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Ceteris Paribus
The assumption that other variables are held constant in order to analyze the relationship between two specific variables in economics.
Positive Statement
An objective statement that can be tested and validated with factual evidence, e.g., 'Raising the tax on alcohol will lead to a fall in the demand for alcohol.'
Normative Statement
A subjective statement based on value judgments and opinions, e.g., 'The government should increase the tax on alcohol.'
Scarcity
The basic economic problem that arises because wants are unlimited and resources are finite, necessitating choices.
Opportunity Cost
The value of the next best alternative that is forgone when making a choice between two or more options.
Factors of Production
The inputs used in the production of goods and services, typically classified as land, labor, capital, and enterprise.
Renewable Resources
Resources that can be replenished naturally over time, such as solar power and fish, as long as they are consumed sustainably.
Non-Renewable Resources
Resources that cannot be replenished once consumed, like fossil fuels, which decrease in stock over time.
Production Possibility Frontier (PPF)
A curve that depicts the maximum potential output of two goods or services in an economy when resources are fully and efficiently employed.
Specialization
The process by which workers focus on specific tasks to increase productivity and efficiency in production.
Medium of Exchange
Function of money that eliminates the inefficiencies of barter by allowing goods and services to be traded for a universally accepted currency.
Measure of Value (Unit of Account)
The function of money that provides a standard measure of the value of goods and services, allowing for price comparison.
Store of Value
A function of money that allows it to hold value over time, enabling individuals to save and use it for future transactions.
Free Market Economy
An economic system where supply and demand dictate the allocation of resources, with minimal government intervention.
Command Economy
An economic system where the government centrally plans and controls resource allocation and production decisions.
Mixed Economy
An economic system that combines elements of both free markets and government control, featuring both private and public ownership.
Economic Growth
The increase in the production of goods and services in an economy, often represented by an outward shift of the PPF.
Economic Decline
A decrease in the productive capacity of an economy, often represented by an inward shift of the PPF.
Demerit Goods
Goods that are considered harmful to consumers and are often overconsumed, leading to negative externalities, e.g., tobacco.
Merit Goods
Goods that are deemed beneficial for individuals and society, which are often underprovided in a free market, e.g., education.
Ceteris Paribus
A Latin phrase meaning 'all other things being equal,' this assumption is used in economics to simplify analysis by holding constant all other influencing factors while examining the effect of one variable on another. It allows economists to isolate relationships.
Positive Statement
A factual assertion that can be proven true or false through empirical evidence and data; it describes what is rather than what ought to be. For instance, 'Increasing the tax on alcohol will lead to a reduction in its consumption' can be tested through market analysis.
Normative Statement
An opinion-based assertion that reflects subjective beliefs or value judgments about what ought to be; these statements cannot be empirically tested. For example, 'The government should impose higher taxes on alcohol' reflects a perspective on public policy.
Scarcity
The fundamental economic issue arising from the gap between limited resources and infinite human wants, necessitating choices about resource allocation and prioritization of needs and wants. Scarcity compels individuals and societies to make trade-offs.
Opportunity Cost
The concept representing the value of the next best alternative that is forgone when making a decision; it highlights the trade-offs in resource allocation and decision-making processes, emphasizing that every choice has an accompanying cost.
Factors of Production
The inputs or resources used in the creation of goods and services, categorized into four primary groups: land (natural resources), labor (human effort), capital (machinery and tools), and enterprise (the innovation and risk-taking activity of entrepreneurs).
Renewable Resources
Natural resources such as sunlight, wind, and biomass that can be replenished at a sustainable rate through natural processes over time, as long as they are managed responsibly to prevent depletion.
Non-Renewable Resources
Natural resources such as fossil fuels (oil, coal, natural gas) that exist in finite amounts and cannot be replaced once consumed; their use leads to depletion of the resource and can have significant environmental impacts.
Production Possibility Frontier (PPF)
A graphical representation that illustrates the maximum feasible output combinations of two goods or services an economy can produce with available resources and technology, assuming full and efficient resource utilization.
Specialization
The economic practice where individuals or entities concentrate on a specific task or production of a limited range of goods, enhancing productivity and efficiency due to increased skill, knowledge, and use of technology.
Medium of Exchange
A fundamental function of money that facilitates trade by providing a universally accepted intermediary for the exchange of goods and services, eliminating the inefficiencies associated with barter systems.
Measure of Value (Unit of Account)
The function of money that establishes a standard numerical scale for pricing goods and services, allowing individuals to compare value and assess the worth of different products within an economy.
Store of Value
A characteristic of money enabling individuals to save and retain purchasing power over time; it ensures that money can be held for future use, resisting depreciation and inflation effects to some extent.
Free Market Economy
An economic system characterized by minimal government intervention where supply and demand freely dictate the production, pricing, and distribution of goods and services, allowing for competition and consumer choice.
Command Economy
An economic system where the government exerts significant control over resource allocation, production, and pricing decisions, with central planning aimed at achieving specific economic and social objectives.
Mixed Economy
An economic system that incorporates elements of both free markets and government intervention, balancing public and private ownership to enhance efficiency and achieve social welfare goals.
Economic Growth
The increase in an economy's output of goods and services over time, typically measured by the gross domestic product (GDP), indicating improved living standards and economic development.
Economic Decline
A reduction in an economy's production capacity, reflected in decreasing GDP and a potential inward shift of the PPF, often associated with rising unemployment and reduced consumer spending.
Demerit Goods
Products deemed socially undesirable, often overconsumed, which generate negative externalities; examples include tobacco and sugary drinks, leading to government-imposed regulations to decrease their consumption.
Merit Goods
Goods considered beneficial for individuals and society as a whole, often underprovided in free markets, leading to positive externalities; examples include education and healthcare, prompting government intervention to ensure adequate provision.
