Economics Unit 1 Definitions

Created by: mo-abas
Created on: 20-04-13 19:31

Economics

branch of knowledge concerned with the production, consumption, and transfer of wealth.

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Basic Economic Problem

Resources are scarce but wants are unlimited.

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Scarce Resources

Resources that are limited or finite.

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Opportunity Cost

The cost of passing up the next best choice when making a decision

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Possible Production Frontier (PPF)

A curve showing the maximum combinations of two goods that can be produced when all factors of production are being used.

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Factors of Production

Various resources, taken as a collective group, which contribute to the production of a product or service (CELL - Capital, Entrepreneurship, Land, Labour).

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Capital

Manufactured goods that are used for production. Paid in interest. (E.g - Machinery)

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Entrepreneurship

The ability to get things moving, to organize and to take risks. Paid in profit.

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Land

Natural resources that are used for production. Paid in rent.

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Labour

Human resources that are used for production. Paid in wages.

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Normative Statement

An economic statement that is based on valued judgement.

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Positive Statement

jnkAn economic statement that can be tested in order to determine whether or not it is true.

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Demand Curve

A curve showing how much people are willing and able to buy for a good/service at each price.

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Suuply Curve

A curve showing how much suppliers are willing and able to supply for a good/service at each price

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Substitute Goods

Goods or services that can be used instead of each other. (E.g - Tea and Coffee)

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Complimentary Goods

Goods or services that are frequently consumed together. (E.g - Tea and Biscuits)

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Price Elasticity of Demand (PED) + Formula

A measure of the responsiveness of demand to a change in price. (% change in quantity demanded divided by % change in price)

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Price Elasticity of Supply (PES) + Formula

A measure of the responsiveness of supply to a change in price. (% change in quantity supplied divided by % change in price)

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Income Elasticity od Demand (YED) + Formula

A measure of the responsiveness of demand to a change in income (% change in quantity demanded divided by % change in income).

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Cross Elasticity of Demand (XED) + Formula

A measure of the responsiveness of demand for one good compared a change in the price of another good. ((% change in quantity demanded of Good A divided by % change in price of Good B)

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Normal Good

A good that has a positive income elasticity of demand because demand for it will increase as real incomes increase. (E.g - Designer Jeans, Watches, Holidays)

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Inferior Good

A good that has a negative income elasticity of demand because demand for it will decrease as incomes increase. (E.g. Public Transport, Bargain Food)

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Command Economy

An economy in which what, how and for whom to produce are determined by a state planning process. (Government)

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Free Market Economy

An economy in which what, how and for whom to produce are determined through the forces of supply and demand with little or no state intervention.

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Mixed Economy

An economy in which what, how and for whom to produce are determined partly through planning and partly through market forces.

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Monopoly

A sole supplier of a good or service. (GlaxoSmithKline)

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Consumer Surplus

The difference between the maximum amount of money consumers are willing to pay for a product and the actual market price.

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Producer Surplus

The difference between the amount that a producer of a good receives and the minimum amount that they would be willing to accept for the good/service.

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Efficiency

How close a firm is to producing at the lowest possible average cost.

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Productivity

Measures the efficiency with which resources are used. Often taken to mean output per person employed.

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Division of labour

The way in which tasks in the production process are broken down and allocated to different people.

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Specialization

When business/area focuses on the production of a specific product/services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas.

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Inflation

A general increase in prices and fall in the purchasing value of money.

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Unemployment

A situation where people who are willing and able to work are without paid employment.

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Structural unemployment

Unemployment caused by a change in the structure of the economy e.g. the decline of a major industry such as coal.

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Market Failure

When free market forces have resulted in a good or service being under or over-provided (free market forces do not result in the socially optimal level of output)

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Recession

Two or more successive quarters of negative economic growth.

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Private Costs

Costs incurred directly by individual producers and consumers when they engage in an economic activity. (these are taken into account by free market forces)

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Private Benefits

Benefits directly received by individual producers and consumers when they engage in an economic activity. (these are taken into account by free market forces)

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External Costs

Costs experienced by third parties. Producers and consumers who are not directly involved in an economic activity.(these costs are ignored by free market forces)

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External Benefits

Benefits received by third parties Producers and consumers who are not directly involved in an economic activity. (these benefits are ignored by free market forces)

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Social Costs

All of the costs of an activity to society (private costs and external costs_

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Social Benefits

All of the benefits of an activity to society (private benefits and external benefits.)

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Negative Externality

If social cost exceeds private cost, the difference is a negative externality (it means the same as external cost.

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Positive Externality

If social benefit exceeds private benefit, the difference is a positive externality ( it means the same as external benefit)

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Merit Good

A good/service that has positive externalities associated with it and is better for the consumer than they realise. It is underprovided by the free market. (E.g - Education, Healthcare)

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Demerit Good

A good/service that has negative externalities associated with it. It is worse for the consumer than they realise.

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Public Good

A good/service that would not be provided by the free market because it is characterised by non-excludability and non-rivalry, (E.g - National Defence, Street Lighting)

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Private Good

A good/service that can excludable and has rivalry. (E.g - Clothes)

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Asymmetric Information

A situation in which some participants in a market have access to more information than others.

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Symmetric Information

A situation when all participants in a market have access to the same information.

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National Minimum Wage

A sum of money that is legally the minimum amount that an employer can pay an employee. It is usually set at an hourly rate.

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Government Failure

Situation when government interference in a market to correct market failure results in a less efficient allocation of resources.

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Buffer Stock

A reserve of a commodity held to stabilise commodity prices. The stocks are usually held by an organisation that is separate from the producers – often the government.

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Subsidy

Subsidies represent payments to producers by the government which reduce their variable costs of production and encourages them to expand their output.

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