Economics - terms to know (Unit - 1)

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 opportunity cost.

Economic Goods are goods which are scarce because their use has an opportunity cost.

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.

Basic Economic Problem is that resources have to be allocated between competing uses because human wants are infinite whilst resources are scarce. 

Land is the natural resources available for production.

Labour is the human input into the production process.

Capital is 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.

Specialization 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 of Nations)

Supply is the quantity of a good or service that firms are willing to supply at a given price over a given time period.

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.

Price Elasticity of Demand (PED) : measure of the responsiveness of quantity demanded to a change in price.

              (percentage change in quantity demanded)  

 =       ____________________________________________

                         (percentage change in price)

Elastic Demand : responsiveness of demand is proportionally greater than the change in price. The PED will be greater than 1. (SMALL CHANGE IN PRICE RESULTS IN LARGE CHANGE IN DEMAND)

Inelastic Demand : responsiveness of demand is proportionally less than the change in price. The PED will be between 0 and 1. (SMALL CHANGE IN PRICE RESULTS IN SMALL CHANGE IN DEMAND)

Perfectly Elastic Demand : change in price leads to an infinite change in demand. PED equals infinity.

Perfectly Inelastic Demand : change in price leads to no change in demand. PED equals 0.

Unit Elasticity :  change in price leads to change in demand, equaling 1. 

 Income Elasticity of Demand (YED) : measure of the responsiveness of quantity demanded to a change in income.

               Percentage change in quantity demanded

 =       ____________________________________________________

percentage change in income

Normal Good : demand increases when income increases. (POSITIVE YED.)

Inferior Good : demand falls when income increases. (NEGATIVE YED.) 

Luxury Good : demand increases more than proportionally when income increases. (YED >1)

Giffen Good : inferior good where demand increases as price increases.