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Economics Definitions UNIT 1
Scarcity: There are insufficient resources to provide for everyone's wants and so people have
to make a choice about how to use resources.
There are insufficient resources to provide for everyone's needs and wants and so people
have to make a decision about how to use resources.
Resources: Factors of production: land- all natural resources; labour- all human effort, physical
or mental, available for production; capital- all man made forms of production; enterprise- the
human force that puts all the other factors of productions to work, ideas and leadership. (Free
resources: air; sand in the desert; sea water).
Infinite: Never ending, everlasting.
Wants: Luxury as opposed to a necessity.
Opportunity Cost: The real cost (as opposed to the monetary cost); the value of the next
best use of that factor or the benefits foregone of the next best alternative.
Positive Statement: A statement that can be supported by evidence or data, it is based upon
a fact, an objective statement.
Normative Statement: A statement that is based upon an opinion, it is a subjective statement
and tends to include the conditional tense.
Free Market Economy: Resources are privately owned; less state intervention means low
taxes; resources are allocated via the price mechanism; there is a more unequal distribution of
income; goods and services are produced according to the wants of the consumer; producers
aim to maximise profit as motivated entire by self-interest; increased efficiency; competition
leads to better quality products, a wider range of goods and innovation- increase total
revenue; incentive for higher productivity e.g. USA.
Command Economy: The government or central planners decide on what to produce and
usually set up a five year plan; policy of full employment; more equal distribution of income;
reduce workers incentives as wage differentials are lower; less incentive to be efficient;
lower quality and range of goods; too much of production going towards defence; the state
sets prices, especially for necessities- leads to excess demand and thus, queues (figures
concealing reality); based on a repressive political structure that can only be run at the
expense of personal freedom; growth of black market economy.
Mixed Economic System: Ownership split 60%-40%.
Transition Economies: Those moving from command style to a free market. Problems- there
were no functioning markets for labour, capital or goods as central planners allocated all
three; there was no legal framework enforcing property rights; there was no official
unemployment due to the commitment to full employment and hence no need for social
security e.g. Poland and Hungary. As the changes took place:
Output: Initially output falls as instead of being allocated resources, companies have to
buy machines etc. so decide not to, reducing output means machine manufacturers also
suffer. Less staff also lowers output.
Unemployment: Large falls in output leads to a sharp rise in unemployment. Factories and
businesses close causing unemployment as well as enterprises shedding workforce but
making fewer people work harder in order to increase efficiency.
Inflation: Economic transformation causes high inflation. Long queues showed excess
demand and once prices are not decided by the government prices rise causing people to
demand higher wages and then in turn prices rise.
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Ownership: The state could either give property and capital away to companies and
individuals already employing them; the state could put assets into a fund and citizens
could have a share in property and the assets; the state could sell assets to the highest
Distribution of Resources: The resources begin to be given to those with the greatest
spending power and wealth causing an unequal distribution of wealth depends on how
much social security there is in place.
Productivity: Output per Worker.…read more
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Positive result substitute good, negative result complementary good, close to 0
Price Elasticity of Supply: A measure of the responsiveness to a change in price (assessing
the firm's ability to increase supply when the price increases, due to an increase in demand)=
% change in quantity supplied
% change in price
>1 elastic, <1 inelastic, 0= perfectly inelastic (short run often is inelastic)
Indirect Tax: Tax on expenditure- lump sum, specific tax e.g. excises Duties; Ad valorem tax
e.g. Value Added Tax 17.…read more
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Market clearing: A market clears when supply matches demand, leaving no shortage or
Equilibrium Price: The price where quantity demanded equals the quantity supplied: the
price where there is no shortage or surplus.
Consumer Surplus: The difference between the value to buyers and what they actually pay.
Producer Surplus: The difference between the market price which the firm receives and the
price at which it is prepared to supply.…read more