Economics Key Terms and Definitions

Vocabulary flashcards covering foundational economics terms, concepts, factors of production, and categories of goods.

Economic problem

The problem of unlimited wants and finite resources, meaning choices must be made about how resources are allocated.

Social science

The study of human behaviour, relationships and interactions within society.

Economic models and assumptions

Simplified representations of economic behaviour used to explain and predict how an economy works.

Positive statements

Objective, factual statements that can be tested or proven true or false.

Normative statements

Subjective statements based on opinions or value judgements about what ought to happen.

Value judgements

Personal opinions or beliefs about what is desirable or undesirable.

Ceteris paribus

A Latin phrase meaning 'all other things being equal'; used to examine the effect of one variable while holding other factors constant.

Free goods

Goods that are unlimited in supply relative to demand and therefore have no opportunity cost.

Economic goods

Goods that are scarce relative to demand and therefore have an opportunity cost.

Scarcity

The situation where finite resources are insufficient to satisfy unlimited human wants.

Factors of production / resources / inputs

The resources used to produce goods and services: land, labour, capital and enterprise.

Land – Rent

Natural resources used in production, which earn rent.

Capital – Interest

Man-made resources used to produce other goods and services, which earn interest.

Labour – Wages

Human effort, both physical and mental, used in production, which earns wages.

Enterprise – Profit

The ability to organise the other factors of production and take risks, which earns profit.

Goods and services / output / product

Goods are physical products; services are intangible activities. Both satisfy consumer wants and needs.

Capital goods

Man-made goods used to produce other goods and services, rather than being consumed directly.

Consumer goods

Goods purchased by households for their own consumption.

Opportunity cost

The value of the next best alternative foregone when a choice is made.

Production Possibility Frontier (PPF)

A curve showing the maximum possible combinations of two goods or services that an economy can produce when all resources are fully and efficiently employed.

Specialisation

The process by which individuals, firms, or entire economies concentrate on the production of a limited range of goods and services.

Division of labour

The separation of a production process into distinct, separate tasks, with each task assigned to a specialised worker.

Functions of money

A medium of exchange, a measure of value (unit of account), a store of value, and a standard of deferred payment.

Free market economy

An economic system where scarce resources are allocated solely through the price mechanism and market forces with minimal government intervention.

Command economy

An economic system where the state owns scarce resources and central planners determine what, how, and for whom to produce.

Mixed economy

An economic system that relies on a combination of market forces and government intervention to allocate resources.

Diminishing marginal utility

The principle stating that as consumption of a good increases, the additional satisfaction or utility derived from each extra unit declines.

Functions of the price mechanism

Rationing scarce resources through price, signalling information about market conditions, and providing incentives for buyers and sellers.

Market failure

A misallocation of resources where the market mechanism fails to achieve allocative efficiency, resulting in a net loss of economic welfare.

Public good

A good that possesses the characteristics of being both non-rivalrous and non-excludable in consumption.

PIRATE

A mnemonic for the non-price determinants that shift demand: Population (demographic changes), Income (affecting normal and inferior goods), Related goods (prices of substitutes and complements), Advertising (marketing and brand loyalty), Tastes and fashion, and Expectations of future price changes.

CARPET

A mnemonic for the non-price determinants that shift supply: Costs of production (wages, raw materials), Alternative goods (prices of goods in competitive supply), Regulations (government legislation), Productivity (output per factor input), Expectations of future prices, and Technology and Taxes/subsidies.

Advantages of division of labour

Benefits include higher productivity and efficiency through worker repetition, time saved by not switching between distinct tasks, reduced training costs due to task simplification, and greater feasibility of mechanisation and automation.

Disadvantages of division of labour

Drawbacks include worker boredom and demotivation from repetitive tasks leading to absenteeism, high staff turnover, risk of structural unemployment from occupational immobility, and production line vulnerabilities where a delay at one stage halts entire output.

Advantages of specialisation

• Higher productivity and efficiency – e.g. rising output per person hour

• Lower unit costs leading to higher profits

• Encourages investment in specific capital – economies of scale

Disadvantages of specialisation

• Risk of worker alienation

• Risk of disruptions to production process

• Risk of structural unemployment due to occupational immobility

Advantages of specialisation in trade

• Allows a country to make full use of their economic resources

• Increases the scale of production – leads to lower costs and prices

• Surplus can be exported, an injection into the circular flow of income

Disadvantages of specialisation in trade

• World prices for a product might fall leading to declining revenues

• Risk of over-specializing and structural unemployment

• Might lead to over-extraction of a country’s natural resources

Law of demand

The economic principle stating that, ceteris paribus, an inverse relationship exists between price and quantity demanded; as price rises, quantity demanded falls, and vice versa.

Law of supply

The economic principle stating that, ceteris paribus, a direct relationship exists between price and quantity supplied; as price rises, quantity supplied increases, and vice versa.

Movement along vs shift of the demand curve

A change in the good's own price results in an extension or contraction along the existing curve, whereas changes in non-price determinants (such as consumer income or tastes) shift the entire curve outward or inward.

Movement along vs shift of the supply curve

A change in the good's own price results in an extension or contraction along the existing curve, whereas changes in non-price determinants (such as unit costs of production or technology) shift the entire curve outward or inward.

Market equilibrium

The state where quantity demanded equals quantity supplied ($Q<em>D = Q</em>S$) at a given price, clearing the market so that there is neither a shortage nor a surplus.