Basic economic problem - resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.
Choice - economic choice involves the alternative uses of scarce resources.
Economic goods – good which are scarce because their use has an opportunity cost.
Free goods – goods which are unlimited in supply and therefore have no opportunity cost.
Margin – a point of possible change.
Needs – the minimum which is necessary for a person to survive as a human being.
Opportunity cost – the cost of the next best alternative foregone.
Production possibility curve (PPC/PPF) – a curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy.
Scarce resources – resources which are limited in supply so that choices have to be made about their use.
Wants – desires for the consumption of goods and services.
Capital productivity – output per unit of capital employed.
Division of labour – specialisation by workers.
Factors of production – 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 risk in attempt to exploit these.
Fixed capital – economic resources such as factories and hospitals which are used to transform working capital into goods and services.
Human capital – the value of the productive potential of an individual or group of workers. It is made up of the skills, talents, education and training of an individual or group and represents the value of the future earnings and production.
Labour productivity – output per worker.
Market – any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.
Non-renewable resources – resources, such as coal or oil, which once exploited cannot be replaced.
Non-sustainable resources – resource which is being economically exploited in such a way that is being reduced over time.
Primary sector – extractive and agricultural industries.
Productivity – output per unit of input employed.
Profits – the reward to the owners of a business. It is the difference between a firm’s revenues and costs.
Renewable resources – resources, such as fish stocks or forests, which can be exploited over and over again because they have the potential to renew themselves.
Secondary sector – production of goods, mainly manufactured.
Specialisation – a system of organisation where economic units such as household and nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.
Stakeholders – groups of people who have an interest in a firm, such as shareholder, customers, suppliers, workers, the local community in which it operates and government.
Sustainable resource – renewable resource which is being economically exploited in such a way that it will not diminish or run out.
Tertiary sector – production of services.
Utility – the satisfaction derived from consuming a good.
Welfare – the well being of and economic agent or group of economic agents.
Working or circulation capital – resources which are in the production system waiting to be transformed into goods or other material before being finally sold to the consumers.
Base period – the period, such as a year or a month, with which all other values in a series are compared.
Index number – an indicator showing the relative value of one number to another from a base of 100. It is often used to present an average of a number of sttistics.
Ceteris paribus – the assumption that all other variables within the model remain constant whilst one change is being considered.
Equilibrium – the point where what is expected or planned is equal to what is realised or actually happens.
Normative economics – the study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated.
Normative statement – a statement which cannot be supported or refuted because it is a value judgement.
Positive economics – the scientific or objective study of the allocation of resources.
Positive statement – a statement which can be supported or refuted by evidence.
Command or planned economy – an economic system where government, through a planning process, allocates resources in society.
Economic system – a complex network of individuals, organisations and institutions and their social and legal interrelationships.
Free market economy – an economic system which resolves the basic economic problem through the market mechanism.
Mixed economy – an economy where both the free market mechanism and the government planning process allocate significant proportions of total resources.
Consumer surplus – the difference between how much buyers are prepared to pay for a good and what they actually pay.
Demand curve – the line on a price-quantity diagram which shows the level of effective demand at any given price.
Demand or effective demand – the quantity purchased of a good at any given price, given that other determinants of demand remain unchanged.
Individual demand curve – the demand curve for an individual consumer, firm or other economic unit.
Market demand curve – the sum of all individual demand curves.
Shift in the demand curve – 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.
Individual supply curve – the supply curve of an individual producer.
Market supply curve – the supply curve of all producers within the market. In a perfectly competitive market it can be calculated by summing the supply curves of individual consumers.
Producer surplus – the difference between the market price which firms receive and the price which they are prepared to supply.
Supply – the quantity of goods that suppliers are willing to sell at any price over a period of time.
Complement – a good which is purchased with other goods to satisfy a want.
Composite demand – when a good is demanded for two or more distinct uses.
Derived demand – when the demand for one good is the result of or derived from the demand for another good.
Joint demand – when two or more complements are bought together.
Joint supply – when two or more goods are produced together, so that a change in supply for one good will necessarily change the supply of the other goods with which it is in supply.
Substitute – a good which can be replaced by another to satisfy a want.
Elastic demand – where the price elasticity of demand is greater than 1. The responsiveness of demand is proportionally greater
Inelastic demand – where the price elasticity of demand is less than 1. The responsiveness of demand is proportionally less than the change in price. Demand is infinitely inelastic if price elasticity of demand is zero.
Unitary elasticity – where the value of price elasticity of demand is 1. The responsiveness of demand is proportionally equal to the change in price.
Cross elasticity of demand – a measure of the responsiveness of quantity demanded on one good to a change in price of another good. It is measured by dividing the percentage change in quantity demanded for one good by the percentage change in price of another good.
Income elasticity of demand – a measure of the responsiveness of quantity demanded to a change in income. It is measured by dividing the percentage change in quantity demanded by the percentage change in income.
Price elasticity of supply – a measure of the responsiveness of quantity supplied to a change in price. It is measured by dividing the percentage change in quantity supplied by the percentage change in price.
Giffen good – a special type of inferior good where demand increased when price increases.
Income effect – 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.
Inferior good – a good where demand falls when income increases.
Normal good – a good where demand increases when income increases.
Substitution effect – the impact on quantity demanded due to a change in price, assuming that consumers` real incomes stay the same.
Ad valorem tax – tax levied as a percentage of the value of the good.
Incidence of tax – the tax burden on the tax payer.
Specific or unit tax – tax levied on volume.
Subsidy – a grant given which lowers the price of a good, usually designed to encourage production or consumption of a good.
Unit labour costs – cost of employing labour per unit of output or production.
Allocative or economic efficiency – occurs when resources are distributed in such a way that no consumers could be better of without other consumers becoming worse off.
Dynamic efficiency – occurs when resources are allocated efficiently over time.
Market failure – when the free price mechanism fails to achieve economic efficiency.
Productive efficiency – is achieved when production is achieved at lowest cost.
Static efficiency – occurs when resources are allocated efficiently at a point in time.
Technical efficiency – is achieved when a given quantity of output is produced wth the minimum number of inputs.
Consumption externalities or external benefits in consumption – when the social costs of consumption are different from the private costs of consumption.
Externality or spillover effect – the difference between social costs and benefits and private costs and benefits. If net social cost (social cost minus social benefit) is greater than net private cost (private cost minus private benefit), then a negative externality or external cost exist. If net social benefit is greater than net private benefit, a positive eternality or external benefit exists.
Marginal social and private costs and benefits – the social and private costs and benefits of the last unit either produce or consume.
Private cost and benefit – the cost or benefit of an activity to an individual economic unit such as a consumer or a firm.
Production externalities or externalities in production – when the social costs of production differ from the private cost of production.
Social cost and benefit – the cost or benefit of an activity to society as a whole.
Free rider – a person or organisation which receives benefits that others have paid for without making any contributions themselves.
Merit good – a good which is underprovided by the market mechanism. A demerit good is one which is overprovided by the market mechanism.
Private good – a good where consumption by one person results in the good not being available for consumption by others.
Public good or pure public good – a good where the 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.
Quasi public good or non pure public good – a good which may no posses perfectly the characteristics of being non-excludable but which is non-rival.
Symmetric information – where buyers and sellers have access to the same imformation.
Asymmetric information – where buyers and sellers have different amounts of information.
Buffer stock scheme – 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.
Government failure – occurs when government intervention leads to a net welfare loss compared to the free market solution.
Public choice theory – theories about how and why public spending and taxation decisions are made.
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