Economics IA1

Wants

Goods and services we desire because they give us satisfaction. They are unlimited and insatiable

Competitive wants

Wants that replace each other (e.g. McDonalds vs KFC).

Complementary wants

Wants that are purchased together (e.g. burger and fries).

Needs

Things that are essential for life in society.

Value judgement

A decision based not solely on facts

Trade-off

When you have to give up one thing to get something else.

Opportunity cost

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

Scarcity

The universal problem because resources available for the satisfaction of human wants are limited while wants are unlimited.

Resources

The things we use to make goods and services.

Factors of production

The broad categories of resources that go into creating goods and services to satisfy human wants; land, labour, capital and enterprise.

Land

All natural resources (except human labour) which can be used in production (renewable & non-renewable).

Labour

The factor of production that includes human effort - both physical and mental.

Capital

The stock of human-made resources that can be used to create further goods and services.

Enterprise

The ability to initiate and manage the production process by combining and organising the other factors of production

Ceteris paribus

'All other things being equal.'

Technical/Productive efficiency

Producing the maximum amount of output from each unit of input - at the lowest average cost.

Allocative efficiency

Occurs when resources are allocated in the most efficient way to generate the maximum possible benefits for both consumers and the nation - i.e. to meet the level of demand.

Production Possibility Curve/Frontier

A model used by economists to demonstrate the concept of opportunity cost.

Economic systems

The way in which a society decides how it will address the production questions arising from scarcity.

Consumer sovereignty

Consumers decide the patterns of production (what goods & services will be produced) through their spending decisions.

Command economy

An economic system in which decisions about what to produce and the way the proceeds of production should be distributed among members of the society are made by a central planning activity (government).

Mixed economy

An economic system that relies on both markets and governments to allocate resources.

Market economy

An economic system in which the important economic questions are decided by interaction between individual buyers and sellers in the marketplace.

Cost-benefit analysis

A process of making a decision by weighing up potential costs and benefits for different stakeholders.

Equilibrium

A balanced situation in economics from which there is no tendency to change

Consumer Expenditure (C)

Total spending on goods and services by the household sector.

Investment Expenditure (I)

May be either:

• Expenditure on capital equipment, or

• An increase in the stocks of unsold consumer goods and services not intended for present consumption

Savings (S)

That part of income that is not spent on consumption but set aside for future use.

Leakage

An outflow of expenditure from the circular flow of income.

Injection

An inflow of expenditure into the circular flow of income.

Exports (X)

Goods and services sold to foreign countries.

Imports (M)

Goods and services purchased from foreign countries.

Subsidies

Grants made by the government to industries whose survival is considered beneficial to the public.

Taxes (T)

A method of financing government activities that involves compulsory payments to the government by individuals and businesses usually based on income earned, and goods and services sold.

Government Expenditure (G)

When the government spends money providing public goods and services for the community.

Gross Domestic Product (GDP)

A measure of the monetary or market value of goods and services produced in an economy in a given period (usually one year)

Paradox of thrift

The "Paradox of Thrift" is an economic theory that suggests when people try to save more this leads to a fall in aggregate demand (the total demand for goods and services within the economy) and economic growth.

Aggregate demand

The total level of demand for all goods and services within an economy

Business (Economic) Cycle

An economic model that demonstrates the alternate but irregular periods of prosperity and recession which naturally occur within an economy.

Inflation

The rate at which the general level of prices for goods and services rises over time in an economy.

Upturn (business cycle)

Sustained periods of above-average economic growth

Peak (business cycle)

The highest point in a cycle with an above-average level of economic activity.

Downturn (business cycle)

Sustained periods of a decline in the growth rate of GDP.

Trough (business cycle)

The lowest point in a cycle with below-average levels of economic activity.

Recession

A decline in economic activity (i.e. negative GDP growth) that lasts for at least two consecutive quarters (6 months).

Fiscal policy

Use of the government's annual budget to influence the level of economic activity.

Monetary policy

Management of interest rates by the Reserve Bank in order to influence the level of economic activity.

Unemployment

The percentage of the labour force (e.g. only people of working age) not engaged in any form of paid employment but actively looking for work.

Basis points

Unit of measurement for interest rates and other percentages in finance