Economic Ideas and Resource Allocation Vocabulary

Vocabulary flashcards based on lecture notes about Economic ideas & Resource Allocation.

Scarcity

The condition where there are insufficient resources to satisfy all the needs and wants of people.

Opportunity Cost

The next best alternative that is given up as a result of making a choice. Indicates the benefits that could have been obtained by choosing the next best alternative and can be used to evaluate both consumption and production decisions.

Ceteris Paribus

All other factors influencing 2 variables are assumed to remain constant; Enables economic behaviours to be studied from a controlled approach

Factors of Production

The inputs used to produce goods and services; they are divided into 4 Land, Labour, Capital, Enterprise

Land

The natural resources of an economy; all that lays on the surface of the earth. Farmland, mineral deposits, forests, lakes and rivers

Labour

The human workforce of the economy, includes the physical and mental effort involved production. Intellectual capital or Human capital. Skills, knowledge and abilities, AND the potential workforce

Capital

The human-made inventions that aid in production. Tools, machinery, equipment, buildings (eg. factories. Fixed Capital: Machinery; Working Capital: Stocks of raw materials

Enterprise

The role of the Entrepreneur in managing all 3 other FOPS, in order to enable production. His risk-taking endeavours make him differentiate from other workers, in order to organise all 3 other FOPS to promote efficiency and increase output

Specialisation

Occurs when individuals, firms, regions, or economies focus on producing certain goods and services instead of others. It allows individuals to concentrate on what they do best, increasing overall production. Technological advancements may make specialised skills redundant. Changing consumer demand can lead to job losses in certain regions or industries.

Division of Labour

When production is broken down into multiple tasks, with workers specialising in specific parts. Increases efficiency and output per worker. Reduces production costs and Improves the quality of finished goods.

Economic System

The way in which a particular country attempts to answer the basic economic problem. 3 Types of Economic Systems: Market Economy, Planned Economy, and Mixed Economy

Market Economy

Type of Economic System where resource allocation is taken by the private sector, producers and consumers where space that brings together buyers and sellers to exchange products. Price Mechanism: The process in which changes in price bring about changes in resource allocation

Planned Economy

Type of Economic system where resource allocation is taken by the State/Gov. Agencies, Very High intervention. The state can decide which goods to produce Also can decide to whom they will be supplied. Price-Stability is Very Likely

Mixed Economy

Type of Economic System where resource allocation is taken by both private and public sector to combine the advantages of Market and Planned Economies, where decision making is both by Private and Public sector. Most Economies in the world

Transitional Economy

Economy that is in the process of changing from a Planned Economy to a more Mixed Economy, the prices become volatile, Industrial Unrest, and side effects of the international trade

Production Possibility Curve (PPC)

Joins the different combinations of products that can be produced in an economy in a given period of time. It assumes the existing resources and level of technology available in order to show the maximum possible output that can be achieved; does this by illustrating the idea of choice and opportunity cost, by increasing the output of 1 Product = Reduces the Output of the Other Product.

Economic Growth

Increase in the productive potential or capacity of an economy, since more of both goods can be produced

Free Goods

Good which is not scarce, thus does not need a mechanism to allocate it, for sufficient quantity to satisfy the good’s demand

Private Goods

Good that is relatively scarce, thus needs to be allocated to a particular use through an allocative mechanism. Has 2 Essential Qualities: Rival and Excludable

Public Goods

Good which is both “non-rival” and “non-excludable”. It is not possible to exclude any person from its use, Impossible to Prevent, and Non-Rejectable

Free Rider Problem

The fact that it’s impossible to exclude individuals who have not paid for a product, price cannot be charged for public goods. Main Outcome: Price cannot be charged for public goods.

Quasi-Public Goods

Impossible to distinguish between if it’s a private or public good, Characteristics: Blend between the 2 types of goods. They may be accessible, but rivalrous and partially excludable.

Merit Goods

Private good that would likely be underproduced and underconsumed in a market economy due to both producers and consumer don’t have the full information needed to make rational decisions.

Demerit Goods

Private good which would be overproduced and overconsumed in a market economy due to individuals may not be aware of the potential damage of its over-consumption (imperfect information). Rival and Excludable

Information Failure

Situation where people do not have the full information needed to make informed decisions about their behaviour, influences market failure in both Merit and Demerit Goods.

Good or service Demand

The quantity of a good or service an individual is willing and able to purchase over a range of prices over a period of time. Must be backed up with the ability to pay for it.

Market Demand

Curve showing the relationship between the quantity of products individuals are willing and able to buy over a range of prices over a period of time. Adding together the quantity demanded of each individual at any given price

Supply

The quantity of a good a producer is willing and able to offer for sale over a range of prices, It has Individual Supply. The relationship between an individual producer’s supply and the price for a product

Law of Supply

For most goods and services, the quantity supplied is directly proportional with its price, so if Price Rises then Quantity Supplied Rises and If Price Falls then Quantity Supplied Falls

Market Supply

The total supply for a particular product in the market. Calculation: Adding together the quantity supplied of each individual producer at each price.
Purpose: Shows the relationship between market supply and the price of a product

Normal Good

Good whose demand rises as income rises, and falls as income falls

Inferior Good

Good whose demand falls as income rises, and rises as income falls. Usually consumers opt for cheaper alternatives when their income is reduced

Subsitutes

Goods that are alternative to one another ; they can replace each other, such as Coffee v/s Tea, If Price of Tea Rises, then Tea’s demand is reduced, since individuals opt for coffee causing Coffee’s demand raises .

Complements

Goods that are consumed together. If Price of Cars Rises, then Car’s demand will fall, since fuel demand fall too

Price of Elasticity of Demand

Measures the responsiveness of a change in demand to a change in price, so PED = (%Change in Quantity Demanded) / (%Change in Price)

Income Elasticity of Demand

Measures the responsiveness of a change in demand to a change in income. YED = (%Change in Quantity Demanded) / (%Change in Income)

Cross Elasticity of Demand

Measures the responsiveness of a change in demand of one good, X, to a change in price of another good, Y. XED = (%change in X’s Quantity Demanded) / (%change in Y’s Price)

Price Elasticity of Supply

Measures the responsiveness of a change in supply to a change in price, so PES = (%change in Quantity Supplied) / (%change in Price)

Market Equilibrium

When supply meets demand that makes the price has No Tendency for Change since producers are meeting consumers’ demand.

Consumer Surplus

The difference between the price the consumer is willing and able to pay and the price they actually pay. Area above market price and below the demand curve.

Producer Surplus

The difference between the price the producer is willing to charge and the price they actually charge.Area below the market price and above the supply curve

Economic Welfare

The total benefit society receives from an economic transaction by adding the area of producer and consumer surplus together that is important when considering the effects of Government Intervention

Maximum Prices

Price control set by the Government as the highest legal price that can be set for a good or service. It can encourage consumption/production of goods/services; avoid goods from getting too expensive by being BELOW Equilibrium

Minimum Prices

Price control set by the Government as the lowest legal price that can be set for a good or service. A Type of minimum price is the Minimum Wage for hourly wage an employer must pay an employee, in order to Reduce poverty; increasing living standard of workers

Buffer Stock

Amount of a commodity that is held to limit its price volatility If Commodity has Production Surplus then Product is bought and stored in the buffer stock vs when Commodity has Production Shortage Buffer then the stock supplies the amount needed to cover the shortage
The government intervenes since Markets with Supply Variations experience price volatility

Direct Taxes

Taxes that are levied on income, wealth and profit that are Paid Payee (Recipient of Tax Payments) directly to the Government. Can be : Income Tax, Capital Gains Tax, Corporation Tax

Indirect Taxes

Tax based upon the total value of a transaction which are levied on expenditure of goods and services.Collected from Sellers, this increases the production costs of producers, thus resulting in less supply Market Price of Good Rises, Hence Quantity Demanded is lower (contracts) Example -> VAT (UK), Sales Tax (USA

Subsidies

Benefit given by the government to producers to reduce their production costs, where Financing/Budget for Subsidies comes from Tax Revenue.

Gini Coeffecient

A statistical measure of the degree of inequality of income in an economy to measuring income & wealth inequality.
The Lower the Figure -> The more equal the distribution of incomeThe
Bigger the Figure -> The more unequal the distribution of income

Income and Wealth inequality

where Income -> Flow of money; variable vs Wealth -> Stock of money or assets; constant. A Policy in order to redistribute these two is a Progressive Income Tax used by governments

National Income

Net Property Income from Abroad= Income from interests - Depreciation=Measures the fall in value of the capital stock of a country
These are Different Approaches as they Basis can be on the following: Expenditure, Income, Output Data

GDP or Gross Domestic Product

Total value of a country’s final output of goods/services in a year where Money from exports entering to the government and Diagram Part of each flow that would go into/come from Households and Firms

GNI or Gross National Income

Total incomes received by a country’s residents in 1 year by GDP at Basic Prices that is GDP at Market Price - Taxes + Subsidies

National Income Equilibrium

Equilibrium: Economy is neither growing nor shrinking since J = W -> Leakages = Injections
Disequilibrium: Economy is either growing (J > W) or shrinking (J < W) in size so: Greater Injections increases economy size vs Greater Leakages shirnks economy Size

Leakage of National Income

Reduces the circular flow of income as Income is not passed onto the circular flow of income, so it will reduce the GDP’s value.Savings + Taxes + Imports
*Savings -> Part of household’s current income which is not consumed *Taxes & Imports** -> Money flows out to other economiesImportant

Injections of National Income

Money from outside the circular flow of income increases the GDP’s value since Investment + Government Expenditure + Exports

AD or Aggregate Demand

Total amount of goods and services demanded in an economy where AD = C + I + G + (X-M) C -> Consumption I -> Investment:. Usually by firms G -> Government Expenditure (X-M) -> Net Exports, affect AD Curve with conditions to Demand so that Produce Shifts in Demand

AS or Aggregate Supply

Total production of goods and services in an economy which depends of Productivity and Determinetas as production costs - taxes, Tech Innovations etc etc

Long-Run AS Curve (LRAS)

Displays Increased in output Fall in unemployment so an important note is to understand that AS curve only shifts if productive capacity of the economy is increased while fall leads to Rise in price, increased workforce-capital stock + other factors

Economic Growth

Either occurs when Shifting the AD or AS Curves OUTWARDS in the AD/AS graph where: Government Expenditure -> Higher G = Investment increases - Tax Cuts -Lower interest - Higher wages
Main outcome= higher Labour productuvity

Unemployment

People of working age who actively seek work, at current wage rate that are unable to do so with the Unemployment Rate = Percentage of the working population who are unemployed, (Unemployed) / (Working Pop) * 100

Price Stability

Fall in Value of money that aims for Good for the Economy -> Eg. Federal Bank (US) aims for 2.0% inflation rate as if it gets extremely high there would cause inflation and labour issues

Monetarism

Alternative upon inflation argues the only cause of inflation is the excess in money supply,assuming the velocity of money where 2 cases and lead either to Demand-Pull & Cost-Push Inflation are solely a result of excess money supply

Fiscal policy

Use of Government Revenue Budget from the Government and Fiscal Year Spending to manage the economy, as for: Tax Revenue < or > goverment spending

Monetary Policy

Central Bank’s use of interest rates, money supply and exchange rates to control the economy such as by controlling: Interest Rates, Targeting the Money Supply, and Maintaining the Exchange Rate

Supply-Side Policy

Policy that helps to improve a country’s productive potential of the economy in other help improve the productivity and productive capacity of the economy and the increase of the Quantity of goods & services produced per unit of input

Terms of Trade

Ratio of a country’s export prices to import prices, as: a Fall occurs in the Index = Deterioration in the Terms of Trade Less imports, viceversa

Trade Free

Brings Lower Overall Price=More benfits and firms=greater Economy Scale which leads to countries= increase on economic welfare (Specialization)

Protected trade

Trade Designed to reduce international trade due to the fwar that domestic industries might nt compete with foreign imports

Balance of Payments

A record of transactions in terms of trade in goods, services and financial assets

Exchange Rates

The price of one currency expressed in terms of another currency