Module 1 Terminology

2 theories of fair distribution

1. utilitarianism

2. capability

utilitarian distribution

• distribute resources so the most people are as happy as possible

• happiness = income

• main theory used in economics

capability theory distribution

• distribute resources so the equality of human capability can be achieved

• happiness = people’s capability

• capability is one’s level of freedom to choose valuable functioning or states of being & doing

economic justice

• application of distributive justice

• focuses on how scarce resources are allocated & how they should be allocated

justice (4 fundamental points)

1. claims of each individual member of society should be taken into consideration

2. rules guiding the society should be impartial and consistent across all members of society

3. an enforceable obligation on each individual, group or institution to deliver what is due to others

4. presence of an agent (individual, group or institution) whose “will” for justice should be harnessed

3 main economic agents

1. individuals or households

2. firms or businesses

3. governments & associated organisations

economic agent definition

• entities that engage in economic activities

• such as buying, selling or producing goods and services

firms or businesses

• produces goods and services to exchange

• aims to maximise profit

• in a free market, firms & businesses interact with households which influences the determination of prices

individuals or houesholds

• a group of people under the same rood

• shares common resources

• consumers of goods & services

• aims to maximise utility (which is linked to satisfaction)

government & associated organisations

• regulates individuals and firms

• provides public goods and services

• aims to maximise social welfare (a matter of fairness in access to facilities)

market

any situation where an exchange of goods and services occurs

scarcity

• the condition where wants exceed available resources

• resources are always limited or “scarce”

• wants and needs are unlimited

3 examples of scarcity

1. land (shortage of fertile land for growing food)

2. water (climate change causing water shortages)

3. labour (e.g. post-covid shortage of essential workers)

exchange

• form of trading goods and services

• to improve happiness and wellbeing

• for both buyer and seller

• e.g. housing auctions where houses are exchanged for the highest price possible to a bidder who will value it the most (efficient)

efficiency

society receives the most that it can from its scarce resources

equity

the benefits of those resources are distributed fairly among members of society

“efficient use of resources”

maximising resource productivity while minimising waste

opportunity set

the group of all potential options

opportunity cost

the value or missed benefit of the next best option/ alternative

the value being forfeited

incentive

• the factors which affect an individual’s decision making process or their behaviour in the market

• the benefits that motivates a consumer to make a choice

• e.g. a workplace offers all workers lunch vouchers, wages which drive people to contribute to labour

trade-off

• the decision to pick an alternative

• when making a trade-off, one weighs the costs and benefits of different options

• to choose the option with the highest perceived value or utility

justice (definition)

• the rules guiding society

• could be written or unwritten

• should be impartial and consistent among all members of society

• aims to generate equality of opportunity

distribution occurs through…

• competition among buyers and consumers

• or among buyers for goods and services

controlled market

• the government or a central authority exercises significant control and influence

• over pricing, production, distribution and other aspects of goods and services

free market

• households and firms make their own decisions

• based on their preferences and available information

• buyers and sellers will have access to complete information about prices, quality, availability, and other relevant factors

• transparency enables rational decision-making & efficient allocation of resources