for their satisfaction.

1.12 Enterprise: risk bearing and key decision making in business.

1.13 Occupationally mobile: capable of changing use.

1.14 Geographically immobile: incapable of moving from one location to another location.

1.15 Mobility of labour: the ability of labour to change where it works or in which occupation.

1.16 Mobility of capital: the ability to change where capital is used or in which occupation.

1.17 Mobility of enterprise: the ability to change where enterprise is used or in which occupation.

1.18 Entrepreneur: a person who bears the risks and makes the key decisions in a business.

1.19 Labour force: people in work and those actively seeking work.

1.20 Productivity: the output per factor of production in an hour.

1.21 Labour productivity: output per worker hour.

1.22 Output: goods and services produced by the factors of production.

1.23 Investment: spending on capital goods.

1.24 Gross investment: total spending on capital goods.

1.25 Depreciation: the value of capital goods that have worn out or become obsolete.

1.26 Net investment: gross investment minus depreciation.

1.27 Negative net investment: a reduction in the number of capital goods caused by some obsolete and
worn out capital goods not being replaced.

1.28 Opportunity cost: the next best alternative forgone while making an economic decision.

1.29 Production possibility curve: a curve that shows the maximum output of two types of products
and combination of those products that can be produced with existing resources and technology.

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Section 2: The Allocation of Resources
2.1 Microeconomics: the study of the behaviour and decisions of households and firms and the perfor-
mance of individual markets.

2.2 Macroeconomics: the study of the whole economy.

2.3 Market: an arrangement which brings buyers into contact with sellers.

2.4 Economic agents: those who undertake economic activities and make economic decisions.

2.5 Private sector: firms owned by shareholders and individuals.

2.6 Economic systems: the institutions, organisations and mechanisms that influence economic be-
haviour and determine how resources are allocated.

2.7 Planned economic system: an economic system where the government makes the crucial decisions,
land and capital are state-owned and resources are allocated by directives.

2.8 Directives: state instructions given to state-owned enterprises.

2.9 Mixed economic system: an economy in which both the private and public sectors play an important
role.

2.10 Market economic system: an economic system where consumers determine what is produced, re-
sources are allocated by the price mechanism and land and capital are privately owned.

2.11 Price mechanism: the way the decisions made by households and firms interact to decide the
allocation of resources.

2.12 Capital-intensive: the use of a high proportion of capital relative to labour.

2.13 Labour-intensive: the use of a high proportion of labour relative to capital.

2.14 Demand: the willingness and ability to buy a product.

2.15 Supply: the willingness and ability to sell a product.

2.16 Market equilibrium: a situation where demand and supply are equal at the current price.

2.17 Market disequilibrium: a situation where demand and supply are not equal at the current price.

2.18 Market demand: total demand for a product.

2.19 Aggregation: the addition of individual components to arrive at a total amount.

2.20 Extension in demand: a rise in the quantity demanded caused by a fall in the price of the product
itself.

2.21 Contraction in demand: a fall in the quantity demanded caused by a rise in the price of the product
itself.

2.22 Changes in demand: shifts in the demand curve.

2.23 Increase in demand: a rise in demand at any given price, causing the demand curve to shift to the
right.

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2.24 Decrease in demand: a fall in demand at any given price, causing the demand curve to shift to the
left.

2.25 Normal goods: a product whose demand increases when income increases and decreases when
income falls.

2.26 Inferior goods: a product whose demand decreases when income increases and increases when
income falls.

2.27 Substitute: a product that can be used in place of another.

2.28 Complement: a product that is used together with another product.

2.29 Ageing population: an increase in the average age of the population.

2.30 Birth rate: the number of live births per thousand of the population in a year.

2.31 Market supply: total supply of a product.

2.32 Extension in supply: a rise in the quantity supplied caused by a rise in the price of the product
itself.

2.33 Contraction in supply: a fall in the quantity supplied caused by a fall in the price of the product
itself.

2.34 Changes in supply: changes in supply conditions causing shifts in the supply curve.

2.35 Increase in supply: a rise in supply at any given price, causing the supply curve to shift to the
right.

2.36 Decrease in supply: a fall in supply at any given price, causing the supply curve to shift to the left.

2.37 Unit cost: the average cost of production. It is found by dividing the total cost by the output.

2.38 Improvements in technology: advances in the quality of capital goods and methods of production.

2.39 Tax: a payment to the government.

2.40 Direct taxes: taxes on the income and wealth of individuals and firms.

2.41 Indirect taxes: taxes on goods and services.

2.42 Subsidy: a payment by the government to encourage the production or consumption of a product.

2.43 Equilibrium price: the price where demand and supply are equal.

2.44 Disequilibrium: a situation where demand and supply are not equal.

2.45 Excess supply: the amount by which supply is greater than demand.

2.46 Excess demand: the amount by which demand is greater than supply.

2.47 Price elasticity of demand (PED): a measure of the responsiveness of the quantity demanded to a
change in price.

2.48 Elastic demand: when the quantity demanded changes by a greater percentage than the change in
price.

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2.49 Inelastic demand: when the quantity demanded changes by a smaller percentage than the change
in price.

2.50 Perfectly elastic demand: when a change in price causes a complete change in the quantity de-
manded.

2.51 Perfectly inelastic demand: when a change in price has no effect on the quantity demanded.

2.52 Unit elasticity of demand: when a change in price causes an equal change in the quantity demanded,
leaving total revenue unchanged.

2.53 Price elasticity of supply (PES): a measure of the responsiveness of the quantity supplied to a
change in price.

2.54 Elastic supply: when the quantity supplied changes by a greater percentage than the change in
price.

2.55 Inelastic supply: when the quantity supplied changes by a smaller percentage than the change in
price.

2.56 Perfectly elastic supply: when a change in price causes a complete change in quantity supplied.

2.57 Perfectly inelastic supply: when a change in price has no effect on the quantity supplied.

2.58 Unit elasticity of supply: when a change in price causes an equal change in the quantity supplied.

2.59 Public sector: the part of the economy controlled by the government.

2.60 State-owned enterprises (SOEs): organisations owned by the government which sell products.

2.61 Privatisation: the sale of public sector assets to the private sector.

2.62 Price mechanism: the system by which the market forces of demand and supply determine prices.

2.63 Market failure: market forces resulting in an inefficient allocation of resources.

2.64 Free rider: someone who consumes a good or service without paying for it.

2.65 Allocative efficiency: when resources are allocated to produce the right products in the right
quantities.

2.66 Productively efficient: when products are produced at the lowest possible cost and making full use
of resources.

2.67 Dynamic efficiency: efficiency occurring over time as a result of investment and innovation.

2.68 Third parties: those not directly involved in producing or consuming a product.

2.69 Social benefits: the total benefits to a society of an economic activity.

2.70 Social costs: the total costs to a society of an economic activity.

2.71 Private benefits: benefits received by those directly consuming or producing a product.

2.72 Private costs: costs borne by those directly consuming or producing a product.

2.73 External benefits: benefits enjoyed by those who are not involved in the consumption and produc-
tion activities of others directly.

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2.74 External costs: costs imposed on those who are not involved in the consumption and production
activities of others directly.

2.75 Socially optimum output: the level of output where social cost equals social benefit and society’s
welfare is maximised.

2.76 Merit goods: products which the government considers consumers do not fully appreciate how
beneficial they are and so which will be under-consumed if left to market forces. Such goods
generate positive externalities.

2.77 Demerit goods: products which the government considers consumers do not fully appreciate how
harmful they are and so which will be over-consumed if left to market forces. Such goods generate
negative externalities.

2.78 Public goods: a product which is non-rival and non- excludable and hence needs to be financed by
taxation.

2.79 Private goods: a product which is both rival and excludable.

2.80 Monopoly: a single seller.

2.81 Price fixing: when two or more firms agree to sell a product at the same price.

2.82 Mixed economic system: an economy in which both the private and public sectors play an important
role.

2.83 Rationing: a limit on the amount that can be consumed.

2.84 Lottery: the drawing of tickets to decide who will get the products.

2.85 Nationalisation: moving the ownership and control of an industry from the private sector to the
government.

2.86 Public corporation: a business organisation owned by the government which is designed to act in
the public interest.

2.87 Cost benefit analysis (CBA): a method of assessing investment projects which takes into account,
social costs and benefits.

2.88 Multinational companies (MNCs): companies which produce in more than one country.

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Section 3: Microeconomic Decision Makers
3.1 Money: an item which is generally acceptable as a means of payment.

3.2 Commercial banks: banks which aim to make a profit by providing a range of banking services to
households and firms.

3.3 Central bank: a government-owned bank which provides banking services to the government and
commercial banks and operates monetary policy.

3.4 Liquidity: being able to turn an asset into cash quickly without a loss.

3.5 Disposable income: income after income tax has been deducted and state benefits received.

3.6 Wealth: a stock of assets including money held in bank accounts, shares in companies, government
bonds, cars and property.

3.7 Rate of interest: a charge for borrowing money and a payment for lending money.

3.8 Average propensity to consume (APC): the proportion of household disposable income which is
spent.

3.9 Consumption: expenditure by households on consumer goods and income.

3.10 Savings ratio: the proportion of household disposable income that is saved.

3.11 Average propensity to save (APS): as savings ratio, it is the proportion of household disposable
income that is saved.

3.12 Mortgage: a loan to help buy a house.

3.13 Earnings: the total pay received by a worker.

3.14 Wage rate: a payment which an employer contracts to pay a worker. It is the basic wage a worker
receives per unit of time or unit of output.

3.15 National minimum wage (NMW): a minimum rate of wage for an hour’s work, fixed by the gov-
ernment for the whole economy.

3.16 Primary sector: covers agriculture, fishing, forestry, mining and other industries which extract
natural resources.

3.17 Secondary sector: covers manufacturing and construction industries.

3.18 Tertiary sector: covers industries which provide services.

3.19 Elasticity of demand for labour: a measure of the responsiveness of demand for labour to a change
in the wage rate.

3.20 Elasticity of supply of labour: a measure of the responsiveness of the supply of labour to a change
in the wage rate.

3.21 Specialisation: the concentration on particular products or tasks.

3.22 Division of labour: workers specialising in particular tasks.

3.23 Trade union: an association which represents the interests of a group of workers.

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3.24 Collective bargaining: representatives of workers negotiating with employers’ associations.

3.25 Real income: income adjusted for inflation.

3.26 Industrial action: when workers disrupt production to put pressure on employers to agree to their
demands.

3.27 Strike: a group of workers stopping work to put pressure on an employer to agree to their demands.

3.28 Industry: a group of firms producing the same product.

3.29 The quaternary sector: covers service industries that are knowledge based.

3.30 Internal growth: an increase in the size of a firm resulting from it enlarging existing plants or
opening new ones.

3.31 External growth: an increase in the size of a firm resulting from it merging or taking over another
firm.

3.32 Horizontal merger: the merger of firms producing the same product and at the same stage of
production.

3.33 Vertical merger: the merger of one firm with another firm that either provides an outlet for its
products or supplies it with raw materials, components or the products it sells.

3.34 Conglomerate merger: a merger between firms producing different products.

3.35 Rationalisation: eliminating unnecessary equipment and plant to make a firm more efficient.

3.36 Vertical merger backwards: a merger with a firm at an earlier stage of the supply chain.

3.37 Vertical merger forwards: a merger with a firm at a later stage of the supply chain.

3.38 Internal economies of scale: lower long run average costs resulting from a firm growing in size.

3.39 External economies of scale: lower long run average costs resulting from an industry growing in
size.

3.40 Internal diseconomies of scale: higher long run average costs arising from a firm growing too large.

3.41 External diseconomies of scale: higher long run average costs arising from an industry growing too
large.

3.42 Corporation tax: a tax on profits of a company.

3.43 Total cost: the total amount that has to be spent on the factors of production used to produce a
product.

3.44 Average total cost: total cost divided by output.

3.45 Fixed costs: costs which do not change with output in the short run.

3.46 Average fixed cost: total fixed cost divided by output.

3.47 Variable cost: costs that change with output.

3.48 Average variable cost: total variable cost divided by output.

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3.49 Long run: the time period when all factors of production can be changed and all costs are variable.

3.50 Price: the amount of money that has to be given to obtain a product.

3.51 Total revenue: the total amount of money received from selling a product.

3.52 Average revenue: the total revenue divided by the quantity sold.

3.53 Profit satisficing: sacrificing some profit to achieve other goals.

3.54 Profit maximisation: making as much profit as possible.

3.55 Market structure: the conditions which exist in a market including the number of firms.

3.56 Competitive market: a market with a number of firms that compete with each other.

3.57 Normal profit: the minimum level of profit required to keep a firm in the industry in the long run.

3.58 Supernormal profit: profit above that needed to keep a firm in the market in the long run.

3.59 Monopoly: a market with a single supplier.

3.60 Barrier to entry: anything that makes it difficult for a firm to start producing the product.

3.61 Barrier to exit: anything that makes it difficult for a firm to stop making the product.

3.62 Scale of production: the size of production units and the methods of production used.

3.63 Sunk costs: cost that cannot be recovered if the firm leaves the industry.

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Section 4: Government and the macroeconomy
4.1 Local government: a government organisation with the authority to administer a range of policies
within an area of the country.

4.2 Natural monopoly: an industry where a single firm can produce at a lower average cost than two
or more firms because of the existence of significant economies of scale.

4.3 Strategic industries: industries that are important for the economic development and safety of the
country.

4.4 National champions: industries that are, or have the potential to be, world leaders.

4.5 Trade bloc: a regional group of countries that remove trade restrictions between themselves.

4.6 Free international trade: the exchange of goods and services between countries without any re-
strictions.

4.7 Economic growth: an increase in the output of an economy and in the long run, an increase in the
economy’s productive potential.

4.8 Actual economic growth: an increase in the output of an economy.

4.9 Potential economic growth: an increase in an economy’s productive capacity.

4.10 Aggregate demand: the total demand for a country’s product at a given price level. It consists of
consumer expenditure, investment, government spending and net exports (exports – imports).

4.11 Aggregate supply: the total amount of goods and services that domestic firms are willing to supply
at a given price level.

4.12 Full employment: the lowest level of unemployment possible.

4.13 Economically active: those in the labour force, both the employed and the unemployed.

4.14 Unemployment rate: the percentage of the labour force who are willing and able to work but are
without jobs.

4.15 Price stability: the price level in the economy not changing significantly over time.

4.16 Inflation rate: the percentage rise in the price level of goods and services over time.

4.17 Balance of payments: the record of a country’s economic transactions with other countries.

4.18 Budget: the relationship between government revenue and government spending.

4.19 Budget deficit: government spending is higher than government revenue.

4.20 Budget surplus: government revenue is higher than government spending.

4.21 National debt: the total amount the government has borrowed over time.

4.22 Multiplier effect: the final impact on aggregate demand being greater than the initial change.

4.23 Progressive tax: one which takes a larger percentage of the income or wealth of the rich.

4.24 Proportional tax: one which takes the same percentage of the income or wealth of all taxpayers.

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4.25 Regressive tax: one which takes a larger percentage of the income or wealth of the poor.

4.26 Automatic stabilisers: forms of government expenditure and taxation that reduce fluctuations in
economic activity, without any change in government policy.

4.27 Inflation: the rise in the price level of goods and services over time.

4.28 Informal economy: that part of the economy that is not regulated, protected or taxed by the
government.

4.29 Flat taxes: taxes with a single rate.

4.30 Fiscal policy: decisions on government spending and taxation designed to influence aggregate
demand.

4.31 Expansionary fiscal policy: rises in government expenditure and/or cuts in taxation designed to
increase aggregate demand.

4.32 Contractionary fiscal policy: cuts in government expenditure and/or rises in taxation designed to
reduce aggregate demand.

4.33 Monetary policy: decisions on the money supply, the rate of interest and the exchange rate taken
to influence aggregate demand.

4.34 Foreign exchange rate: the price of one currency in terms of another currency or currencies.

4.35 Expansionary monetary policy: increases in the money supply and/or the rate of interest designed
to increase aggregate demand.

4.36 Contractionary monetary policy: cuts in the money supply or growth of the money supply and/or
rises in the rate of interest designed to reduce aggregate demand.

4.37 Supply-side policy: measures designed to increase aggregate supply.

4.38 Deregulation: the removal of rules and regulations.

4.39 Gross domestic product (GDP): the total output of a country.

4.40 Circular flow of income: the movement of expenditure, income and output around the economy.

4.41 Value added: the difference between the sales revenue received and the cost of raw materials used.

4.42 Transfer payments: transfers of income from one group to another not in return for providing a
good or service.

4.43 Nominal GDP: GDP at current market prices and so not adjusted for inflation.

4.44 Real GDP: GDP at constant prices and so adjusted for inflation.

4.45 Subsistence agriculture: the output of agricultural goods for farmers’ personal use.

4.46 Recession: a reduction in real GDP over a period of six months or more.

4.47 International Monetary Fund (IMF): an international organisation which promotes international
cooperation and helps countries with balance of payments problems.

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4.48 Sustainable economic growth: economic growth that does not endanger the country’s ability to
grow in the future.

4.49 Employment: being involved in a productive activity for which a payment is received.

4.50 Unemployment: being without a job while willing and able to work.

4.51 Flexible labour force: a labour force is one which adjusts quickly and smoothly to changes in
market conditions.

4.52 Economically inactive: those not in the labour force.

4.53 Labour market participation rate: the proportion of the working-age population who are in the
labour force.

4.54 Claimant count: a measure of unemployment which counts as unemployed those in receipt of
unemployment benefits.

4.55 Labour Force Survey (ILO) Measure: a measure of unemployment which counts as unemployed
people who identify as such in a survey.

4.56 Frictional unemployment: temporary unemployment arising from workers being in between jobs.

4.57 Structural unemployment: unemployment caused by long- term changes in the pattern of demand
and methods of production.

4.58 Cyclical unemployment: unemployment caused by a lack of aggregate demand.

4.59 Search unemployment: unemployment arising from workers who have lost their jobs looking for a
job they are willing to accept.

4.60 Casual unemployment: unemployment arising from workers regularly being between periods of
employment.

4.61 Seasonal unemployment: unemployment caused by a fall in demand at particular times of the year.

4.62 Regional unemployment: unemployment caused by a decline in job opportunities in a particular

4.63 Technological unemployment: unemployment caused by workers being replaced by capital equip-
ment.

4.64 Deflation: a sustained fall in the prices of goods and services.

4.65 Disinflation: a fall in the rate of inflation.

4.66 Consumer prices index (CPI): a measure of the weighted average of the prices of a representative
basket of goods and services.

4.67 Cost-push inflation: rises in the price level caused by higher costs of production.

4.68 Demand-pull inflation: rises in the price level caused by excess demand.

4.69 Wage-price spiral: wage rises leading to higher prices which, in turn, lead to further wage claims
and price rises.

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4.70 Monetarists: a group of economists who think that inflation is caused by the money supply growing
more rapidly than output.

4.71 Monetary inflation: rises in the price level caused by an excessive growth of the money supply.

4.72 Hyperinflation: a very rapid and large rise in the price level.

4.73 Index-linking: changing payments in line with changes in the inflation rate.

4.74 Menu costs: costs involved in having to change prices as a result of inflation.

4.75 Shoe-leather costs: costs involved in moving money around to gain high interest rates.

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Section 5: Economic development
5.1 Human Development Index (HDI): a measure of living standards which takes into account income,
education and life expectancy.

5.2 Genuine Progress Indicator (GPI): a measure of living standards which takes into account a variety
of indicators including income, leisure time, distribution of income and environmental standards.

5.3 Purchasing power parity: an exchange rate based on the ratio of the price of a basket of products
in different countries.

5.4 Gender Inequality Index (GII): a measure of gender inequalities in terms of reproductive health,
empowerment and labour market participating.

5.5 Happy Life Expectancy Index (HLEI): an index which multiplies life expectancy by a happiness
index.

5.6 Gross National Happiness: a measure of living standards which includes a wide number of indicators
including income, psychological wellbeing, education and ecological diversity.

5.7 Absolute poverty: a condition where people’s income is too low to enable them to meet their basic
needs.

5.8 Relative poverty: a condition where people are poor in comparison to others in the country. Their
income is too low to enable them to enjoy the average standard of living in their country.

5.9 Vicious circle of poverty: a situation where people become trapped in poverty.

5.10 Multidimensional Poverty Index (MPI): a measure of poverty based on deprivations in education,
health and standard of living.

5.11 Emigration: the act of leaving the country to live in another country.

5.12 Birth rate: the number of births in a year per 1000 population in a year.

5.13 Death rate: the number of deaths in a year per 1000 population in a year

5.14 Net immigration: more people coming to live in the country than people leaving the country to
live elsewhere.

5.15 Infant mortality rate: the number of deaths per 1000 live births in a year.

5.16 Net migration: the difference between immigration and emigration.

5.17 Population pyramid: a diagram showing the age and gender structure of a country’s population.

5.18 Dependency ratio: the proportion of the population that has to be supported by the labour force.

5.19 Optimum population: the size of population which maximises the country’s output per head.

5.20 Economic development: an improvement in economic welfare.

5.21 The World Bank: an international organisation which provides long term loans on favourable
terms, to promote development.

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Section 6: International trade and globalisation
6.1 Tariff: a tax on imports.

6.2 Globalisation: the process by which the world is becoming increasingly interconnected through
trade and other links.

6.3 Quota: a limit placed on imports or exports.

6.4 Embargo: a ban on imports or exports.

6.5 Exchange control: a limit on the amount of foreign currency that can be obtained.

6.6 Voluntary export restraints (VERs): agreements with other governments to restrict their exports
to the country.

6.7 Infant industries: new industries with relatively low output and high cost.

6.8 Declining industries: old industries which are going out of business.

6.9 Strategic industries: industries that are considered important for the survival or development of
the country.

6.10 Dumping: selling products in a foreign market at a price below the cost of production.

6.11 Foreign exchange rate: the price of one currency in terms of another currency or currencies.

6.12 Fixed exchange rate: an exchange rate whose value is set at a particular level in terms of another
currency or currencies.

6.13 Devaluation: a fall in the value of a fixed exchange rate.

6.14 Revaluation: a rise in the value of a fixed exchange rate.

6.15 Floating exchange rate: an exchange rate which can change frequently as it is determined by
market forces.

6.16 Appreciation: a rise in the value of a floating exchange rate.

6.17 Depreciation: a fall in the value of a floating exchange rate.

6.18 Foreign direct investment (FDI): setting up production units or buying existing production units
in another country.

6.19 Hot money flows: the movement of money around the world to take advantage of differences in
interest rates and exchange rates.

6.20 Trade in goods: the value of exported goods and the value of imported goods.

6.21 Trade in goods deficit: expenditure on imported goods exceeding revenue from exported goods.

6.22 Trade in goods surplus: revenue from exported goods exceeding expenditure on imports.

6.23 Trade in services: the value of exported services and the value of imported services.

6.24 Trade in service surplus: revenue from exported services exceeding expenditure on imported ser-
vices.

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6.25 Primary income: income earned by people working in different countries and investment income
which comes into and goes out of the country.

6.26 Secondary income: transfers between residents and non-residents of money, goods or services, not
in return for anything else.

6.27 Current account balance: a record of the income received and expenditure made by a country in
its dealings with other countries.

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