Introduction to Economics – Key Vocabulary

Vocabulary flashcards covering fundamental terms and concepts from the “Introduction to Economics” lecture.

Economics

The social science that studies human behaviour in the production, distribution and consumption of goods and services as people try to satisfy unlimited wants with limited resources.

Scarcity

The condition arising because resources are limited while human wants are unlimited, creating the fundamental economic problem.

Economic Reasoning

The logical comparison of all costs and benefits when making a decision, aiming for choices where benefits exceed costs.

Positive Economics

Objective study of ‘what is, was, or will be’ in the economy, based on verifiable facts and free of value judgements.

Normative Economics

Subjective statements about ‘what ought to be’ in the economy, based on personal values, culture or ethics and not testable by facts alone.

Microeconomics

Branch of economics that analyses the behaviour of individual units such as households and firms.

Macroeconomics

Branch of economics that examines aggregate variables of the whole economy, such as inflation, GDP and unemployment.

Human Needs

Basic necessities essential for survival—food, clothing, shelter and security.

Human Wants

Unlimited, varied ways of satisfying needs; differ by person, place, culture and time.

Choice (Economic)

The selection of which wants to satisfy and which to forego because resources are scarce and have alternative uses.

Opportunity Cost

The value of the next best alternative forgone when a decision is made.

Economic Goods

Goods that are limited in supply relative to wants, involve opportunity cost, and result from using scarce resources.

Free Goods (Non-Economic Goods)

Goods available in unlimited supply at zero price, such as sunlight or fresh air, carrying no opportunity cost.

Bads

Items that confer negative utility, like pollution or garbage, for which people would pay to avoid.

Consumption

The act of purchasing or using goods and services to satisfy human needs and wants.

Utility

The mental satisfaction or pleasure derived from consuming a good or service.

Production Resources (Factors of Production)

Inputs used to create goods and services, classified as land, labour, capital and entrepreneurship.

Land (Factor)

All natural resources used in production, including soil, minerals, water and forests; earns rent.

Rent

Payment made for the use of land or natural resources in production.

Labour

Human physical and mental effort used in production; measured in labour hours and rewarded with wages or salaries.

Wages

Income paid to labour for its contribution to production.

Division of Labour

Breaking a production process into separate tasks and assigning workers to each to raise efficiency.

Specialization

Focusing on a single activity or narrow range of tasks in which an individual or firm performs best.

Capital

Man-made production aids such as machinery, buildings and equipment that directly assist production; earns interest.

Fixed Capital (Physical Capital)

Durable capital goods used repeatedly in production and worn out through depreciation (e.g., machines, factories).

Circulating/Floating Capital

Inventories of raw materials, work-in-progress and finished goods that are used up in a single production cycle.

Infrastructure Capital

Capital goods that provide economy-wide services; split into social (schools, hospitals) and economic (roads, power plants) infrastructure.

Human Capital

The stock of education, skills, experience, health and nutrition embodied in the labour force that raises productivity.

Natural Capital

Environmental assets such as waterways, ecosystems and scenic landscapes that facilitate production and growth.

Social Capital

Networks, norms, institutions and trust that improve social cooperation and lower the cost of doing business.

Gross Investment (Capital Formation)

Total additions to the capital stock of a country or firm during a period.

Capital Reformation (Replacement Investment)

Investment that replaces depreciated capital to maintain the existing stock.

Net Investment (New Capital Formation)

Investment that adds new capital over and above replacement; equals gross investment minus depreciation.

Interest

The price paid for the use of capital funds over time.

Entrepreneurship

The human resource that organises land, labour and capital, takes business decisions, introduces innovation and bears risk.

Profits

Income earned by entrepreneurship after deducting all costs; can be positive or negative.

Productivity

The amount of output produced per unit of input; an input–output ratio.

Production Possibility Curve (PPC)

A graph showing alternative combinations of two goods an economy can produce with full employment and full production at a given technology level.

Production Possibility (Potential Output)

The maximum total goods and services an economy can produce with full utilisation of resources and current technology.

Productive Efficiency

Producing the maximum output with given inputs (full employment and full production); represented by any point on the PPC.

Allocative Efficiency

Using resources to produce the combination of goods most preferred by society, achieved where marginal benefit equals marginal cost.

Marginal Opportunity Cost Ratio

The amount of one good that must be sacrificed to produce an extra unit of another good; equal to the slope of the PPC.

Law of Increasing Opportunity Cost

Principle that as production of one good expands, the opportunity cost of additional units rises because resources are not perfectly adaptable.

Economic Efficiency

Achieving both productive and allocative efficiency—producing the right goods at the lowest cost and in the desired mix.

Basic Economic Problems

Fundamental choices every society faces: what to produce, how to produce and for whom to produce.