Economics L2

Scarcity

The limited availability of economic resources relative to society’s unlimited needs and wants for goods and services.

Wants

Desires for things that go beyond what is required to sustain life.

Needs

Things required to sustain life, such as food, water and shelter.

Goods

Usually tangible objects produced to satisfy wants or needs.

Services

Activities provided by other people to satisfy wants or needs.

Resources / factors of production

The inputs used to produce goods and services: land, labour, capital and entrepreneurship.

Land

Natural resources used in production.

Labour

Human effort used in the production of goods and services.

Capital

Human-made resources used to produce other goods and services.

Entrepreneurship

The organizing and risk-taking role that combines the other factors of production to produce goods and services.

Allocate

To distribute resources among alternative uses.

Trade-off

A want or need that is not chosen when a decision is made.

Opportunity cost

The next-best alternative foregone when an economic choice is made.

Economic good

A good produced with scarce resources; it therefore has an opportunity cost.

Free good

A good not produced with scarce resources, with no opportunity cost and therefore no price, such as air or sunlight.

What to produce?

The choice about which goods and services a society should produce and in what quantities.

How to produce?

The choice about which resources and production methods should be used.

For whom to produce?

The choice about how produced goods and services are distributed among people.

Economic system

A way in which a society allocates scarce resources and distributes the goods and services produced with them; also called a rationing system.

Centrally planned economy

An economic system in which the government makes the main economic decisions and owns the factors of production.

Free-market economy

An economic system in which households and firms privately own resources and make decisions through markets and the price mechanism.

Mixed economy

An economy combining market decision-making with government intervention.

Price mechanism

The process by which prices signal consumer demand and help consumers and producers allocate resources in a market.

Government intervention

Government involvement in economic decisions and the allocation of resources.

Merit good

A good or service, such as education, that may be underprovided by a free market and is considered beneficial to society.

Demerit good

A good, such as alcohol or cigarettes, whose consumption is considered harmful and may be discouraged by government.