Economics - Supply and Demand Definitions

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The basic economic problem

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35 Terms

1

The basic economic problem

Limited resources + Unlimited wants = scarcity

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2

Opportunity Cost

The next best alternative forgone when an economic decision is made

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3

Free Good

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

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4

Production Possibility Curve

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

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5

Factors of production

land, labor, capital, entrepreneurship

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6

Land

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

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7

Labour

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

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8

Capital

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

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9

Enterpreneurship

Organising & Risktaking factor of production

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10

Sustainability

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

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11

Actual Economic growth

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

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12

Potential Economic growth

An increase in the productive capacity of the economy

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13

Planned (command) economy

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

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14

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

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15

Mixed Economy

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

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16

Positive Statement

May be proven right or wrong by looking at the facts

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17

Normative Statement

Matter of opinion and cannot be proven right or wrong

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18

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

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19

Leakages

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

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20

Injections

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

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21

Investment

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

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22

Gross Domestic Product (GDP)

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

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23

Direct Tax

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

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24

Indirect Tax

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

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25

Specific Tax

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

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26

Ad Valorem Tax

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

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27

Subsidy

The government pays for firms to produce a good/service

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28

Consumer Surplus

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

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29

Producer Surplus

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

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30

Price Elasticity of Supply

Responsiveness of quantity supplied to a change in price

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31

Price elasticity of demand

Responsiveness of quantity demanded to a change in price

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32

Income elasticity of demand

Responsiveness of quantity demanded to a change in income

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33

Total Revenue Formula

Price x Quantity

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34

Minimum Price (price floor)

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

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35

Maximum Price (price ceiling)

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

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