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Unit 1 Definitions
Positive Economics deals with objective or scientific explanations of the economy. Positive
statements are value free and can be proved or disproved.
Normative Economics attempts to describe what ought to be. Normative statements
contain a value judgement and they cannot be scientifically proved or disproved.
Free Goods are goods which are in unlimited supply and which therefore have no
Economic Goods are goods which are scarce because their use has an opportunity cost.
Basic Economic Problem is that resources have to be allocated between competing uses
because human wants are infinite whilst resources are scarce.
Market Economy (Capitalist Economy) is an economic system which resolves the basic
economic problem through the market mechanism.
Mixed Economy is an economy where both the free market mechanism and the
government planning process allocate significant proportions of resources.
Command Economy (Planned Economy) is an economic system where the government
allocates resources through a planning process.
Land is the natural resources available for production.
Labour is the human input into the production process.
Capital means investment in goods that are used to produce other goods in the future.
Enterprise is the quality which involves initiative and willingness to take risks in order to
create and sell a product.
Opportunity Cost is the benefit lost from the next best alternative forgone.
Production Possibility Frontier (PPF) shows the maximum potential level of output of two
goods, given all resources are allocate efficiently.
Specialisation is the process by which individuals, firms or economies concentrate on
producing those goods and services in which they have an advantage.
Division of Labour is a particular type of specialisation where the production of a good is
broken up into many separate tasks, each performed by one person. (Adam Smith Wealth
Supply is the quantity of a good or service that firms are willing to supply at a given price
over a given time period.
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Demand is the quantity of a good or service that consumers are willing to buy at a given
price over a given time period.
Equilibrium occurs in the marketplace when quantity demanded exactly equals quantity
supplied. This is the price at which there is no tendency to change.
Consumer Surplus is the difference between the price buyers are prepared to pay for a
good and what they actually pay.…read more
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Complement Goods are goods which are consumed together so the increase in the price of
one good leads to a fall in the demand for the other good. Therefore they have a negative
Price Elasticity of Supply (PES) is a measure of the responsiveness of quantity supplied
to a change in price.
Derived Demand is when the demand for one good is as a result of demand for another
good because it is required in its production.…read more
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QuasiPublic Goods possess some of the characteristics of public goods for some, but not
all of the time.
Buffer Stock Schemes intervene into the market to even out price fluctuations. An
intervention price is set and if the market price is different from this an intervention will take
CBA (Cost Benefit Analysis) is a technique which attempts to evaluate the social costs
and benefits of a decision. It is particularly used by governments to evaluate investment