Economics Definitions Unit 1 – Flashcards
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economics
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the allocation of scarce resources to provide for unlimited human wants
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economic goods
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goods which are scarce because their use has an opportunity cost
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free goods
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goods which are unlimited in supply and which therefore have no opportunity cost
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margin
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a point of possible change
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needs
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the minimum which is necessary for a person to survive as a human being
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opportunity cost
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the benefits forgone of the next best alternative
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production possibility frontier
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a curve which shows the maximum potential level of output of one good given the level of output for all other goods in the economy
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scarce resources
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resources which are limited in supply so that choices have to be made about their use
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wants
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desires for the consumption of goods and services
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capital productivity
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output per unit of capital employed
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division of labour
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specialisation by workers
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factors of production
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the inputs to the production process; land, which is all natural resources; labour, which is the workforce; capital, which is the stock of manufactured resources used in the production of goods and services; entrepreneurs, individuals who seek out profitable opportunities for production and take risks in attempting to exploit these
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fixed capital
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economic resources such as factories and hospitals which are used to transform working capital into goods and services
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human capital
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the value of productive potential of an individual or group of workers made up of their skills, talents, education and training and represents the value of future earnings and production
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labour productivity
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output per worker
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market
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any convenient arrangement by which buyers and sellers communicate to exchange goods and services
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non-renewable resources
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resources such as coal or oil which once exploited cannot be replaced
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non-sustainable resources
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resource which is being economically exploited in such a way that it is being reduced over time
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primary sector
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extractive and agricultural industries
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productivity
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output per unit of input employed
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renewable resources
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resources such as fish stocks or forests which can be exploited over and over again because they have the potential to renew themselves
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profits
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the reward to the owners of a business it is the difference between a firms revenue and its costs
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secondary sector
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production of goods mainly manufactured
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specialisation
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a system of organisation where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others
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stakeholders
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groups of people which have an interest in a firm such as shareholders, customers, suppliers, workers, the local community and the government
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sustainable resources
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renewable resources which are being economically exploited in such a way that it will not diminish or run out
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tertiary sector
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production of services
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utility
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the satisfaction derived from consuming a good
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welfare
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the well being of an economic agent or group of economic agents
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working or circulating capital
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resources which are in the production system waiting to be transformed into goods or other materials before being finally sold to the consumer
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base period
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the period such as a year or a month with which all other values in a series are compared
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index number
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an indicator showing the relative value of one number to another from a base of 100
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nominal values
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values unadjusted for the effects of inflation (ie values at current prices)
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real values
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values adjusted for inflation (ie values at constant prices)
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ceteris paribus
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the assumption that all other variables within the model remain constant whilst one change is being considered
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equilibrium
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the point where what is expected or planned is equal to what is realised or actually happens
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law
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a theory or model that has been verified by empirical evidence
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normative economics
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the study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated
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normative statement
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a statement which cannot be supported or refuted because it is a value judgement
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partial and general models
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a partial model is one with few variables whilst a general model has many
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positive economics
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the scientific or objective study of the allocation of resources
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positive statement
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a statement which can be supported or refuted by evidence
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static and dynamic models
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a static model is one where time is not a variable whilst a dynamic model is one where time is an explicit variable
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the scientific method
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a method which subjects theories or hypotheses to falsification by empirical evidence
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theory or model
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a hypothesis which is capable of refutation by empirical evidence
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command or planned economy
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an economic system where the govt through a planning process allocates resources in society
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economic system
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a complex network of individuals organisations and institutions and their social and legal interrelationships
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free market economy
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an economic system which resolves the basic economic problem through the market mechanism
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mixed economy
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an economy where both the free market mechanism and the govt planning process allocate significant proportions of total resources
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consumer surplus
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the difference between how much buyers are prepared to pay for a good and what they actually pay
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demand curve
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the line on a price-quantity diagram which shows the level of effective demand at any given price
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demand
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the quantity purchased of a good at any given price given that other determinants of demand remain unchanged
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market demand curve
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the sum of all individual demand curves
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shift in the demand curve
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a movement of the whole demand curve to the right or left of the original caused by a change in any variable affecting demand except price
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market supply curve
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the supply curve of all producers within the market
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producer surplus
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the difference between the market price which firms receive and the price at which they are prepared to supply
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supply
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the quantity of good that suppliers are willing to sell at any given price over a period of time
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equilibrium price
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the price at which there is no tendency to change because demand = supply
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excess demand
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where demand is greater than supply
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excess supply
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where supply is greater than demand
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free market forces
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forces in free markets which act to reduce prices when there is excess supply and raise prices when there is excess demand
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market clearing price
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the price at which there is neither excess demand nor excess supply but where everything offered for sale is purchased
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competitive demand
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when two or more goods are substitutes for each other
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complement
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a good is purchased with other goods to satisfy a want
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composite demand
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when a good is demanded for two or more distinct uses
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derived demand
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when the demand for one good is the result of or derived from the demand for another good
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joint demand
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when two or more complements are bought together
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joint supply
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when two or more goods are produced together so that a change in supply of one good will necessarily change the supply of the other goods with which it is in joint supply
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substitute
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a good which can be replaced by another to satisfy a want
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elastic demand
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where the price elasticity of demand is greater than 1 as the responsiveness of demand is proportionally greater than the change in price
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inelastic demand
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where the price elasticity of demand is less than 1 as the responsiveness of demand is proportionally less than the change in price
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price elasticity of demand
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the proportionate response of changes in quantity demanded to a proportionate change in price and measured by P/Q X change in Q/change in P
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unitary elasticity
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where the value of price elasticity of demand is 1 as the responsiveness of demand is proportionately equal to the change in price
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cross elasticity of demand
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a measure of the responsiveness of quantity demanded of one good to a change in price of another good and measured by %change in QD of good 1/%change in P of good 2
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income elasticity of demand
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a measure of the responsiveness of quantity demanded to a change in income and measured by %change in QD/%change in income
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price elasticity of supply
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a measure of the responsiveness of quantity supplied to a change in price and is measured by %change in QS/%change in P
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giffen goods
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a special type of inferior good where demand increases where price increases
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income effect
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the impact on quantity demanded of a change in price due to a change in consumers real income which results from this change in price
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inferior good
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a good where demand falls when income increases as it has a negative income elasticity of demand
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normal good
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a good where demand increases when income increases as it has a positive income elasticity of demand
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substitution effect
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the impact on quantity demanded due to a change in price assuming that consumers real incomes stay the same. This is the impact of a change in price excluding the income effect
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ad valorem tax
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tax levied as a percentage of value of the good
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incidence of tax
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the tax burden on taxpayer
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specific or unit tax
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tax levied on volume
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subsidy
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a grant given which lowers the price of a good usually designed to encourage production or consumption of a good
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unit labour costs
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costs of employing labour per unit of output or production
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allocative or economic efficiency
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occurs when resources are distributed in such a way that no consumers could be better off without other consumers being worse off
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dynamic efficiency
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occurs when resources are allocated efficiently over time
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market failure
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where resources are inefficiently allocated due to imperfection in the the working of the market mechanism
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productive efficiency
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is achieved when production is achieved at its lowest cost
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static efficiency
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occurs when resources are allocated efficiently at a point in time
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technical efficiency
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is achieved when a given quantity of output is produced with the minimum number of inputs
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consumption externalities or external benefits in consumption
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when the social costs of consumption are different from the private costs of consumption
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externality
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the difference between social costs and benefits and private costs and benefits
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negative externality
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if net social cost (social cost minus social benefit) is greater than net private cost (private cost minus private benefit)
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positive externality
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if net social benefit is greater than a net private benefit
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marginal social and private costs and benefits
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the social and private costs and benefits of the last unit either produced or consumed
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private cost and benefit
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the cost or benefit of an activity to an individual economic unit such as a consumer or firm
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production externalities
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when the social costs of production differ from the private costs of production
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social cost and benefit
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the cost or benefit of an activity to society as a whole
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free rider
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a person or organisation which receives benefits that others have paid for without making any contribution themselves
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merit good
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a good which is overprovided by the market mechanism
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demerit good
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a good which is overprovided by the market mechanism
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private good
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a good where consumption by one person results in the good not being available for consumption by another
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public good
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a good where consumption by one person does not reduce the amount available for consumption by another person and where once provided all individuals benefit or suffer whether they wish to or not
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quasi-public good
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a good which may not possess perfectly the characteristics of being non-excludable but which is non-rival
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principal-agent problem
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occurs when goals of principles, those standing to gain or lose from a decision are different from agents, those making decisions on behalf of the principal
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symmetric information
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where buyers and sellers have access to the same information
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asymmetric information
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where buyers and sellers have different amounts of information
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buffer stock scheme
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a scheme whereby an organisation buys and sells in the open market so as to maintain a minimum price in the market for a product
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government failure
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occurs when govt intervention leads to a net welfare loss compared to the free market solution
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public choice theory
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theories about how and why public spending and taxation decisions are made
