Economics Fundamentals: Scarcity, Systems, and Production

Flashcards covering core economic terminology including factors of production, economic systems, market types, and the Production Possibility Curve based on lecture notes.

Scarcity

Occurs because people have unlimited wants when there’s limited resources

Choice

A necessity forced upon individuals, firms and the government because of scarcity

Opportunity cost

In decision making, the value of the next best alternative forgeon

Consumer sovereignty

Determined by the prices that the consumers are willing to pay, which helps producers decide what to produce

Price mechanism

A system that rations out goods produced according to the consumers’ willingness and ability to pay

Dollar votes

The power owners have to determine what is produced based on the amount of factor earnings received

Positive statement

About what is/Fact, may be right or wrong and can be tested by checking the facts

Normative statement

Involves a value judgement about what ought to be/Opinion, is made depending on values and cannot be tested

Value judgement

A statement based on opinions or beliefs rather than facts

Ceteris paribus

A Latin phrase meaning “other things being equal” which is used to focus on changes in one variable while other variables remain the same

Short run

A time period where all Factors of Production (FOP) remains same, except labour

Long run

A time period where all Factors of Production (FOP) can change

Very long run

A time period where all Factors of Production (FOP) can change, and technological change can occur or new government policy may be made

Labour

People/Human resource involved in production process (e.g. workers, managers, specialists) rewarded with Wages/Salary

Land

Natural resources found on and in the earth (e.g. oil, wood, fish) rewarded with Rent

Capital

Man-made goods used for production (e.g. Machinery, tools, computers) rewarded with Interest

Enterprise (Entrepreneuship)

Coordinates Factors of Production (FOP) and takes risk to produce goods and services; rewarded with Profit

Division of labour

Process where the production process is broken down into stages and workers are assigned to particular stages according to their skills

Specialisation

Where a firm concentrates its production on goods where it has an advantage over others to produce more than if it produced a wider range of products

Economic system

A way of making the three fundamental economic decisions of what to produce, how to produce and for whom to produce

Market economy

An economic system in which the 3 fundamental economic decisions are made by private individuals with no government intervention and private ownership of all FOP

Centrally planned economy

An economic system in which the 3 fundamental economic decisions are made by the government with no involvement of private individuals and state ownership of all FOP

Mixed Economy

An economic system where resources are allocated partly through price signals and partly on the basis of direction by government

Transition economies

Countries that transform from a planned economy to a mixed economy

Public sector

The part of a mixed economy that provides necessary infrastructure and public goods to complement the private sector

Monopoly

A sole or single seller of a product in the market whose power is regulated by the government in a mixed economy

Progressive income tax system

A system where high income earners are taxed more in terms of proportion as compared to low-income earners to minimize income inequality

Investment

Expenditure undertaken by firms to add to the capital stock

Consumption

Household spending on goods and services in the economy

Production possibility curve (PPC)

A curve showing the maximum combination of goods and services that can be produced in a set period of time given fixed resources and technology

Free goods

Goods with no opportunity cost that are abundant in supply and considered 'gifts of nature' (e.g. air, sunlight, sea water)

Private goods

Goods that are excludable (preventing non-payers) and rivalrous (consumption reduces amount available to others)

Public Goods

Goods or services that are non-rival and non-excludable in consumption (e.g. streetlights, national defence)

Non-rival

Consuming a good does not reduce the amount available to others; usually associated with zero marginal cost

Non-excludable

Once a good is provided, it is difficult to exclude non-payers from enjoying it

Free rider problem

Occurs when non-payers enjoy a public good without paying, leading to concealed demand and lack of supply from private firms

Merit goods

Goods society deems desirable (e.g. education, healthcare) that are under-consumed because people underestimate their benefits

Demerit goods

Goods society deems undesirable (e.g. alcohol, cigarettes) that are over-consumed because people underestimate their harms

Imperfect information

Occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially 'wrong' choices