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A Glossary of Economic Terms

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Cartel: An agreement between suppliers in an oligopoly that they will co-ordinate their market strategies. Effectively, the suppliers act as single group and decide upon a single strategy. An example of a cartel is OPEC.

Closed Shop: A legal requirement for all the workers in a particular industry to belong to an officially sanctioned union (e.g. all actors in the television industry must legally be members of the actors' union, Equity).

Company: An organisation which is recognised legally and has the legal right to buy and sell.

Complementary Goods: Goods or services which are usually bought as an accompaniment to other goods or services. For instance, piano tuning is a complementary service to buying a piano, video tapes are a complementary good to video recorders.

Consumer Surplus: The difference between how much a consumer would be willing to pay and how much (s)he has to pay for an item or service, e.g. if a consumer had to pay 7500 for a car but was willing to buy the car at 9000, the consumer surplus would be 9000 - 7500 = 1500.

Costs: Money paid by a company in order to produce goods or services (such as cost of raw materials or hiring labour). Fixed costs are costs which do not change depending on how many goods or services are sold (e.g. the cost of hiring a building is independent of how much work is done in that building). Variable costs depend on how many items are produced (e.g. the raw materials for producing 100 items will cost twice as much as the raw materials to produce 50 items).

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Demand: The quantity of an item or service that customers wish to buy at any conceivable price.

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Economic Rent: The smallest wage rate that people are prepared to work for in any industry. (This is nothing to do with renting houses or equipment)

Elastic: A market is defined as elastic if a relatively small change in price produces a relatively large change in the quantity of the items demanded. See Price Elasticity of Demand

Entry: When a new company enters a market and starts trading.

Equilibrium: A balance point, the point where market forces become stable. Left on their own, markets tend to move until they reach equilibrium. They then stay there unless some external event disturbs them.

Exit: When a company stops trading in a market, for instance, through insolvency or a change in strategy.

Externality: An influence affecting market conditions from outside which is not controlled by the normal market conditions inside that market. An example is a chemical factory which allows pollution to seep into a river. This affects the market conditions for fishermen, who catch fewer and smaller fish. However, the market condition of the fishermen does not affect the actions of the chemical company in any way. Externalities which worsen conditions in a market are called negative externalities. Those which tend to improve conditions in a market (far rarer!) are called positive externalities.

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Inelastic: A market is defined as inelastic if a relatively large change in price produces a relatively small change in the quantity of the items demanded. See Price Elasticity of Demand

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Marginal Costs: The extra costs incurred from making the last item produced.

Marginal Revenue: The extra revenue that comes from selling the last item produced.

Market Structure: A description of the behaviour of buyers and sellers in any particular market.

Merit Goods: A merit good is one provided by the government or authority for the benefit of consumers. The consumers themselves may not always appreciate how much they benefit from the merit good. Examples include education and vaccinations against diseases, not always appreciated by the people who receive them. Merit goods are not always provided free of charge!

Monopoly: A market where there is only one supplier providing goods to a large number of consumers. An example of a monopoly is the Post Office who currently (2002) have a monopoly on delivering letters and parcels under a certain weight.

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Negative Externality: An externality which tends to worsen conditions in a market.

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Oligopoly: A market characterised by a few suppliers providing goods to a large number of consumers. The suppliers generally have to base their market strategy not only on their own production but on the decisions made by their competitors. Examples of oligopolies include the providers of essential services in Britain (water, power) and mobile phone companies.

OPEC (Oil Producing and Exporting Countries) The association of countries in the world that produce oil, including several in the Middle East (Saudi Arabia, Oman, the Yemen etc.) They meet regularly to decide on a common policy, specifically the price of a barrel of oil.

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Perfectly Competitive Industry: An industry in which every trading company that believes that the way it trades does not affect the market conditions.

Picket Line: A blockade imposed by striking workers to prevent other workers who are not prepared to strike from going back to work for the company.

Price Elasticity of Demand: A measure of how much demand for an item will change if the price is altered. Defined using the following equation:

Price Elasticity of Demand =
Percentage change in quantity demanded
Percentage change in price

P.E.D. is always negative. If P.E.D. for a market is between 0 and -1, it is inelastic. If P.E.D. is -1, it is unit-elastic. If P.E.D. is less than -1, it is elastic.

Price Elasticity of Supply: A measure similar to Price Elasticity of Demand that indicates how much the supply of an item will change if the price is altered. Defined using the same equation as for Price Elasticity of Demand, except with "supply" substituted for "demand". P.E.S. is always positive.

Price Taker: A company that sets the prices of its products based on the existing market prices. It is influenced by the market, rather than influencing the market itself.

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Revenue: Money received by a company for selling goods or services.

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Strike: The withdrawing of labour (i.e. refusing to work) by employees in a company until some demand of theirs is met by the management (e.g. a pay rise, better working conditions).

Subsidy: Money provided (usually by the government or some authority) to support some market or process. For instance, some national governments provide subsidies to businesses such as national airlines, to help them survive in times of economic downturn.

Substitute Goods: Substitute goods or services are those which can replace another product or service easily. For instance, Tesco's Own Baked Beans are a substitute product for Heinz Baked Beans - they are just as good.

Supply: The quantity of any item or service that a manufacturer or retailer is prepared to provide at any given price per item.

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Trade Union: An organisation that represents the workers collectively in an industry and negotiates with the company management on their behalf. They fight for workers' rights, and their main weapon is a strike. Examples of trade unions are the National Union of Teachers (NUT), the Transport and General Workers' Union (TGWU) and the train drivers' union ASLEF.

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