Economics definitions

Scarcity

One of the key concepts of this course; it is the condition in which available resources (land, labor, capital, entrepreneurship) are limited; they are not enough to produce everything that human beings need and want. One of the key concepts of this course

Choice

One of the key concepts of this course economics is a study of choices, or selecting among alternatives, due to the scarcity of resources One of the key concepts of this course

Efficiency

One of the key concepts of this course; involves making the best possible use of scarce resources to avoid waste; may refer to producing at the lowest possible cost, or producing what consumers mostly want (see allocative efficiency).

Allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. The condition for allocative efficiency is given by MSB \= MSC (marginal social benefit \= marginal social cost or P \= MC (price is equal to marginal cost); alternatively it is when social surplus is maximum.

Equity

One of the key concepts of this course; is the condition of being fair or just; it should be contrasted with the term 'equality'. Often used in connection with income distribution, in which case it is usually interpreted to mean income equality (though this is only one possible interpretation of equity).

Economic well being

One of the key concepts of this course, refers to levels of prosperity, economic satisfaction and standards of living among the members of a society. One of the key concepts of this course

Sustainability

One of the key concepts of this course; refers to maintaining the ability of the environment and the economy to continue to produce and satisfy needs and wants into the future for future generations; depends crucially on the preservation of the environment over time. Related to the concept of sustainable development, meaning 'Development which meets the needs of the present without compromising the ability of future generations to meet their own needs' (according to the Brundtland Commission). One of the key concepts of this course

Change

One of the key concepts of this course; change is important in economics in the study of both economic theory as well as in real world events. One of the key concepts of this course

Interdependence

One of the key concepts of this course; refers to the idea that economic decision-makers interact with and depend on each other, arises from the fact that no one is self-sufficient.

Intervention

One of the key concepts of this course; typically refers to government intervention, meaning that the government becomes involved with the workings of markets.

Resources

Factors of production, used by firms as inputs in the production process; see factors of production.

Factors of production

All resources, or inputs (land, labor, capital, entrepreneurship) used to produce goods and services.

Land

A factor of production which includes all natural resources: land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called 'gifts of nature' or 'natural capital'.

Labor

A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.

Capital

One of the factors of production, which itself has been produced (it does not occur naturally), also known as 'physical capital', includes machinery, tools, equipment, buildings, etc. Other types of capital include "human capital', or the skills, abilities, knowledge and levels of good health acquired by people; 'natural capital', or everything that traditionally has been included in the factor of production 'land'; and "financial capital', or purchases of financial instruments such as stocks and bonds.

Entrepreneurship

One of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things to take business risks and to seek new opportunities for opening and running a business Entrepreneurship organizes the other three factors of production (land, labor and capital) and takes on the risks of success or failure of a business

Human capital

The skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of 'capital' because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.

Opportunity

A set of circumstances making it possible for someone to do something.

Free good

Any good that is not scarce, therefore has a zero opportunity cost.

Resource allocation

Assigning available resources, or factors or production, to specific uses chosen among many possible and competing alternatives; involves answering the 'what to produce' and 'how to produce basic economic questions.

Distribution of income

Concerned with how much of an economy's total income different individuals or different groups in the population receive, and involves answering the 'for whom' basic economic question.

Government intervention

The practice of the government to intervene (interfere) in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Free market economy

An 'ideal type' of economy based on the market approach to making economic decisions; involve private sector ownership and decision-making, and price rationing; to be contrasted with a planned economy.

Planned economy

An economy where all economic decision-making is carried out by government planning (based on command and control methods); rather than reliance on prices determined in markets; to be contrasted with a free market economy.

Mixed economies

economy that combines the command approach (government decision-making) companies in areas where they operate as a single supplier (these are natural monopolies).

Rationing

A method used to apportion or divide something up between its interested users; in economics it refers to the method used to make resource allocation and output/income distribution decisions.

Model

A simplified representation of something in the real world, showing only the important aspects of the real world being investigated, ignoring unnecessary details

Production possibilities curve

A curve showing production possibilities.

Production possibilities

All possible combinations of the maximum amounts of two goods that can be produced by an economy, given fixed and unchanging resources and technology, when there is full employment of resources and efficiency in production.

Economic growth

Increases in total real output produced by an economy (real GDP) over time; may also refer to increases in real output (real GDP) per capita (or per person).

Actual growth

In the context of the production possibilities (PPC) model, it is growth that occurs due to reduction of unemployment or improvement in efficiency of resource use, resulting in a movement of a point inside the PPC to a point closer to the PPC in the northeast direction.

Growth in production possibilities

An outward shift in the PPC caused by a decrease in unemployment, or improvement in efficiency of production, or both, leading to more output produced.

Circular flow of income model

A model showing the flow of resources from consumers (households) to firms, and the flow of products firms consumers, as well as money flows consisting of consumers' income arising from the sale of their resources and firms' revenues arising from the sale of their products

Households

A consumer or group of consumers (such as a family) that buys goods and services for its own use; a key decision-maker in a market economy.

Firms

A business involved in production of goods or services; a key decision-maker in a market economy.

Injections

In the circular flow of income model, refer to the entry into income flow of funds corresponding to investment, government spending or exports.

Leakages

In the circular flow of income model, refers to the withdrawal from the income flow of funds corresponding to savings, taxes or imports.

Imports

Goods or services produced in other countries that are bought and brought into the domestic economy.

Exports

Goods or services that are sold to other countries.

Positive economics

The body of economics based on positive statements, which are about things that are, were or will be. Positive statements may be true or false so they can be refuted. They form the basis of theories and models that try to explain economic events. To be contrasted with normative economics.

Normative economics

The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they cannot be refuted, they can only be assessed relative to beliefs and value judgements. Normative economics forms the basis of economic policies; to be contrasted with positive economics.

Equality

The state of being equal with respect to something; income equality means everyone receives the same income. One of the key concepts of this course

Adam smith

(1723-1790) a Scottish philosopher often referred to as the 'Father of economics, best known for his idea that the self-interested behavior of decision- makers without government intervention results in competitive markets leading to a more efficient use of resources and increased output; see laissez faire.

Laissez faire

A French expression meaning let it do, referring to a free market economy without government intervention, such as was advocated by Adam Smith. According to this idea a free market economy left on its own will be highly efficient.

Classical economics

Economic ideas of the nineteenth century; a main feature was the idea that markets working on their own according to the principles of supply and demand could solve all major economic problems, including unemployment and recession, and allocate resources efficiently.

Marginal utility

The extra or additional utility received from consuming one more unit of a good.

Karl marx

A German philosopher who developed a theory predicting the collapse of capitalism and its replacement by communism, highly regarded for his insights into how capitalism works.

John meynard keynes

(1883-1946) A British economist; one of his ideas that he is famous for is that an economy left on its own will not necessarily lead to full employment on its own, thus requiring government intervention.

Monetarist/new classical model

Actually includes two different models of the macroeconomy (the monetarist and the new classical); both are based on the following principles: the importance of the price mechanism in coordinating economic activities, the concept of competitive market equilibrium, and thinking about the economy as a harmonious system that automatically tends toward full employment.

Behavioral economics

A relatively new branch of economics strongly influenced mainly by psychology, but also by sociology and neuroscience based on the idea that human behavior is far more complex than the assumptions of rational consumer choice.

Circular economy

The idea that goods should be produced in such a way that they can be repaired rather than thrown out; they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet.

Market

Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange.

Competition

Occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.

Competitive markets

A market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product (i.e. no market power).

Demand

Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period, ceteris paribus (all other things being equal).

Demand curve

A curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus (all other things equal); see demand.

Law of demand

A law stating that there is a negative relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus. as the price of the good increases, the quantity of the good demanded falls (and vice versa).

Market demand

Refers to the sum of all individual consumer demands for a good or service.

Non-price determinants of demand

The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve.

Normal good

A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.

Inferior good

A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases

Substitutes

​​Two or more goods that satisfy a similar need, so that one good can be used in place of another. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.

Complements

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other,

Utility

A subjective concept, it is the satisfaction that consumers gain from consuming something.

Law of diminishing marginal utility

A law stating that as consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed, therefore consumers will buy more only if price falls; this underlies the law of demand.

Substitution effect

Part of an explanation of the law of demand; there is an inverse relationship between price and quantity demanded because as price falls consumers substitute the now less expensive good for other products (the other part is the income effect).

Income effect

Part of an explanation of the law of demand; as price falls real income increases causing the consumer to buy more of the good (the other part is the substitution effect).

Supply

Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus (all other things being equal).

Supply curve

A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus (all other things equal); see supply.

Law of supply

A law stating that there is a positive relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus. as the price of the good increases, the quantity of the good supplied also increases (and vice versa).

Market supply

Refers to the sum of all individual firm supplies of a good or service.

Non price determinants of supply

The variables (other than price) that can influence supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve.

Competitive supply

In the case of two goods, refers to production of one or the other by a firm; in other words the two goods compete with each other for the same resources (for example, if a farmer can produce wheat or corn, producing more of one means producing less of the other).

Joint supply

Refers to production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other (for example, butter and skimmed milk are both produced from whole milk, and producing more of one means producing more of the other as well).

Subsidy

An amount of money paid by the government to firms for a variety of reasons: to prevent an industry from failing, to support producers' incomes, or as a form of protection against imports (due to the lower costs and lower prices that arise from the subsidy). A subsidy given to a firm results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution.

Total product

The total quantity of output produced by a firm.

Marginal product

The extra or additional output that results from one additional unit of a variable input (such as labor).

Law of diminishing marginal returns

A law stating that as more and more units of a variable input (such as labor) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease; underlies the firms' supply curve

Total cost

The total costs incurred by a firm that undertakes production of something.

Marginal cost

The extra or additional cost of producing one more unit of output.

Excess supply

In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus; see surplus.

Surplus

In general, this is the excess of something over something else to which it is being compared. (i) In the context of demand and supply, it is the extra supply that results when quantity supplied is greater than quantity demanded. (ii) In the case of consumer and producer surplus, it is the extra benefit consumers get by paying less for a good than the amount they are willing to pay, or the extra benefit producers get by receiving a higher price for the good they are selling than the price they are willing to receive. (iii) In the case of the government budget, a surplus occurs when government revenues are greater than government expenditures. (iv) In the balance of payments, a surplus in an account occurs when the credits (inflows of money from abroad) are larger than the debits (outflows of money to other countries).

Excess demand

In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good; see shortage.

Shortage

In the context of demand and supply, is the amount by which quantity demanded is greater than quantity supplied.

Equilibrium

A state of balance such that there is no tendency to change

Market equilibrium

Occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change.

Equilibrium price

The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change; it is the price that prevails when there is market equilibrium.

Equilibrium quantity

The quantity that is bought and sold when a market is in equilibrium, i.e. when quantity demanded is equal to quantity supplied.

Competitive market equilibrium

The equilibrium that emerges at the point where the demand curve intersects the supply curve in a free competitive market (where there is no government intervention).

Price mechanism

The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers (demanders) and sellers (suppliers); these interactions determine the allocation of resources

Signaling

In the event of asymmetric information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of good quality; for example use of warranties or establishment of brand names.

Prices as Incentives

The ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest; firms according to the law of supply and consumers according to the law of demand; compare with prices as signals, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures).

Marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

Consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers up to quantity purchased.

Producer surplus

Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by producers and above the supply curve up to the quantity sold.

Social/community surplus

The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures. See consumer surplus and producer surplus.

Welfare

In general, it refers to the well-being of a population. In microeconomics, it is measured by the amount of social surplus (consumer and producer surplus) that is generated in a market. Welfare is greatest, i.e. social surplus is greatest, in competitive market equilibrium when there are no externalities, and marginal social benefits are equal to marginal social costs (MSB \= MSC).

Welfare loss

Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs (MSB\# MSC), due to market failure.

Rational consumer choice

In the microeconomic theory of consumer behavior, consumers make choices about what goods and services to buy based on the following assumptions. All consumers (i) have consistent tastes and preferences, (ii) have perfect information, and (iii) try to maximize their utility (make it as great as possible).

Bias

A term from behavioral economics, it is a term from psychology that refers to systematic errors in thinking or evaluating; examples include rules of thumb, anchoring, framing, availability.