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All of the key terms with their definitions, as well as some other things we need to memorise, like the economies of scale, for example. To anyone doing the exam on Friday, good luck!!
Resources
factors used to produce goods and services
The economic problem
unlimited wants exceeding finite resources
Wants
desires for goods and services
Scarcity
a situation where there isn't enough to satisfy everyone's wants
Economic good
a product which requires resources to produce it and therefore has an opportunity cost
Free good
a product which does not require any resources to make it and so does not have an opportunity cost
Factors of production
the economic resources of land, labour, capital and enterprise
Land
gifts of nature available for production
Labour
human effort used in producing goods and services
Capital/capital goods
human-made goods used in production
Consumer goods
goods and services purchased by households for their own satisfaction
Enterprise
risk bearing and key decision making in business
Occupationally mobile
capable of changing use
Geographically immobile
incapable of moving from one location to another
Mobility of labour
the ability of labour to change where it works or in which occupation
Mobility of capital
the ability to change where capital is used or in which occupation
Mobility of enterprise
the ability to change where enterprise is used or in which occupation
Entrepreneur
a person who bears the risks and key decisions in a business
Labour force
people in work and those actively seeking work
Productivity
the output per factor of production in an hour
Labour productivity
output per worker hour
Output
goods and services produced by the factors of production
Investment
spending on capital goods
Gross investment
total spending on capital goods
Depreciation (capital consumption):
the value of capital goods that have worn out or become obsolete
Net investment:
gross investment minus depreciation
Negative net investment
a reduction in the number of capital goods caused by some obsolete and worn out capital goods not being replaced
Opportunity cost
the best alternative forgone
Production possibility curve
a curve showing the maximum output of two types of products and combinations of those products that can be produced with existing resources and technology
Microeconomics
the study of the behaviour and decisions of households and firms, and the performance of individual markets
Macroeconomics
the study of the whole economy
Market
an arrangement that brings buyers into contact with sellers
Economic agents
those who undertake economic activities and make economic decisions
Private sector
firms owned by shareholders and individuals
Economic system
the institutions, organisations and mechanisms that influence economic behaviour and determine how resources are allocated
Planned economic system
an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives
Directives
state instructions given to state-owned enterprises
Mixed economic system
an economy in which both the private and public sectors play an important role
Market economic system
an economic system where consumers determine what is produced, resources are allocated by the price mechanism and land and capital are privately owned
Price mechanism
the way the decisions made by households and firms interact to decide the allocation of resources
Capital-intensive
the use of a high proportion of capital relative to labour
Labour-intensive
the use of a high proportion of labour relative to capital
Demand
the willingness and ability to buy a product
Supply
the willingness and ability to sell a product
Market equilibrium
a situation where demand and supply are equal at the current price
Market disequilibrium
a situation where demand and supply are not equal at the current price
Market demand
total demand for a product
Aggregation
the addition of individual components to arrive at a total amount
Extension in demand
a rise in the quantity demanded caused by a fall in the price of the product itself
Contraction in demand
a fall in the quantity demanded caused by a rise in the price of the product itself
Changes in demand
shifts in the demand curve
Increase in demand
a rise in demand at any given price, causing the demand curve to shift to the right
Decrease in demand
a fall in demand at any given price, causing the demand curve to shift to the left
Normal goods
a product whose demand increases when income increases and decreases when income falls
Inferior goods
a product whose demand decreases when income increases and increases when income falls
Substitute
A product that can be used in place of another product
Complement
a product that is used together with another product
Ageing population
An increase in the average age of the population
Birth rate
the number of live births per thousand of the population in year.
Market supply
total supply of a product
Extension in supply
a rise in the quantity supplied caused by a rise in the price of the product itself
Contraction in supply
a fall in the quantity supplied caused by a fall in the price of the product itself.
Change in supply
changes in supply conditions causing shifts in the supply curves
Increase in supply
a rise in supply at any given price, causing the supply curve to shift to the right
Decrease in supply
a fall in supply at any given price, causing the supply curve to shift to the left
Unit cost/Average total cost(ATC)
the average cost of production. It is found by dividing total cost by output
Improvements in technology
advances in the quality of capital goods and methods of production
Direct taxes
taxes on the income and wealth of individuals and firms
Indirect taxes
taxes on goods and services
Tax
a payment to the government
Subsidy
a payment by the government to encourage the consumption or production of a product
Equilibrium price
the price where demand and supply are equal
Excess supply
the amount by which supply is greater than demand
Excess demand
the amount by which demand is greater than supply
Price elasticity of demand (PED)
a measure of the responsiveness of the quantity demanded to a change in price
Elastic demand
when the quantity demanded changes by a greater percentage than the change in price
Inelastic demand
when the quantity demanded changes by a smaller percentage than the change in price
Perfectly elastic demand
when a change in price causes a complete change in the quantity demanded
Perfectly inelastic demand
when a change in price has no effect on the quantity demanded
Unit elasticity of demand
when a change in price causes an equal change in the quantity demanded, leaving total revenue unchanged
Price elasticity of supply
a measure of the responsiveness of the quantity supplied to a change in price
Elastic supply
when the quantity supplied changes by a greater percentage than the change in price
Inelastic supply
when the quantity supplied changes by a smaller percentage than the change in price
Perfectly inelastic supply
when a change in price has no effect on the quantity supplied
Perfectly elastic supply
when a change in price causes a complete change in quantity supplied
Unit PES
when a change in price causes an equal percentage change in the quantity supplied
Public sector
the part of an economy that is controlled by the government.
State-owned enterprises (SOEs)
organisations owned by the government which sell products
Privatisation
the sale of public sector assets to the private sector
Market failure
market forces resulting in an inefficient allocation of resources
Free riders
someone who consumes a good or service without paying for it
Allocative efficiency
when resources are allocated to produce the right products in the right quantities
Productively efficient
when products are produced at the lowest possible cost and making full use of resources
Dynamic efficiency
efficiency occurring over time as a result of investment and innovation
Third parties
those not directly involved in producing or consuming a product
Social benefits
the total benefits to a society of an economic activity
Social costs:
the total costs to a society of an economic activity
Private benefits
benefits received by those directly consuming or producing a product
Private costs
costs borne by those directly consuming or producing a product
External costs
costs imposed on those who are not involved in the consumption and production activities of others directly
Note
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