Topic 1 Definitions (economic methodology and the economic problem)

Allocative efficiency

when economic resources are utilised to produce the combination of goods and services that maximise economic welfare

Allocative price function

price allocate resources away from markets with excess supply to markets with excess demand

capital

producer goods

capital/producer goods

goods used in the production of other goods

ceteris paribus

all other things being held constant

choices

selecting one of multiple alternatives when deciding how to allocate scarce resources

consumer goods

goods consumed by households and individuals, used to satisfy needs and wants.

Economic welfare

The economic satisfaction/wellbeing of individuals/households/groups in an economy

Enterprise

The ability to utilise factors of production effectively

Factors of production

inputs of the production process, such as land, labour, capital and enterprise

Finite resources

Non-renewable resources that become increasingly scarce

Fundamental economic problem

deciding how to best allocate scarce resources to maximise overall economic welfare

imperfect information

when individuals lack the info to make the best decision

incentive price function

prices create incentives for people to adjust their economic transactions

infrastructure

facilities required for an economy to function

labour

workers with human capital

land

natural physical materials, as well as space for fixed capital

need

something necessary for human survival

normative statement

statements that include value judgements, that cannot be easily disproved

opportunity cost

loss of other alternatives due to selecting one of a set of options

pareto efficiency

state of resource allocation, where in order to make an economic agent better off, another agent is made worse off

positive statement

statements including facts, that can easily be proved/disproved.

PPF

a curve displaying the various possible combinations of 2 products that can be produced with finite resources

Rationing price function

prices rise to ration demand for goods

renewable resources

restorable resources that can be replenished

scarcity

Resulting from the concept of infinite wants and needs, yet limited resources.

signalling price function

prices provide info to sellers and buyers, influencing economic decisions.

Trade

Buying and selling of goods and services

value judgements

statements that are subjective and based on opinion rather than factual evidence

want

something desirable, yet not necessary for human survival