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Positive statement
A statement that does not include a value judgement and can be tested against the facts or evidence.
Normative statement
A statement that includes a value judgement and cannot be refuted just by looking at data or evidence.
Value judgement
A view about what is right or wrong, good or bad in a moral sense. Statements that include value judgements often contain the words 'should' or 'ought'.
Economic activity
The production, consumption, exchange, and distribution of goods and services.
Economic resources (factors of production)
The inputs into the production process that are needed to produce the goods and services that satisfy people’s wants, classified as land, labour, capital, and enterprise.
Land
The factor of production that includes all the natural resources available on the earth, including land and sea.
Capital
The human-made factor of production, including machines, tools, lorries, and buildings.
Labour
The human resource that contributes to the production of goods and services.
Entrepreneur
The person or group who organises the other economic resources to produce goods and services.
Enterprise
Involves making decisions and taking risks.
Scarce resource
A factor of production that is limited in supply and cannot satisfy all needs and wants.
Scarcity
The fundamental economic problem that arises from limited resources and unlimited wants, leading to choices with opportunity costs.
Opportunity cost
The next best alternative foregone when a choice is made.
Production possibility diagram
A diagram that shows the quantities of two goods or services that can be produced with available resources, given current technology.
Production possibility boundary (PPB)
Also known as the production possibility curve (PPC) or frontier (PPF); shows the various quantities of two goods or services that can be produced when all resources are fully employed.
Resource allocation
How available factors of production are used to produce various goods and services.
Rational economic decision making
Using all available information to select the best option to maximise welfare.
Utility
The satisfaction derived from consuming a good or service.
Marginal utility
The change in total utility resulting from consuming one more or one fewer good or service.
Hypothesis of diminishing marginal utility
The proposition that additional consumption of a product yields less additional satisfaction.
Imperfect information
When an economic agent lacks all necessary information to make a rational decision.
Asymmetric information
When one party in an economic transaction has more information than another party.
Behavioural economics
A branch of economics that incorporates psychology to understand decision-making influenced by biases and emotions.
Bounded rationality
The idea that human limitations lead to decisions that are not completely rational.
Bounded self-control
The idea that people lack sufficient willpower to resist self-defeating choices.
Rules of thumb
Mental shortcuts based on experience that help individuals make quick decisions.
Anchoring
The tendency to rely too heavily on the first piece of information encountered when making decisions.
Availability bias
When recent events or easily recalled information unduly influence decision-making.
Social norms
Behaviours considered acceptable by society at the present time.
Choice architecture
The framework in which choices are presented to individuals.
Nudge
Encouragement of a particular choice or behaviour while maintaining freedom of choice.
Default choice
A pre-selected option that an individual can change if desired.
Restricted choice
Limited options presented to an individual, often to simplify decision-making.
Mandated choice
A required decision-making process enforced by law.
Demand curve
The relationship between price and quantity demanded of a good or service over time.
Price elasticity of demand
The extent to which quantity demanded changes in response to price changes.
Income elasticity of demand
The extent to which quantity demanded changes in response to income changes.
Cross elasticity of demand
The extent to which the quantity demanded of one product changes in response to the price change of another product.
Normal good
A product for which demand increases as income rises.
Inferior good
A product for which demand decreases as income rises.
Supply curve
The relationship between price and quantity supplied of a good or service over time.
Price elasticity of supply
The extent to which quantity supplied changes in response to price changes.
Equilibrium market price
The price at which quantity demanded equals quantity supplied, with no price change tendency.
Disequilibrium price
A price leading to excess demand or supply, resulting in price changes.
Excess demand
The quantity demanded exceeds quantity supplied at the current price.
Excess supply
The quantity supplied exceeds quantity demanded at the current price.
Joint demand
When two products are demanded together; demand for one product relates directly to the demand for the other.
Competitive demand
When an increase in demand for one product leads to a decrease in demand for another substitute product.
Composite demand
When a product has multiple uses; increased demand for one use impacts supply for other uses.
Derived demand
Demand for a product determined by the demand for another product.
Joint supply
When the production of one product also results in the production of another product.
Production
The process of using production factors to create goods and services.
Productivity
A measure of output in a given period, indicating efficiency.
Labour productivity
Output per worker in a specific time frame.
Specialisation
The concentration on producing a specific good or service.
Division of labour
Breaking down the production of a good into separate tasks performed by different workers.
Short run
The time period when at least one production factor is fixed.
Long run
The time period when all production factors are variable.
The law of diminishing returns
As more of a variable factor combines with a fixed factor, initial marginal and average returns increase but eventually decrease.
Returns
The output of a good or service.
Marginal returns
The change in total output from employing one more unit of a variable factor.
Average returns
Total output divided by the number of units of a variable factor employed.
Total returns
Total output.
Returns to scale
The effect on total output when all production factors change.
Increasing returns to scale
A larger percentage increase in output from a percentage increase in all factor inputs.
Constant returns to scale
A percentage increase in all factor inputs leads to the same percentage increase in output.
Decreasing returns to scale
A percentage increase in all factor inputs leads to a smaller percentage increase in output.
Fixed costs
Costs that do not change with variations in output.
Variable costs
Costs that fluctuate with output changes.
Marginal cost
The change in total cost when one more or one fewer unit of output is produced.
Average cost
Total cost divided by output.
Total cost
Total fixed cost plus total variable cost.
Internal economies of scale
Falling long-run average cost due to firm growth.
External economies of scale
Lower average costs for firms in an industry due to industry growth.
Diseconomies of scale
Increasing long-run average costs due to firm growth.
Long-run average cost curve (LRAC)
Shows minimum average costs at any given output level when all production factors are variable.
Minimum efficient scale of production
The lowest output level that minimises a firm’s long-run average costs.
Total revenue
The total money a firm receives from selling its output.
Marginal revenue
Change in total revenue from selling one more or one fewer unit of output.
Average revenue
Total revenue divided by quantity sold.
Profit
The difference between total revenue and total cost.
Normal profit
The minimum profit required to keep an entrepreneur in business in the long run.
Abnormal profit (supernormal profit)
When total profit exceeds normal profit.
Subnormal profit
When total profit is less than normal profit.
Technological change
The introduction and use of new methods for producing goods and services.
Invention
The discovery of a new product, process, or production method.
Innovation
The process of developing and introducing a new product, service, or method of production.
Market structure
Classification of an industry based on key characteristics.
Divorce of ownership from control
When business owners are different from business managers.
Satisficing
A strategy where decision-makers aim for a satisfactory outcome instead of the optimal solution.
Market share
The percentage of total market sales attributed to a specific firm or product.
Perfect competition
A market structure with many small firms selling identical products.
Homogeneous products
Identical products that are perfect substitutes.
Price taker
A firm that cannot influence product price, determined by market forces.
Monopolistic competition
A market structure with many firms selling differentiated products.
Differentiated products
Similar but not identical products; close substitutes.
Price maker
A firm that can set its product's price.
Oligopoly
A market structure dominated by a few large firms that compete with each other.
Concentration ratio
The market share percentage of the largest firms in an industry.
Collusion
When competing firms work together for mutual benefit, harming consumers.
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