Definitions

Unintended consequences

Distortion of consumer or producer behaviour due to the impact of an economic decision

Social science

Investigates human behaviour

Cetris paribus

All other factors being equal

Positive statements

Objective statements that can be tested with factual evidence and can be rejected or accepted

Normative statements

Subjective statements based on value judgements

Scarcity

In the world, resources are limited but people’s wants are unlimited

Opportunity cost

The loss of the next best alternative when a choice is made

Production possibility frontiers (PPFs)

Shows the maximum productive potential of an economy using a combination of two goods or services when recources are fully and effectively employed

Consumer goods

Goods which cannot be used to produce other goods

Capital goods

Goods which can be used to produce other goods

Specialisation

Refers to producing what a worker, firm, or country is most efficient at by focusing on a narrow range of goods and/or services (e.g. Thailand - coconuts)

Division of labour

Refers to the production process being broken down into separate specialised tasks

Free market

An economy where the government have no or minimal input

Command economy

The government regulates the economy completely. They will tell buisnesses what to produce, how much, and who to sell to

Demand

The amount buyers are willing and able to purchase at any given price

Expansion of demand

A lower price causes a larger quantity to be demanded

Contraction of demand

A higher price causes a lower quantity to be demanded

Derived demand

Demand for a good comes from a demand for another good

Joint demand

Refers to complimentary goods

Composite demand

Two goods require the same input

Marginal utility

The additional benefit gained from consuming an extra unit

Diminishing marginal utility

As an extra unit of the good is consumed, the benefit / satisfaction from consuming the good falls. Therefore, consumers are willing to pay less for the good.

Price elasticity of demand

measures the responsiveness of quantity demanded given a change in price

Price inelastic

Demand for a product doesn’t change much with a change in price

Price elastic

Demand for a product changes a lot with a change in price

Unitary elastic good

Has a change in demand which is equal to the change in price

Total revenue

A measure of how much can be made from selling products / services

Income elasticity of demand

Measures the responsiveness of quantity demanded given a change in income

Inferior goods

As income goes up, demand goes down. YED < 0

Necessity goods

As income goes up, demand goes up. YED > 0

Luxury good

An increase in income causes an even bigger increase in demand. YED > 1

Unitary elastic good

Has a change in demand which is equal to the change in income. YED = 1

Cross elasticity of demand

Measures the responsiveness of quantity demanded of one good to a change in price of another good

Close compliments

A slight fall in price of A leads to a large increase in demand for B

Weak compliments

A large fall in price of A leads to a small increase in demand for B

Close substitutes

A slight increase in price of A leads to a large increase in demand for B

Weak substitutes

A large increase in price of A leads to a small increase in demand for B