Economics - Supply and Demand Definitions

The basic economic problem

Limited resources + Unlimited wants = scarcity

Opportunity Cost

The next best alternative forgone when an economic decision is made

Free Good

Something that is available without a limit, e.g. Air

Production Possibility Curve

Shows the maximum combination of goods & services that can be produced by an economy in a given time

Factors of production

land, labor, capital, entrepreneurship

Land

Everything that grows on the land or is found under it (includes all natural resources)

Labour

Human Factor (physical and mental contribution of the workforce to production)

Capital

Stock of manufactured resources that is used to produce goods & services

Enterpreneurship

Organising & Risktaking factor of production

Sustainability

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Actual Economic growth

Growth that stays within the production possibility curve / Increase in Real GDP

Potential Economic growth

An increase in the productive capacity of the economy

Planned (command) economy

Decisions are made by the government, all resources are collectively owned

Free market economy

Prices are used to ration goods and services, all productions is in private hands and demand & supply set wages & prices in the economy

Mixed Economy

A mix between planned (command) economy and free market economy

Positive Statement

May be proven right or wrong by looking at the facts

Normative Statement

Matter of opinion and cannot be proven right or wrong

Refutation

a denial of the validity of an opposing argument / a research study to determine if the findings can be applied to other data/methods

Leakages

Capital or Income that escapes an Economy (Taxes, Savings, Imports)

Injections

Introduction of income into an economy (Government expenditure, Exports, Investment)

Investment

The production of goods and services that will be used to produce other goods

Gross Domestic Product (GDP)

Monetary Value of final goods and services produced in an economy in a given period of time

Direct Tax

A charge levied by the government on an individual, household or institution (e.g. income tax, NI, council tax, etc.)

Indirect Tax

A charge levied by the government on spending on goods and services (e.g. VAT, excise duties)

Specific Tax

A fixed amount of tax per unit (e.g. excise duty on alcohol = GBP 2.23 per 750ml)

Ad Valorem Tax

A percentage tax is added onto the price of the good (e.g. VAT in UK = 20%)

Subsidy

The government pays for firms to produce a good/service

Consumer Surplus

the difference between the highest price a consumer is willing to pay and the actual price they pay

Producer Surplus

the difference between what producers are willing to sell at and what price they actually receive

Price Elasticity of Supply

Responsiveness of quantity supplied to a change in price

Price elasticity of demand

Responsiveness of quantity demanded to a change in price

Income elasticity of demand

Responsiveness of quantity demanded to a change in income

Total Revenue Formula

Price x Quantity

Minimum Price (price floor)

A certain price at below which it is illegal to sell a good for (e.g. minimum wage)

Maximum Price (price ceiling)

A certain price above which it is illegal to sell a good for (e.g. rent controls)