Unit 1: Introductory Concepts

Capital

Physical capital refers to means of production that include machines, tools, equipment, and factories;(man-made aids to production) the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills, and experience embodied in the labor force of a country.

Ceteris Paribus

A Latin expression meaning “other things being equal.”

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Circular flow of income

A simplified illustration that shows the flows of income and expenditures in an economy.

Economics

Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

Economics systems

The economic system refers to the organized method by which a country allocates its scarce resources toward the production of goods and services in the economy.

Efficiency

In general, involves making the best use of scarce resources.

Equity

The concept or idea of fairness

Equality

Equality is state of being equal, especially in status, rights, and opportunities

Entrepreneur

Refers to the ability of certain individuals to organize the other factors of production (land, labor, capital) and their willingness to take risks.

Factors of production

Resources used in the production of goods and services; include land (natural resources), labor, capital, and entrepreneurship.

Foreign sector

In an open economy, the term refers to exports and imports.

Free market economy

An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how, and for whom) that all economies face.

Growth in production possibilities

When the production possibilities of a country increase because of more/better resources and/or better technology becoming available, illustrated by a shift outwards of the PPC.

Households

Groups of individuals in the economy who share the same living accommodation, who pool their income and jointly decide the set of goods and services to consume.

Injections

Any addition to the circular flow of income. Within the circular flow model, these refer to spending on domestic output that does not originate from households and thus includes investment spending by firms, government expenditures, and exports.

Labor

One of the four factors of production that refers to the physical and mental contribution of workers to the production process.

Laissez faire

The view is that if market forces are left alone unimpeded by government intervention, the outcome will be efficient.

Land

One of the four factors of production that refers to the natural resources with which an economy is endowed; is also referred to as “gifts of nature.

Leakages

Income that is leaving the circular flow. (Income not spent on domestic goods and services. It includes savings, taxes, and import expenditures.

Macroeconomics

The study of aggregate economic activity. It investigates how the economy as a whole work.

Microeconomics

The study of the behavior of individual consumers, firms, and markets and the determination of market prices and quantities of goods, services, and factors of production.

Mixed economy

An economy that has elements of a planned economy and elements of a free market economy. In reality, all economies are mixed. What is different is the degree of the mix from country to country.

Normative economics

Deals with areas of the subject that are open to personal opinion and belief, thus not subject to refutation.

Normative statements

Statements which are based on value judgments and are subjective.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Planned economy

An economy where the means of production (land and capital) are owned by the state. The state determines what/how much to produce, how to produce, and for whom to produce. 

Positive economics

Deals with areas of the subject that are capable of being falsified or shown to be correct or not.

Positive statements

Statement of fact which can be tested and proved true or false.

Production possibility curve

A curve showing the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Refutation

A method used in the natural sciences and social sciences where any proposition must be subjected to an empirical test in order to see if it can be disproven or refuted. If it is disproven or refuted, then the proposition must be rejected.

Scarcity

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

Transitional economics

A transition economy or transitional economy is an economy that is in the process of changing from one type of economic system to another.